Eamon Ryan (Dublin South, Green Party)

I welcome the opportunity to speak on Second Stage. While there may be difficulties on Committee Stage, I hope to speak on Report Stage. A number of measures in the Bill will be welcomed across the House. The Green Party launched a paper this year which dealt with trying to ease the burden of regulation, particularly on small Irish businesses. I welcome the proposal in the Bill to raise the audit exemption limit to the maximum amount allowed in the EU. It is not a fundamental change because many small companies will still have to draw up their annual accounts and submit them to the Companies Registration Office and will still use accountants in this regard. However, it does reduce the cost somewhat. In particular, as the audit requirements become onerous each year, it makes it easier for accountancy practices dealing with those small companies not to have to go through unnecessary regulatory and bureaucratic control.

I was a small businessman before I entered the House and I found the relationship with my company accountant to be extremely beneficial and positive. The annual audit was one of the few occasions when I was probably pulled back to the nuts and bolts of what the business was actually doing and whether it was making money. It is very important to maintain and encourage this connection between the accountancy profession and small Irish businesses but it does not need to include regulated and audited accounts which more properly apply to larger businesses. The audit exemption limit of €7.3 million is an accurate reflection of the difference between small and medium-sized companies which might be forced to take on those.

I also understand and support the proposal in the Bill for the dematerialisation of the stock market share processing process within the Irish Stock Exchange and in our dealings with other international stock exchanges. It has been promised for many years. I remember approximately 30 years ago when computers started becoming commonplace it was stated we would have paperless offices in no time. It is remarkable how the quantity of paper used has increased rather than decreased since then. Dematerialisation makes sense and I welcome it. However, it must be properly managed and major security provisions must be included to ensure fraudulent or other improper behaviour cannot take place.

I welcome the opportunity provided by this Bill to transpose the European directive on transparency in business. On many occasions in this House I spoke on the wisdom, merit and effectiveness of having greater transparency and openness in business decision-making. This returns to what I stated about my experience as a small business person. Commentators may argue greater transparency is an imposition or breaches the need for a business to have confidentiality. I disagree. The more business and commerce is conducted in the broad open light of day, the better the quality of business and commerce which will be undertaken.

I will make my main comments on the provisions outlined in section 8 of the Bill, regarding the restriction of liability where non-equity securities are involved. This is the one element of the Bill about which I am cautious.

I welcome the development of the Irish Financial Services Centre. It has been a major success. Approximately 20,000 people now work there and traded finance amounts to approximately €4.5 billion net cash inflow. We must seek to continue, support and develop that. I attended an Irish Bankers Federation dinner at which the Taoiseach spoke. It was noticeable the Taoiseach made clear to the banking industry that the Government would provide whatever flexibility was necessary to ensure the continued success of the IFSC.

While I welcome that, I would sound a note of caution. Banking, re-insurance and asset management industries seek flexible regulatory and Government support. It is one of the criteria these industries use in deciding where to locate. We must make that provision and be responsive. It is extremely responsive to immediately change a provision of the 2005 Act which causes the financial services industry difficulty. However, we must be careful to ensure standards in the industry are at the highest international level. We must not be seen as an easy and attractive offshore haven of low taxes and a relatively light regulatory regime. In the long run, a successful and stable financial services industry is one viewed as based on a good, strong regulatory system rather than a fly-by-night operation where rules can be bent. Finance requires trust, and trust requires strong and effective governance and regulatory systems.

We have natural advantages, such as our time zone location, English language usage and our education system. For many years, Irish mothers urged Johnny or Mary to go into commerce or the bank. In hindsight, after 20 or 30 years, it was not bad advice to have given the young men and women now working in the Irish Financial Services Centre and elsewhere.

A number of recent events increased my cautiousness about a particular provision in the Bill, as did reading the consideration of new non-equity products in a series of articles in The Economist and a number of newspapers. Recently, The Economist stated phenomenal growth occurred in these slightly unusual non-equity securities. According to a recent article in The Economist, last year approximately $600 billion was issued in equities throughout the world, $685 billion was issued in standard bonds and loan volumes of the new innovative financial packages, which I want to see regulated, increased to $3.5 trillion during the same period.

An editorial article in The Economist stated central bankers and supervisors are increasingly worried about the risk to financial stability which may be lurking in the complex debt instruments dreamed up by the finance industry. It also states a major concern is a potential danger to regulated banks from the faceless institutions, such as hedge funds, with which they now do much of their debt trading. It is interesting to note these comments were made not in a socialist worker publication, but in The Economist, a publication at the heart of the free market and free capital movement.

The article also argued particular risk is involved with new innovative products such as credit-default swaps and insurance products. Two articles quote researchers at the European Central Bank as stating part of the problem with credit-default swaps is that they are used for speculation as well as hedging. The European Central Bank is also quoted as stating, "We have introduced a new product, "insurance", that appears to be used by people not looking for insurance. It is not the instrument[s] which [are] causing liquidity concerns but the way market participants may be using them."

A current debate in the financial regulatory industry is whether the provision of liquidity itself will be good for markets or whether allowing such unregulated access to liquidity will build up a significant risk in the event of a downturn in the markets which could lead to an extremely serious crash. We need only to look at the case of Brian Hunter, a Canadian hedge fund operator who made $100 million for himself during the first six months of the year. He made $2 billion on a gas play in the hedge fund markets during the first six months of the year and subsequently lost $5 billion in a week. That hedge fund was then in severe difficulty.

These products and their prospectuses are extremely complex. The companies involved are not like AIB, Bank of Ireland, Deutsche Bank or any other mainstream banks. They are new innovative financial companies offering prospectuses for new non-equity, non-traditional bond funding often in insurance and on a credit worthy note. That is the background to my concern on reading that section 8 appears to contain no liability other than the strict liability contained in the guarantee within such a prospectus.

I need to hear from the Minister what exactly are the implications of this and how we will place ourselves internationally. The Minister states in the absence of such a regulatory change, we may lose some of these new monoline insurance instruments and companies to other locations. I am sure that is also argued by the industry. However, we must be careful to protect existing jobs and asset management portfolios in the IFSC. We must not simply chase after the latest, newest, most liquid financial instrument. We must maintain Dublin's success and not always be at the edge or on the crest of the latest instrument. This market changes extremely rapidly. Suddenly, $30 billion is traded within a short period on new instruments which did not exist a year ago.

We must walk a difficult line between being ambitious, creative, innovative, flexible and ahead of the pack and being as prudent, conservative, cautious, above board and exemplary as is required in financing, so Dublin will not be seen as a place which will allow slightly riskier instruments than other capital markets. It is a thin line to walk but that is the only worry I have about this Bill. We may be putting ourselves in an attractive position in the short term to gain certain business, but if some of the hedge funds or non-traditional fund management systems run into difficulty in Dublin, it may damage other business we have successfully built up over the past 20 years and harm the reputation of Irish financial management. Funds of this scale would also have a significant global effect. I wanted to raise that concern on Second Stage. We are dealing with such complex funds and such a new industry that this must be teased out on Committee Stage.

Small business people welcome the audit exemptions in the Bill. It is a concern that our economy benefits from a number of industries, with property being the main driver of growth and enterprise. The IFSC is an example that shows we do not have to trade widgets to be successful internationally; we can trade services. It is disappointing, however, that the export performance of indigenous industry has been declining in recent years despite the efforts of Enterprise Ireland and the IDA. If we look at the Irish Stock Exchange, we have not been successful in developing new companies that raise capital to invest in new entrepreneurial activity. We are suffering from what used to be known as Dutch oil disease, where economies with access to a major industry, like oil, do not develop any other industry, weakening their economy. Something similar is happening here, because the over-emphasis on property for enterprise and growth has sucked entrepreneurial activity from the rest of the economy. That has placed us in an increasingly exposed position.

While we are correctly opening our stock market to more innovative systems with dematerialisation of the stock exchange trading system, I am concerned about the lack of Irish companies seeking to be listed on the exchange or in London to raise capital for new projects. Why are companies not seeking to develop wave and tidal energy, where we should have a competitive advantage? Why are Irish companies not trying to raise €400 million on the Irish Stock Exchange to invest in research in that area? Why are companies not investing in innovative food processes or other services where we could succeed? That is my concern regardless of the systems on the exchange.

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