The principal objective of this Bill is to establish, in the public interest and in the interest of investors, new and enhanced arrangements for the control and regulation of unit trust schemes.
Unit Trusts Bill, 1990: Second Stage.
On a point of order, is there a copy of the Minister's script available?
I understand it will be made available.
The Central Bank will, under this Bill, become the designated statutory authority for the supervision of unit trusts. The other main objective of the Bill is to provide for developments in accepted international practice with regard to the supervision and operation of unit trusts since the Unit Trusts Act, 1972, was passed by the Oireachtas.
The scope of the Bill continues to comprehend unit trust schemes providing for collective investment in securities or any other property whatsoever. The Bill is also designed to cater for the tailoring of supervisory requirements to the varying characteristics of the different types of unit trust schemes which now exist.
The transfer of supervisory functions from myself to the Central Bank is part of a wider process which has been ongoing for a number of years, with the objective of reducing, as far as is practical and desirable, the range of supervisory authorities responsible for the financial services sector. In this context, the Central Bank, in addition to their responsibility for the banking sector, have already been given regulatory powers with regard to building societies and trustee savings banks, as well as supervisory powers in relation to the International Financial Services Centre in Dublin.
In the specific area of collective investment schemes the Central Bank are already the supervisory authority for UCITS (Undertakings for Collective Investment in Transferable Securities) under the European Communities (UCITS) Regulations, 1989, and they will assume a similar supervisory role for variable capital companies under Part XIII of the Companies (No. 2) Bill, 1987, which has just completed its passage through both Houses of the Oireachtas and is awaiting signature by the President. The Unit Trusts Bill, 1990, will complete the adoption of a consistent approach to the control and supervision of this sector of the financial services industry.
The consolidation of regulatory control for these financial services in a single supervisory authority will result, I believe, in a more efficient use of scarce resources and the ready availability of a pool of expertise should enhance the quality of supervision by providing for a consistent approach in different sectors and helping to eliminate any gaps in the supervisory structure.
Such a supervisory authority will help ensure that the rules impact evenly on all institutions operating in this sector and allow for a coherent response to events, having regard to the rapid and substantial developments in financial services in recent years.
The other main objective of the Bill is to update the provisions of the Unit Trusts Act, 1972, to allow for developments in accepted international practice concerning the operation and supervision of unit trusts. Since the passage of the 1972 Act, this sector of the financial services industry has developed and expanded enormously and this has been reflected internationally in changes in the form and degree of control and regulation.
From being a relatively new investment vehicle in Ireland in the early seventies — in 1973 only two unit trusts were registered in Ireland — unit trusts are now firmly established. At present, there are some 30 registered unit trusts with investments worth just under £1 billion.
With supervisory systems in existence in most developed countries for many years, the unit trust industry has now, in contrast to the situation prevailing when the 1972 Act was enacted, a body of well known and accepted rules and best practices. To take account of the situation facing existing and future unit trusts in the nineties and into the 21st century, it is necessary, I believe, to adapt our supervisory system to accommodate these new circumstances.
I believe that the best way of dealing with this situation is to adopt an approach which allows for more flexibility in dealing with modern practices yet maintains the fundamental principles of investor protection enshrined in the 1972 Act. This approach will allow the supervisory authority to respond more rapidly to developments by using the powers devolved on them in this Bill.
In addition I consider that this Bill, in updating our supervisory system, will, without any reduction in supervisory standards, enhance the attractiveness and competitiveness of Ireland, including the IFSC and Shannon, as a location for investment fund management services.
I would now like to summarise, for the benefit of Senators, the general thrust of the most important sections of the Bill.
Section 3 provides that the Central Bank establish and maintain a register of authorised unit trust schemes. This provision is similar to that contained in section 2 of the 1972 Act. In addition the section also covers other public discolosure requirements imposed on the bank.
The necessary conditions, similar to those of the 1972 Act, for the authorisation of a unit trust are set out in section 4. These include the bank being satisfied with the competence and probity of the management company and trustee; the financial resources and corporate status of the management company and trustee; the independence of the management company and trustee from one another; the trust deed's compliance with the provisions of the Bill and its deposit with the bank; and the name of the unit trust scheme.
This section also empowers the Minister to direct that authorisations be subjected by the bank to specified conditions or requirements, as long as these do not constrain the prudential supervision of a scheme by the bank.
Section 5 gives the bank power to impose conditions for authorisation of unit trusts either generally, individually or of a particular class. This will allow the bank to regular the operation of unit trust schemes, taking due account of the different characteristics of schemes. For example, a scheme which offers units to the public would probably need to be subjected to more rigorous conditions than a scheme whose unit holders are a select group of major institutions.
In the event of a refusal of an authorisation by the bank, section 6 provides that the management company or trustee may appeal to the High Court. Sections 7 and 8 of the Bill require that the approval of the bank is necessary to any alteration in the trust deed, or change in name or replacement of the management company or trustee of a scheme. Section 8 also gives the bank the power, where it is in the interests of unit holders, to replace the management company or trustee, who would have the right to appeal any such decision to the High Court.
In section 9 the Sale or purchase of units, or any solicitation in that regard, by unauthorised unit trusts is prohibited unless approval has been received from the bank, who may attach conditions to any such approval. This prohibition extends to any arrangements, resembling unit trusts, which provide for the participation of the public in profits or income from securities or any other property. This prohibition does not extend to private trusts. Neither does it cover collective investment schemes linked with life assurance nor companies incorporated under the companies Acts or by statute or charter, building societies, friendly societies or industrial and provident societies, which are all already covered by separate legislation. The effect of this section is to prohibit the operation of unauthorised unit trust schemes and is similar to the provisions of section 7 of the 1972 Act. Section 10 prohibits the advertising of unauthorised unit trusts, as defined in section 9, unless approval has been received from the bank, who may attach conditions to any such approval.
The effectiveness of the Bill depends not only on prohibiting unauthorised schemes from carrying on business but also on preventing them from advertising. The bank will have the power to exempt foreign newspapers and magazines with only a small circulation in Ireland from compliance with this provision.
Effectively sections 9 and 10 prevent unauthorised unit trusts from operating in Ireland and so avoiding the duties and responsibilities attendant upon authorisation. The intention is that trust law should continue to be a key element in the safeguarding of the interests of investors in unit trusts schemes.
A general principle of unit trusts is that the proceeds of the sale of any units or any income in respect of the assets of a scheme that is not distributed to unit holders shall be assets of the scheme and be treated accordingly and this continues to be provided for in section 11. Following amendment in the Dáil, this prohibition shall not apply to the sale by a management company of units purchased by it on its own account, to the extent that the Bank may specify in conditions attached to the authorisation.
Another principle is incorporated in section 12 which obliges the management company, as soon as may be, to purchase units from unit holders who so request. The section allows for the temporary suspension of such purchase in exceptional circumstances in the interests of investors. There is also provision for the bank to specify other limited circumstances under which this stipulation need not apply.
Section 13 prohibits a management company, or connected persons, from making profits from transactions in any assets held under the scheme. It also prohibits a management company or trustee borrowing or lending on the scheme. The bank will be empowered to allow such practices under conditions it might impose in certain circumstances.
The bank, in setting conditions on authorisation, including those abating the provisions of sections 11, 12 and 13, will be required to so do in the interests of the orderly and proper regulation of unit trust schemes. Strict liability of trustees under authorised unit trust schemes is provided for in section 14, which is in itself a re-enactment of section 15 of the 1972 Act.
The application to authorised unit trusts of certain provisions of the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations, 1989, is provided for in section 15. These adapted provisions relate to the temporary suspension of the purchase of units, reporting and auditing requirements, keeping of records, appelate procedures, revocation of authorisation, the bank's power of intervention and the review of the bank's decisions by the High Court.
I would like to conclude by saying that this Bill is designed to provide a continuing framework of control and supervision allowing for the protection of the public interest and the interests of investors into the next century without inhibiting the development and growth of this sector of the financial services industry.
I commend the Bill to the House.
I have no problem with the general thrust of the Bill. Indeed, I welcome it but there is a number of matters on which I seek clarification which I expect will be forthcoming from the Minister. The Bill has two main objectives one of which is to transfer the supervisory role, which heretofore has been exercised by the Minister, to the Central Bank and to establish new and enhanced powers for the control and regulation of unit trusts schemes. I intend to raise the question of whether these controls and regulations are adequate. The second main objective of the Bill is to update the provisions of the Unit Trusts Act, 1972 to provide for developments in accepted international practice with regard to the supervision and operation of unit trusts.
To the best of my knowledge, in the main it is the small investor who avails of unit trusts schemes. While I have no problem with the thrust of the Bill I want to raise a number of queries and make it clear, even though there are others who avail of unit trusts, that I want to focus attention on the small investor. In their case the sums involved are small and represent their savings, in some cases their life savings, or redundancy payments and their main purpose is to ensure that bit of security in their later years which is very commendable.
It has to be accepted that their expertise in financial and related matters is not very extensive with the result that they have to rely greatly on the expertise of those who run and control unit trusts schemes, in other words, the management companies and trustees of such schemes. Should at any stage the expertise of those management companies and trustees prove to be inadequate the results could be disastrous for the unit holders I am referring to. Therefore I suggest to the Minister, having regard to the fact that these unit holders have to rely on the expertise of others to secure their investment, that the key question is that of the expertise and honesty of the management companies and the trustees involved. In addition to laying emphasis on the integrity and status of the trustees emphasis must also be laid on the investment vehicles used.
Reference has been made to the fact that foreign companies who wish to operate in this field will be welcomed. It will also be open to them to advertise their services. I would like an assurance therefore from the Minister that the safeguards are adequate as I have my doubts, having read the measure, as to whether they are. Can we be given a guarantee, in relation to both home and foreign investment vehicles, that investors' funds will be secure?
I am a bit reluctant to raise the following matter but feel it is necessary to do so. There is always the possibility of bad management and this can present problems. However a far greater problem, as we know from experience, for small investors is that so often in the past they have been the victims of fraud. I have my doubts as to whether these safeguards are adequate to deal with that problem. I paid attention to what the Minister had to say this morning and listened to what the Minister of State, Deputy Smith, had to say in reply on Second Stage in the other House where he seemed to suggest that nothing like this has ever happened in the past 60 years and that therefore our fears are unfounded. That may be so but there is a duty on us to ensure that adequate safeguards will be in place in the event of risks emerging.
Let me put my query in the following terms. Are there loopholes which will allow agents and others to get around the regulations and can we be satisfied that the funds of small investors will be fully protected? Can we further be certain that all small investors will be protected if they invest with the principal parties who control investment vehicles — the trustees, the management companies and agents of both foreign and home based companies?
I would now like to deal with another matter which was raised in the other House but which the Minister did not respond to when replying to the Second Stage debate. As I have not got a copy of the Official Report of the Committee Stage debate I find myself at a disadvantage in that I do not know whether that matter was satisfactorily disposed of at that stage. Let me therefore put the following query to the Minister. Given that the small investor may lose his savings either through bad management or fraud on the part of anyone who manages and controls these funds, why is a provision on compensation not included in the Bill? That responsibility could be vested in either the Central Bank or some other body who has a function to discharge under the Bill. If the Central Bank are to be the regulatory authority why are they not to be held responsible if, for example, their judgment or regulations are found to be faulty and prove damaging to some of the investors concerned?
I would like the Minister to respond to the question of the fees to investors charged by management companies. I understand each investor will have deducted from the sum invested a certain percentage to cover management charges. In legislation of this sort would the Minister not have been wise to insert the scale of charges perhaps to provide guidelines, or is there provision for him to do that? What protection is there for the small investor against excessive charges being put on by those involved in the administration and management of the scheme?
On the question of costs, what control rests with investors in relation to the level of profits retained or, so to speak, disposed of? As far as I can see, this decision as to what is done with profits arising rests very much with the management company. Therefore, if the management company wish to retain profits, for example to build up the funds, and if, on the other hand, at the same time the investors wish to distribute a greater share of the profits, then who adjudicates? Who resolves the situation at that point?
There is an obligation placed on the management company to repurchase units at the request of the unit holders. Is there control of the level of charges, fees or deductions which management may charge? If not, why not?
I am raising a matter in a general way here because in the light of the Minister's response it may not be necessary to pursue it further. The Minister in his speech has referred to the powers retained under section 4 which will enable the Minister to direct that authorisation be subjected by the bank to specific conditions or requirements as long as these do not constrain the prudential supervision of a scheme by the bank. Section 4 (2) provides for a review function being reserved by the Minister. I know the query has been raised in the other House as to whether the Minister is transferring control and the regulatory functions from his Department to the Central Bank. Why retain this power, as it were, under section 4 (2) particularly to issue directions? I raise this matter simply to get clarification on it. It may well have been dealt with on Committee Stage in the Dáil. I do not share the fears that have been expressed elsewhere that it is wrong that the Minister should retain his power there. Whether in relation to this or any other function of administration, I have always held the view that if a citizen, in this case a unit holder, is in difficulty with bureaucracy involved with the Central Bank, there is nothing wrong in providing a reserve to the Minister the power to intervene in those circumstances. We all are politicians and we have to answer for our actions to the public. On the other hand, bureaucrats do not have to do that. Therefore, I do not altogether share the reservations expressed elsewhere. Nonetheless, the matter requires clarification and I am sure the Minister will provide that.
Interest was expressed in the other House in having agents and intermediaries included within the provisions of section 4. I do not believe the Minister accepted that and I would like to hear him in his reply to this debate give the reasons for that.
A matter raised was the extension of the terms of the proposed legislation here to countries outside the EC. I do not believe the Minister accepted that either. Therefore, what is the position if the legislation is confined in its application to Ireland and other countries of the EC? What protection and safeguards are there in relation to investment vehicles that may have their base outside the EC and ourselves?
By and large I support the thrust of the Bill before us, subject to clarification on the questions I have raised.
We are legislating to put the EC UCITS Directive into law. The main objective of the Bill is to update the provisions of the 1972 Unit Trusts Act and to set the way forward for future development concerning the whole operation and supervision of unit trusts. It took 15 years for the Directive to be written and it is probably generally agreed that the past four or five years in particular have seen many significant changes in collective investment which necessitate the updating of the legislation. While the Directive has been successful in establishing a great deal of investor protection for the UCITS funds themselves, I am of the opinion that it probably falls short in the implementation of best advice by leaving marketing and selling regulations to member states and not covering all forms of collective investments. Perhaps the Minister will comment on that.
The basic supervisory structure established under the 1972 Act has been very largely maintained under this Bill, the two obvious and main changes being the transfer of the supervisory functions from the Minister for Industry and Commerce to the Central Bank and more open or perhaps more flexible attitudes to authorisation. Though I understand many people may not agree, I agree with the new role of the Central Bank in the monitoring and supervision of unit trusts. I feel we need a unified control in our financial services which are developing and to which we are giving a great deal of attention.
I know from my experience of the control of financial and deposit-taking institutions of some undesirable activities in recent years. It is right and proper that we allocate responsibility very clearly and ensure that that type of responsibility be efficient and thorough. Obviously we must ensure that savers' interests are protected at all times. While many people, somehow, are of the opinion that UCITS are for the small investors only my understanding is — and perhaps the Minister would confirm this — that there are many big players or investors in this area also. But, from the savers' point of view, large or small, it is important that unit trusts be allowed operate with freedom, to yield good returns on investments and, generally, be allowed an air of flexibility and freedom.
Perhaps the Minister would comment briefly on section 3 which provides that the Central Bank establish and maintain a register of authorised unit trust schemes. Any additional information the Minister can provide on that section I shall welcome. In general I welcome the Bill which I believe will afford the public and investors' interests greater protection over the next decade.
At the outset I have to say that, whenever I detect consensus and unanimity about a Bill of this sort — especially when it is introduced in the run-up to Christmas before an empty House — I become a little suspicious. While there would appear to be no grounds for suspicion I do not think a Bill of this sort should be allowed go through the House without criticism and without examining the reasons for its introduction.
The more I look at this Bill the more difficult I find it to accept not only its provisions but the principle behind it we are being asked to accept. Whereas it sounds right that we should transfer unit trusts and other financial instruments and institutions to one authority, under one umbrella, whereas it sounds innocent that we should do so, we must question the reasons for so doing. While I applaud any effort by the Minister or Government to bring our law with regard to financial services up to date and on updating the Unit Trusts Act, 1972, obviously necessary in the changing financial environment in which we live, we should be cautious. I think that caution crept into the Minister's introductory remarks here today and in another Minister's remarks in the Dáil when he mentioned the Financial Services Centre. We should be cautious in that we should not necessarily adjust our law to attract those who are looking to Dublin as an attractive Financial Services Centre. The word "flexibility" in the Minister's introductory remarks — which I think appeared in another form in the words "less rigid" in the other House — means there are dangers in that we have not been able to balance the conflict between investor protection and the requirements of the Financial Services Centre here. There are dangers in trying to render Dublin a particularly attractive financial environment in that there may be pressures to change rules, to loosen or take what is described as a "less rigid" approach to investors' protection. That is a danger which is apparent in this Bill, not in the principle but in the practice behind it.
The Minister's introductory remarks and the discussion in the Dáil were very short on information. They were very short on how, in the past the Department of Industry and Commerce had treated the policing and regulation of the unit trust industry, which has grown from a very small base in the early seventies to just short of £1 billion. That is not very large in terms of other financial instruments but is very large in terms of what it was. I do not know what the Department of Industry and Commerce did, what the Minister's officials did in the last 18 years, to ensure that unit trusts were properly regulated. I would be interested to know what practical steps, detailed and regular steps, were taken to examine this industry.
Whereas the principle of the transfer to the Central Bank is a good one in that it is an attempt to put one more financial service under a single supervisory body, the Central Bank may prove to have been an unfortunate choice. The Minister will correct me but I think the Central Bank administer the banks, the Trustee Savings Bank, the building societies and the Financial Services Centre and will now have unit trusts under their umbrella. If we accept that the Central Bank will regulate and supervise this industry we should ask what is the record of their regulatory and supervisory authority over the other institutions they supervise. It is not fashionable to criticise the Central Bank. What I say is not necessarily the fault of the Central Bank but I do not think that the Central Bank have a proud record in their supervision of other institutions in this State. Let me start with the Exchange Control Bill passed in this House only this week. Basically the provisions of that Bill renewed exchange controls under the supervision of the Central Bank and the Minister for Finance announced that certain regulations were going to be lifted and relaxed. My experience of exchange control — I hope the House will forgive me for talking about it in a personal way — really began in 1979 when the break with sterling was introduced. It would not be unrealistic to say that that caused absolute turmoil in the financial markets because nobody knew how exchange control would operate; nobody was ready although it had been well signalled that this might happen; none of those who were in the financial markets was ready to impose exchange control or knew how it would operate.
For those of us who had been delegated this authority by the Central Bank, as stockbrokers or bankers, there ensued an extremely unhappy and uncomfortable period during which we worked, to a large extent, in the dark. That would be forgiveable and understandable; it would be understandable that the Central Bank were unable to administer this in that immediate context — which was the break with sterling — but, in the ensuring years, those exchange controls continued. For at least ten years — because as a stockbroker authority was delegated in me and in other stockbrokers — I recall having to impose those exchange controls on behalf of the Central Bank. Certainly I was aware of the outlines and obligations imposed on me by the Central Bank in refusing people the right to exchange money in certain circumstances and in enforcing the rules of the Central Bank in having them repatriated.
What astounded me was that in that decade when the Central Bank imposed rigid exchange control, not alone was there never a prosecution for breach of exchange control but I can never recall the Central Bank once inspecting the books or having any sort of inquiry into breaches of exchange control.
It is utterly unrealistic to expect that there were no such breaches, whether wilful or not. It seems to me that the Central Bank was a totally inadequate body to impose those controls. It simply does not have the staff or the resources or the department, to do this.
In the area of banking also it seems that the Central Bank has not had a particularly happy history in recent years. Granted, it is impossible to discover where it has prevented difficulties, scandals, or collapses of banks. It may well be that there are areas where banks have been in difficulty or have breached rules and have been drawn back into line by the Central Bank, but we have had unhappy experiences. We have had the Gallagher experience all too recently and no warning of that; and, regrettably we have had no prosecution as a result of that. That is something I regret, and that is not to the credit of the Central Bank. We have also had the collapse of the Insurance Corporation of Ireland — which indirectly was within the Central Bank's ambit in that it was wholly owned by Allied Irish Banks — which rocked the Irish banking system to its foundations. It is not sensationalism to say that somehow, somewhere that should have been detected early. There was no early warning system; there was certainly no early warning system that worked which gave AIB, and therefore the Central Bank, a warning that the whole banking system was in danger of a major catastrophe at that time. Really, the buck stopped in that case as well with the Central Bank.
I am uneasy about the bland acceptance by this House, and all sides of this House, that it is a good idea to put unit trusts into the hands of the Central Bank. The Central Bank has not proved itself a good policeman of the financial services industry, maybe through no fault of its own. Had it been better equipped with that pool of expertise — as the Minister called it this morning — maybe some of these things could have been prevented. As it stands at the moment, I do not believe the Central Bank structure gives us grounds for confidence that the unit trust industry will be any better policed than any of the other industries it policed before.
That is not a reflection on the unit trust industry. I do not believe there is any suspicion of any wrong doing or danger or even impropriety in the unit trust industry. The unit trust industry has up to now, as far as one knows, been impeccable in its behaviour and has not given rise to concern. I would be interested in what the Minister for Industry and Commerce has to say about this because his Department have been policing it in the past. I am sure that, whether it has been policed effectively or not, the unit trust industry has always behaved in a manner which is above reproach and which is different, I suspect, from other areas of financial services in Ireland.
I would like to look for one moment at the sort of regulatory environment that exists in this country, and the sort of regulatory environment which we are trying to create in this Bill to impress overseas investors and to induce people to come to the financial services centre. The fact of the matter here is that we decided not to imitate the British Financial Services Act which was introduced in 1986 for reasons which I have never quite understood. It has always, I think, been maintained by people in the financial services area that that particular Act was too rigid for Ireland, that we did not need and did not suffer from the sort of abuses that existed in the United Kingdom at that time. That is debatable, but the fact that we have not suffered so notably and so obviously from these practices is a result of bad policing rather than non-existence of the offences for which the British Financial Services Act was introduced.
The environment here into which this Unit Trust Bill is being introduced is one with very few financial regulations. It is one which is open to abuse and, undoubtedly, where there is a financial environment which is open to abuse, it is abused. That is the law of money, and it is the law of greed. I regret that there are no strict regulations in this country of the sort that were introduced in the UK. We only have to look at the leak of the inflation figures last week which caused such a stir in financial markets. One of the problems about this particular leak was that there was no provision for doing anything about it and no provision for investigating it. It happened in an area hitherto unsuspected and unthought of as a primary area for abuse by legislators or those in charge of regulating financial markets. Insider dealing was always thought to be restricted to equities and to individual companies in Ireland. The possibility of a leak in the area of Government stocks, had not been imagined; and what would be done or who would be there to regulate it if there were to be a leak in the area of Government stocks had not been discussed. I suppose it is fair to look at the reaction of the Government and the Stock Exchange to this and to ask about the regulatory environment in which we live. Why should the Government have to order an inquiry into a leak of this sort? Why is there no mechanism already established within the Government system and the Stock Exchange system for an inquiry into a leak of this sort? It should not take an order from the Taoiseach in Rome to initiate an inquiry into a serious leak of price sensitive information. There should be a mechanism there for doing it immediately. First there should be a mechanism to prevent it, which I think is there; but also there should be a mechanism within Government circles and within the Stock Exchange for looking at leaks and preventing them and for detecting the source of leaks and punishing those who have acted as a result of those leaks. No such mechanism exists. The financial environment in which we live is lacking. The Stock Exchange, a self-regulatory body — which it should not be in a small city such as Dublin and a small country such as Ireland — should have held an inquiry immediately that leak happened. It seems utterly wrong to me that the Stock Exchange should leave it to the Government because the Stock Exchange is a self-regulatory body.
There is an obligation on both parties here to have an inquiry into a serious leak. There is an obligation on the Government to find out if it came from a Government Department, and to prevent it happening again. There is also a serious obligation on the Stock Exchange to carry out an inquiry to find out who dealt as a result of that information and whether they were insider dealing, and to take measures immediately to stop that happening. There should have been two parallel inquiries. The weakness of our regulatory financial environment is highlighted by the fact that the Taoiseach had to order an inquiry from Rome. That is absurd and is something which I hope will never happen again.
I would like to ask the Minister a question. For instance I am not suggesting that this happens but it is an important question which must be tackled — if a leak comes from, say, the National Treasury Management Agency, are they immune from prosecution? Are public officials in the Central Bank immune from prosecution? If so, this is a new area, a hitherto undiscovered and unthought of area which is protected. This Bill is being introduced into a regulatory area which is totally inadequate. It seems the Minister should look again not only at the Central Bank, which are so inadequate in their resources and expertise in this area, but also at all self-regulatory bodies, and consider bringing them under the supervision of one body, not necessarily the Central Bank. It is simply unfair — I have experience of this — to ask the Stock Exchange in Dublin to police its own members. That is unrealistic.
It is no coincidence that under self-regulation the Stock Exchange has been unable or unwilling to convict anybody of insider dealing, and nobody suggests it does not happen. That is one of the tragedies of self-regulation here. It should be considered. It is not necessarily their fault; it is just that we live in a very small, incestuous financial environment whereby people who meet each other day in and day, out find it very difficult to police each other. That kind of self-regulation must be looked at. It is relevant because the Unit Trusts Bill is being introduced to some extent as a sop or a flag to induce foreign investors here. We are putting the cart before the horse. We are choosing unit trusts when it is not really necessary, when we should be concentrating on totally different areas. I do not know enough about the insurance industry to make a comment on it but I suspect that industry also ought to be looked at and brought under the same supervisory umbrella, although not the Central Bank in their present form.
There are other important areas which were touched on by Senator Howard and which were omitted from this Bill. There is a real danger that the unit trusts area will be discredited by the fact that this Bill does not go far enough. The lack of proper regulation in the financial services area means that anybody can call themselves investment advisers and put up a brass plaque anywhere in the country. As a result, the public — no-one is more gullible than the Irish public who have a few bob in their pockets — are impressed by the title people carry and are very happy to part with their money. I have seen this in action, and there have been very well documented cases of it. The danger for this Bill in that context is that someone can set up as an investment adviser without being regulated by any body and can advise people to buy unit trusts. By doing so he is piggy-backing on the goodwill of the unit trusts management, trustee and company. It would have been an ideal opportunity, in the introduction of this Bill which is after all only piecemeal, for the Minister to tackle the problem of people operating in this unregulated environment in an unscrupulous way. It would have been helpful if all those who set themselves up as advisers, consultants or whatever one wants to call them, in the financial world were regulated and had to work under very strict rules, as is the case under the Financial Services Act in England.
There are certain practices which ought to be outlawed here. There are people setting themselves up in extremely plush offices, issuing very colourful, glamorous and impressive brochures and working on huge commissions. They can very skilfully separate people from their money, but they are not regulated by the law or by any self-regulating organisation. This is a yawning gap which the Minister has failed to tackle and it is in danger of discrediting the whole financial services industry. There is no obligation on those who set themselves up as investment consultants or advisers to declare to those from whom they extract money for investment what commissions or benefits they are getting or what interest they have in the investment. That is a particularly dangerous area which, I gather, will be covered — I do not wish the Minister to take this as an out — by a 1993 European directive, but in the meantime with which apparently we shall have to live.
They also practice a rather unethical method of code calling, ringing people up from a list, which is illegal in many countries. This is thought to be a particularly pressurising way of extracting money from people. There is no comeback for the people who part with their money, whereas in the self-regulatory Stock Exchange, with all its inadequacies, at least there is a compensation fund. The insurance industry also protects its investors. There are, and have been cowboys advertising openly and without restriction in a way which extracts money from people who are very vulnerable.
It is very difficult for those of us who are educated in the financial world — we are all so educated to a certain extent — and are suspicious of it to realise how extraordinarily vulnerable people with small sums of money are. People who are not used to money and who inherit small sums between £10,000 and £20,000 have no experience in this world and do not know who to go to. They do not know the difference between a reputable stock broker and an investment adviser or consultant. They are impressed by the fact that people can advertise on the back of reputable newspapers and presume as a result that they are particularly good at what they are doing, honest in their endeavours and will give them sensible advice, but that is not the case. Those people need protection but are not given it in this Bill.
There is a whole area in the financial services sector which is open to abuse, which is not regulated and which has been abused. I have probably said enough on Second Stage although I will have some questions to ask the Minister on Committee Stage on the detail of the Bill, in particular about why ministerial powers are retained in it. Senator Howard touched on that as well. I am not certain whether it is a good or bad thing in the present circumstances to maintain ministerial powers on these regulations. I do not understand why they are retained if the Bill is necessary and if there is trust in a Central Bank, which I do not share. I will leave that until Committee Stage.
I welcome the Bill which is necessary and indeed in many ways overdue. It is an extraordinary development that almost £1 billion is invested in unit trusts in this country. A very large percentage of that has probably been the investment of small shareholders although there is a substantial institutional element. I would like to look at this very briefly from the point of view of savings of developing capital in this country. As we have seen in some of the other Bills we have been looking at recently, one of the essentials we require if we are to have a continuing healthy economy, if we are to join, in economic terms, the stronger countries of Europe, is a healthy development of capital to encourage savings. We suffer very much by comparison with most other countries in the amount of savings, and the percentage of savings, which people make out of their income.
As Senator Ross implied, a large number of people do not have any particular financial experience or investment or financial advisers; they have sums of money to invest, perhaps small sums in themselves but very large to the individual concerned and, in total, amounting to enormous sums of money. In that regard there is a gap in our legislation to which Senator Ross has drawn attention. One can always think of additional things one could add to a Bill or of other Bills which could be introduced. This Bill is, if anything, overdue partly because of the growth in trusts to date but also because of the likely growth for the future. Even though we have 30-odd unit trusts here, it is still a minuscule development compared with the number and range which we are probably likely to have in the future, indigenous and, as the financial markets open, we will be exposed to the possibility, or opportunity, depending on how you look at it, of investing in the vast number of unit trusts in the United Kingdom and elsewhere. In some ways there will be an almost bewildering number of investments in various types of business, commodity, shares or geographical regions of the world. Indeed, unit trusts can go down; there is no guarantee that because you put money into unit trusts it will automatically increase year by year unless there is a specific guarantee built into that particular trust, and even then there may be difficulties.
It is necessary that there should be regulations and fairly comprehensive legislation. Whether that legislation should be drawn up by a Government Department, the Central Bank or some other body is a very interesting point. The Central Bank in this country, by an large, have done a good job. I would agree that their staff and resources should be very considerably increased. Perhaps the devolution of their authority and requirement to carry out investigations where necessary and to have a closer involvement with the various institutions and markets which they are at present charged with regulating should be made clear.
Even in the United States where there is very comprehensive legislation regarding securities and the Stock Exchanges, the necessity for companies to produce information and many other requirements in relation to securities, trading and very detailed banking regulations, does not mean you can avoid financial difficulties. The financial difficulties of the banks in the United States are far greater than any difficulties we have seen. Indeed, the Central Bank and the Government of the time did a magnificent job in the way they averted an extremely dangerous situation which could have become critical.
If the Central Bank are to be the regulatory agency — this is the trend whether we like it or not and there are many good arguments in its favour — we must also take into account that we will have, effectively, a European Central Bank grouping. It is important for our own Central Bank to have somewhat comparable powers and, I would argue, very considerable autonomy. This is not a very new idea. Until the early part of this century, less than 70 or 80 years ago, the Bank of England were an entirely autonomous, independent — indeed not long previously — private institution; yet right up to the 1914-18 war the Bank of England carried at least as much weight as the Treasury in the United Kingdom. The balance has tilted very greatly in the inter-war years and since the Second World War. Now there is no doubt that the balance is moving steadily back towards the Central Banks. This is a very major aspect and I am not altogether sure it is one that has received a great deal of thought or attention in this country, although there is evidence in this Bill that some people, at least — and the Minister obviously — are considering the implications of this trend. I welcome the Central Bank's involvement. I strongly urge that their entire position is reviewed and their staff and resources very considerably increased. I welcome the Bill, and perhaps there will be a few more points on the sections as we go through it.
I thank Senators for their remarks in relation to the Bill which were generally favourable and supportive. I will try to deal with some of the points that have been raised by a number of Senators. Senator Howard expressed some concern about the position of small investors who were heavily reliant on the expertise and probity of the management company and the trustees. The Senator asked why this Bill did not contain any arrangement whereby if a loss were sustained, the Central Bank, or some other agency, would make up that loss to such an investor. We do not have those arrangements by and large. It is really impossible to have such arrangements. Everybody who invests in any form of security necessarily takes some risk. The purpose of this Bill is to minimise the risk but neither the Central Bank or any other supervisory agency can give a copperfastened guarantee that a loss will not accrue.
Unit trusts are quoted daily. They go up and down and reflect the value of the underlying securities which are invested in the trust. If the securities fall, obviously the value of the unit falls and, therefore, the investor stands to incur some loss if he chooses to sell at a time when the unit price has fallen. He cannot be guaranteed against that. If a small investor wants an investment where the value of his capital, at least in nominal terms cannot fall, he would be better advised to put it in to a bank, savings certificates, a building society or something like that. He may in inflationary times suffer a loss there, whereas in inflationary times he may make a gain if he is in equities. That is the nature of the thing and it is not possible to guarantee people against losses. It would be an intolerable and impossible burden if the State or any of its agencies were to do so.
The Senator raised the question of fraud causing loss. There is some risk of that. All I can say in regard to unit trusts is that they have been in existence as authorised and supervised entities here for 18 years and we have not had any loss through fraud or otherwise. That is a reasonably good record. There is not any guarantee that it will not happen in the future. If people are of a fraudulent frame of mind or intent, almost no form of supervision can prevent them acting fraudulently. The best that a good supervisory system or authority can hope to do is try to pick up the fraud or recognise it as quickly as possible before substantial losses are incurred.
Senator Howard queried the Minister's powers under section 4 (2) and asked why that residual power was retained. It is retained because at the moment the only regulatory authority in regard to unit trusts is the Minister for Industry and Commerce. It is being transferred, but I thought it prudent that I should retain some residual overall policy power of direction. I emphasise that it would relate only to broader issues of policy and not to day-to-day prudential supervision or the things that make that up. It is not unreasonable that somebody who is directly accountable to the Oireachtas might retain such residual power, because the Central Bank are a rather remote body who are not answerable to this House. The Central Bank are independent under the various Central Bank Acts and it is no harm to have some level of accountability in these matters even if it is a relatively slight one and a residual one.
The question of intermediaries was raised as was the question of the regulation of agents, for example, the people who nowadays describe themselves as investment brokers, but who are not recognised under any statute so far as I am aware, and have no organisation or professional body dealing with them. I recognise that there is potential for difficulty in that field. It has been recognised in Britain, and it is dealt with under the 1986 Act in Britain. This is an area we will have to face up to. I have spoken with the Minister for Finance about that, because I am concerned about it.
We have now regulated insurance intermediaries very strictly for example. Stockbrokers are regulated and the actual schemes, such as unit trusts schemes and UCITS, are now subject to relatively stringent regulation. The one weakness in the whole chain is the non-regulation of those who act as intermediaries for these schemes between the principals in the schemes and the public. If a loss occurs there, the investors have very little redress. They only have redress against the person concerned or his company if he is a company. I regret that there was a case of such a loss in the last month or two. It has given rise to some concern. Happily, while the amounts involved are considerable for the small investors involved, the total amount is not great. It has to be a matter of concern that people have lost money due to the default of an intermediary of this kind.
The appropriate Minister in all the circumstances to introduce legislation on this matter is the Minister for Finance. The time for that to be done would more appropriately be after the adoption by the Council of Ministers of the draft investment services directive which is before the council at the moment. It is before the ECOFIN Council and is being handled there by the Minister for Finance. It is not before the internal market council. Once that directive has been adopted it will be opportune for us to introduce legislation here which would have the effect of bringing the directive into effect in Irish law. We could then use the opportunity to broaden the terms of the directive so far as our requirements are concerned.
Senator Ross spoke about some doubts he had with regard to the principles underlying this Bill. I understood him to say he did not regard the Central Bank as necessarily being the be-all and end-all in so far as being a supervisory authority is concerned. I agree that there were instances in the past where the Central Bank in regard to certain aspects of supervision may not have been all that was entirely desirable. We can say that with hindsight. I am satisfied that the Central Bank is no less qualified than my own Department in this matter. Senator Ross and others laid some emphasis on the necessity for resources, people and so on, in the Central Bank. I mentioned this in the Dáil and immediately I drew a number of comments. The Central Bank is in a far better position to recruit further expertise, as and when they need it, than are my Department. My Department are strafed for numbers due to the embargo. People in the supervisory area, particularly, are trying to cover a far wider area than, ideally, they should. The Central Bank does not seem to suffer from this problem. The Central Bank is independent as a monetary authority and seems to carry its independence in this respect far beyond what may have been in the mind of the Oireachtas when the legislation was passed. I am not aware of any inhibition on the Central Bank on recruitment at present. It is uniquely lucky in that respect.
I would prefer to see the Central Bank boost their profits each year.
They do generate a substantial surplus. If the surplus happens to be about £1 million less because they spent it on things they wanted to spend it on, apparently nobody can say boo to them. I wish we were all in that position; that the poor over-worked Department of Industry and Commerce were in that position. However, it is as well to accept the reality that whatever doubts or reservations one may have had in the past the Central Bank are in a better position now to act as a supervisory authority in respect of these matters. It certainly makes sense to try and bring all these analagous forms of financial service under the same supervisory authority, otherwise there will be serious anomalies in the way in which schemes, unit trusts, UCITS, SICA Vs and so on are authorised.
Senator Ross made the point that we should not change our law just to suit financial services centre companies in Dublin and I agree with him. At the same time there is a happy medium. Shannon, which everybody forgets, has the same rights as Dublin to promote these financial services but it is not used as much. In the establishment of the Dublin centre we would be very foolish if we did not in legal and supervisory terms put ourselves on roughly a level playing pitch with some of the other major centres. If we had law that was entirely rigid and reflected the thinking on these products — as it was in the early seventies — then we would not be in a position to facilitate the setting up here of many companies and schemes of different kinds who would be free to go to other major centres, perfectly respectable centres such as Luxembourg. I take the Senator's point that we should not be falling over ourselves to change the law generally to get them to come here and we should not lose sight of the necessity to protect investors. I hope this Bill meets the balance that needs to be struck.
Senator Ross queried my use of the word "flexible" and I can understand that up to a point, because if you want to you could insinuate by the use of the word "flexible" that there was a certain flexibility of principle or whatever and that the principles could be bent in favour of individual companies. I certainly hope the Central Bank would not do that. It is not my experience that they have done so and if I thought there was any danger of it I would give them a direction under section 4 of this Bill not to do so.
Senators would probably agree on reflection that a certain sensitivity — I use that word as opposed to "flexibility"— to the changing nature of the products in the financial services area is necessary, otherwise we exclude ourselves from things that would be entirely beneficial to us. It is no harm to have that sensitivity built in — as I think it is — to this legislation without losing the advantages of control and protection.
Senators Ross, Conroy and others referred to certain things which happened in banks and insurance companies within the past ten years. It may not be appropriate for me to refer to the detail of those incidents now but in the merchant banking case I have already expressed the view that I find it difficult to understand why there were no prosecutions. It was not a matter for me or for the Government, it was a matter for the Director of Public Prosecutions but, for some reason that I cannot understand, he chose not to prosecute. It appeared in that case, from the report of the liquidator, that apart from matters relating to fraud and breaches of the law generally there were specific breaches of the Central Bank Act. Why they were not prosecuted I am not clear. I do not have the Act in front of me so I cannot say whether the Central Bank can prosecute in its own name. Whoever is the prosecuting authority under the Central Bank Act did not take prosecutions even though there appeared to be clear evidence of breaches of the main Central Bank Act, 1981.
Some major amendments have been made to the Central Bank Act since the merchant banking case in 1989. They have taken account of difficulties that came to light in that case. The AIB-ICI affair which was referred to is one that is still so sensitive that I would prefer not to get into it because it is not yet over. I did note with some interest that Senator Conroy complimented the Government and the Central Bank for sorting out what could have been a major banking problem. Senator Conroy said certain things ——
He was being diplomatic.
——that were even more meaningful than he thought. It is very interesting that that is the perception from outside. I happen to believe it is very largely true. That is why I highlight what the Senator said. I have heard in my present capacity very strenuous arguments from another quarter to the effect that this had nothing whatever to do with banking or the banking industry. For that reason I will not pursue this point any further.
I think I have dealt with most of the main points raised. If there are any individual points I did not deal with, I will be glad to do so. I should like to thank Senators for their generally positive response to the Bill.