Brian Cowen (Laois-Offaly, Fianna Fail)

I move: "That the Bill be now read a Second Time."

This Bill started out as a very short item of legislation. Just a few short sections were needed to complement the regulations which I made last February to transpose the EU Markets in Financial Instruments Directive or MiFID into Irish law. The whole new MiFID regime comes into effect for the industry across the European Union with effect from 1 November next. While the deadline for transposition of the directive was 1 February 2007, the relatively long lead-in time before it comes into effect was sought by industry throughout the EU to allow it to train staff in the new provisions and especially to make the extensive updatings required to its IT systems.

The transposing of the MiFID statutory instrument is Statutory Instrument No. 60 of 2007, and it is called the European Communities (Markets in Financial Instruments) Regulations, 2007. Given the volume and complexity of these regulations that run to 259 pages, it was perhaps inevitable that subsequent close scrutiny by industry and the Financial Regulator would identify a few areas where clarification, amendment or correction might be appropriate. I was pleased to be able to meet these concerns in the amending regulations which I signed last week.

The core issue that needed to be addressed in this Bill was the requirement to introduce penalties at national level for breaches of the new MiFID provisions. Minor infringements were taken care of in the MiFID statutory instrument of last February, but the scale of the penalties for conviction on indictment for breaches of the new MiFID legislation, namely, fines of up to €10 million and-or ten years imprisonment, is such that primary legislation is required. That requirement for primary legislation was the immediate reason for bringing forward this Bill.

However, it is also necessary to empower the Financial Regulator to be able to levy fees on the financial services sector towards the cost of implementing its new MiFID functions and responsibilities in the same way as arises for other regulatory provisions enforced by the Financial Regulator.

Finally, in this context, it is necessary to repeal the Stock Exchange Act 1995 as its provisions are being superseded by the MiFID statutory instrument. I wish to make clear to Deputies that the penalties involved — fines of up to €10 million and-or ten years imprisonment — are not unique to this legislation. Such penalties are already set out in the Investment Funds, Companies and Miscellaneous Provisions Act 2005.

The MiFID directive is one of the most significant items of EU financial services legislation agreed in recent times and applies to both investment firms and credit institutions when providing investment services. The aim of the MiFID directive is to create a pan-European market in investment products by replacing a patchwork of national rules with harmonised EU-wide regulation and investor protection so as to allow investment firms to sell investment products and services outside their home markets, across the Union, based on a single licence from their home country regulator.

The MiFID also aims to increase transparency and to reduce costs for users of financial instruments such as equities and shares, bonds and derivatives, for example, credit or commodity derivatives or financial contracts for differences. This is being achieved through standardised rules on the dissemination of quotes and on pre and post-trade transparency, as well as best execution practices.

The MiFID directive replaces the 1993 Investment Services Directive, the ISD. The effectiveness of the ISD's "passport" had been undermined by member states imposing their own local consumer protection requirements. Investment firms wishing to trade across the EU had, heretofore, to comply with 25 sets of rules. It was essential, therefore, that investor protection provisions in this area be harmonised and also updated across the Union so that investors could avail of greater competition in investment firms' services on a cross-border basis. It was also important to bring new services such as investment advice and new financial instruments such as derivatives within the scope of the legislation.

A significant development under MiFID is the creation of a new regime for investment firms who buy and sell shares on "own account" outside of a regulated market — known as "systematic internalisers". It clarifies that the operation of an electronic-based trading system that matches buy and sell orders, known as a multilateral trading facility, MTF, is covered by the MiFID passport. Consequently, all share transactions will no longer be required to be executed in a stock exchange, thus facilitating competition from multilateral trading facilities.

The MiFID-related provisions in this Bill are important and urgent because they need to be in place in advance of the "going live" date for this directive of 1 November next. Similarly, the Stock Exchange Act must be repealed under this Act from that date.

This directive is a further element of the comprehensive and detailed EU-wide framework for regulation of financial services which is implemented in Ireland by the Financial Regulator. Arising from developments in global financial markets in recent weeks, I wish to reiterate briefly a number of key points which I have previously highlighted regarding the quality of Ireland's financial system and its regulatory regime.

The single most important point to be made in the national context is that Ireland's banking system is well-capitalised, profitable, liquid and soundly regulated. This is confirmed by the conclusions of the recently published IMF report which also noted that the Central Bank is satisfied major lenders here have a solid financial base. As far as the effectiveness of the Irish regulatory system is concerned, the IMF report explicitly acknowledged the strengthening of the financial regulatory and supervisory system in Ireland over recent years which conforms to international best practice standards.

It is important to highlight the Central Bank and Financial Services Authority of Ireland, CBFSAI, integrates within a single institutional structure both the supervision of individual financial firms by the Financial Regulator and the monitoring of overall financial stability, which is the responsibility of the Governor of the Central Bank. This structure yields significant advantages in terms of the appropriate co-ordination of these two activities under the current legislative framework. In addition, the Central Bank and Financial Services Authority of Ireland operates within the overall context of the euro system and the European Central Bank which has ensured a consistent and coherent approach across the euro area to addressing current uncertainty in financial markets.

In contributing to the further development of financial services regulation at EU level, important lessons are to be learned from recent developments in global financial markets. This process of review and examination is already under way. A key issue following recent events in the UK is the effectiveness of deposit protection arrangements across the EU. The European Commission has recently concluded a review of the Deposit Protection Schemes Directive which sets the framework for national schemes in the EU. It is necessary to look again at this work and in the light of recent developments to make sure that deposit guarantees strike the right balance between protecting depositors and making sure banks are not encouraged to take inappropriate risks.

When a Bill of this nature is proposed in a Department, it often affords a welcome opportunity to address a variety of other reforms which would not merit a separate Bill in their own right but which, nevertheless, are important to the stakeholders affected by the measures in question. It is that consideration which accounts for the "miscellaneous" part of this Bill.

There are nine miscellaneous provisions in the Bill as published and I shall deal briefly with them in the order in which they appear. Section 9 provides for sanctions similar to those for MiFID which I mentioned earlier, that is, fines of up to €10 million and-or ten years in prison, for conviction on indictment for breaches of the Reinsurance Directive as transposed by S.I. 380 of 2006. It should be noted that the intention of this provision is to provide the option of a more severe set of penalties for serious breaches of certain provisions in the reinsurance regulations. Minor offences, as a matter of course, will continue to be dealt with through the administrative sanctions system and-or as summary offences.

Section 10 is an amendment of the Netting of Financial Contracts Act 1995. This Act provides protection for netting or set-off arrangements between parties to financial contracts in the event of insolvency. Given the rapid pace of change in financial services, provision now needs to be made to widen the definition of financial contracts in response to market developments.

Section 11 deals with the Investment Intermediaries Act 1995 to confirm certain limitations of receiver or liquidator access to client money following the winding-up of an authorised investment business firm, and implements an important recommendation in the report of the Morrogh review group published in November 2006.

Section 12 provides for a simplification of the State ownership of Icarom plc under administration — formerly the Insurance Corporation of Ireland, ICI. The main role of Icarom is to run off ICI's pre-1985 liabilities, mainly in respect of its US risks. The simplification of the legal structures, by removing the holding company Sealúchais Árachais Teoranta, is in the interests of making it easier for Icarom to deal with litigation in the US courts. Given that the Oireachtas approved the establishment of Sealúchais Árachais Teoranta by way of primary legislation, the Insurance (Miscellaneous Provisions) Act 1985, it is appropriate that its proposed dissolution be approved by the Oireachtas.

Section 13 introduces a variety of minor amendments to the Central Bank Act 1942, as follows. First, there is an extension of the deadline for submission of its annual budget by the Financial Regulator from end-September to end-October of the preceding year. Given the complexity of the Financial Regulator's budgetary process, an extension of the time period is required. Second, there is an amendment regarding disclosure of confidential information from the Financial Regulator to the National Consumer Agency. The purpose of this provision is to put beyond doubt the right of the Financial Regulator to disclose confidential information to the National Consumer Agency for the performance of the agency's functions. This is subject to any EU confidentiality constraints on the Financial Regulator. Third, an amendment extends the immunity from costs arising from the discharge of their duties to members of the Financial Services Ombudsman Council. It will ensure members of the council are not liable for damages arising from the discharge, in good faith, of their statutory duties. Fourth, an amendment relieves the Financial Services Ombudsman of a requirement to provide the Financial Regulator with certain details where it decides not to investigate or to discontinue an investigation. The Financial Services Ombudsman was established as an independent body in its own right. The existing provision may give the impression of an element of accountability to the Financial Regulator which was never intended. This amendment will clarify the Financial Services Ombudsman's independence. Fifth, in order to ensure continuity of membership and to minimise any potential disruption to the efficient working of the Financial Regulator, the amendment permits the number of required compulsory retirements from the board to be reduced by the number, if any, of voluntary resignations which may have occurred between the relevant anniversary dates.

Section 14 makes miscellaneous amendments to the National Treasury Management Agency Acts 1990 and 2000, as follows. Paragraphs (a), (b) and (c) extend the NTMA's central treasury service, which currently offers competitive deposit and borrowing facilities to local authorities, to new categories of bodies such as non-commercial semi-State bodies, the Courts Service, universities and colleges, the Railway Procurement Agency and the Housing Finance Agency, HFA. The extension of the treasury service to the HFA in particular will allow the NTMA to provide the HFA more efficiently with the short-term funds needed to manage its cash-flow requirements.

Section 14 also allows the NTMA to engage in swap transactions in regard to its lending activities with local authorities and semi-State bodies through the central treasury service and in lending to the Housing Finance Agency through the Post Office Savings Bank fund. This will allow the NTMA to offer the fixed-rate loans sought by those bodies while hedging the risk involved for the NTMA through interest rate movements. The NTMA is already allowed to engage in swaps and other derivative transactions in relation to its debt management activities, and in futures and options transactions, but not swaps, in regard to the Post Office Savings Bank fund. In line with the NTMA legislation generally, these provisions will apply to the Minister for Finance, who will then delegate the powers to the NTMA.

Section 15 is an amendment to provide that the NTMA may use the foreign currency clearing accounts established under section 139 of the Finance Act 1993 for foreign currency transactions other than debt-related transactions, namely, the National Pensions Reserve Fund.

Section 16 makes amendments to the provisions dealing with ministerial pensions, as follows. First, former office holders — Ministers and Ministers of State — on leaving service are entitled to receive severance for up to two years. Circumstances can arise where, through oversight or otherwise, a former officer holder does not apply for the pension within the specified time period, namely, within six months of severance payments ending. The amendment would give the Minister for Finance the discretion to backdate the payment of pension in the case of an application made outside the six-month limit to the date of entitlement and reflects a similar provision which applies to Civil Service pensions. Second, whereas the current ministerial pensions scheme allows for a pension to be payable after two years service as a Minister, the "old" pre-1993 scheme requires three years service. This amendment would provide for payment of a ministerial pension to a member of the "old" pre-1993 scheme who has more than two years service as a Minister. This has been the position for members of the "new" scheme since 2001.

Section 17 has been brought forward at the request of the credit union movement. It provides for a practical interpretation of the lending limits which apply to loans where the period on the loan falls below the periods specified in the legislation. This arises from the implementation of the report of the review group on longer-term lending by credit unions. This change has already been effected on a provisional basis by way of S.I. 193 of 2007 — the Credit Union Act 1997 (Alteration of Financial Limits) Regulations 2007 — but the Attorney General has advised that the change should be confirmed in primary legislation, hence this provision.

The reason the Bill requires early attention is that the imposition of significant penalties for conviction on indictment for breaches under this directive's statutory instrument provisions needs to be in place in advance of the implementation date of the directive on 1 November next across the EU and also to repeal the Stock Exchange Act 1995 with effect from that date. I must advise the House, however, that I shall bring forward a number of additional measures by way of Committee Stage amendments. Some of these are merely minor technical administrative provisions but some significant new initiatives are also included, such as the proposal to bring within the sphere of financial regulation the activities of non-deposit-taking lenders. This will enable the application of the Financial Regulator's consumer protection code to all consumer lending, including what is described as sub-prime lending, which I undertook to ensure earlier this year. The final details of this proposal are currently the subject of a public consultation exercise until next Friday, 5 October. Once the public consultation has concluded, I shall move quickly to finalise my proposals in time for Committee Stage. Details of the public consultation are on my Department's website.

As I have outlined, the issues addressed in this Bill largely relate to some important, albeit technical, issues. The Bill completes the final element of the implementation of the directive, which will yield significant benefits to both Irish investors and Irish-based investment firms as well as addressing a range of outstanding technical reforms to various Acts falling within my remit. I trust, therefore, that the House will be amenable to a positive and constructive consideration of the Bill's provisions. I commend the Bill to the House.

See this speech in context