Joan Burton (Dublin West, Labour)

This is the first opportunity the House has had to converse with the Minister for Finance on financial matters since the general election. To paraphrase Yeats, all is changed utterly. We received word today that the Minister acknowledges now that the deficit by the end of the year will be €1 billion, which is at least €500 million more than he indicated at budget time. There have also been extraordinary developments with the credit crunch and collapses in banking which have seen people queue to get their money back from banks, a sight not seen in these islands for a long number of decades.

The model of regulation adopted by Fianna Fáil and the Progressive Democrats, which continues to be employed, involves regulation of the financial services industry with a very light hand. The financial services industry is a very important and valuable employer providing many well-paid jobs, especially for younger people and graduates at the IFSC, and related accounting and legal employment, which are highly attractive. Like the Minister, I have seen income and other tax revenues generated from people working in financial services. It is important that the financial services industry, therefore, operates with prudence and consciousness of the importance of reputation. Historically in financial services, reputation is the guarantee of future expansion and growth. Therefore, the Minister's silence on the model he has selected of regulation with a very light hand deserves to be questioned.

Much as they like to present themselves as masters of the universe, many bankers and stockbrokers have been shown at the end of a long bear market and beginning of a potentially lengthy bull market to be emperors with very little in the way of clothes. Most people in politics recognise that comprehension of financial products, especially derivatives, is taxing. To a significant degree, these products are developed and sold internationally from the IFSC. Other than those who have recently obtained a business degree, accountancy qualification or in some cases a PhD, very few people, certainly in this House, understand much about modern financial transactions and products like derivatives. In this context, the Bill is timely. The last couple of months have shown that an Irish economy which is overly reliant on the construction sector may experience a credit crunch which affects financial services and puts at risk some of the employment they have generated. While the Bill seeks ostensibly to implement European regulations, it represents also a welcome and important opportunity to have a conversation about the direction of our economy and financial services. I want to raise a number of issues in that regard. Reference is made in the Bill to the Stock Exchange. The Minister is aware that more than 50% of the transactions made on the Stock Exchange over the past couple of years have involved contracts for difference, CFDs, a product which was not known in this country before 2002. In his 2005 budget speech, he announced his intention to bring an amendment which would provide for stamp duty on CFDs. Surprisingly for someone as politically robust as the Minister, he told the Dáil a couple of months later that he was withdrawing the amendment, which had already been advertised on the Revenue Commissioners' website, following advice he had presumably received from brokers.

A number of Irish brokerage firms have made a lot of money from CFDs, although these contracts are now rapidly disappearing as a financial services product. I am told that certain high net-worth individuals, probably including some of those who are happy to pay no tax, have incurred losses on a personal basis of up to €15 million on CFDs entered into on the Stock Exchange. The investment sections of major banks have announced in recent weeks that they are no longer advising their private high net-worth individual clients to enter into CFDs because the risk for such products is too high in a falling stock market. Given that the almost entirely unregulated market in CFDs has been very profitable for certain Irish financial institutions, what in this Bill will make any difference for the future?

I listened to a household name, Nick Leeson, being interviewed on RTE yesterday. Mr. Leeson, who is now living happily in Ireland, is fronting Paddy Power's spread betting. That is probably a bit of fun but can the Minister tell me the difference between the spread betting advertised yesterday by Mr. Leeson and the CFDs which made up more than 50% of the volume of transactions on the Stock Exchange? It is neither here nor there if a high net-worth individual loses €15 million, particularly if he or she is one of the many who are tax free thanks to the Minister's kindness. However, it is a more important issue if financial instability is caused to the extent that ordinary people and businesses are squeezed by the cost of lending and the capacity for raising mortgages. I am delighted we are having a conversation about where our financial services sector with its ultra-light regulation is going.

The Minister will recall that I raised the issue of sub-prime lending on 22 November 2006 and on several other occasions over the past two years both on the floor of this House and in the Committee on Finance and the Public Service. In many poorer housing estates, sub-prime lenders are selling door-to-door and they distribute more advertisements than take away restaurants or pizza delivery companies in their efforts to persuade people to roll up their loans and re-mortgage their houses. The lenders speak about easy borrowing but make a fortune from the people they pressure into taking such loans. I asked whether the Minister was concerned about sub-prime lenders preying on vulnerable people and about the regulation of the sub-prime market and he replied that the sub-prime market was not really going to be regulated by the Financial Regulator because it was carefully excluded from his light regulation model and did not come under the terminology defining the authority. He said, however, that the practice was covered by the Consumer Credit Act 1995 and if I had concerns I should make a complaint. Given the wreckage of the international financial markets over the past few months, it was very arrogant of him to say that something which appeared so risky to those who were concerned about the prudential element of banking could be simply addressed through the 1995 Act.

He also stated:

the Financial Regulator has a consumer protection remit in the area of financial services. It was established as a modern regulatory authority that would perform its function in an independent fashion.

However, the Financial Regulator has had nothing to say about what has happened in the sub-prime market, which is estimated to be worth €1 billion in Ireland and, prior to the advent of the recent problems, was expected to grow to around €5 billion within the next few years. In comparison with the losses in Ormonde Quay and Saschen Bank, €1 billion sounds like small beer but it involves a large number of vulnerable people. In its two most mature markets, the USA and the UK, sub-prime lending has faced accusations of predatory practices. Research shows those who access the sub-prime market are more likely to be financially vulnerable and display little financial sophistication, underlining the need to protect them from predatory lenders. In the UK, practices have included cold-calling and loans have been granted to borrowers who have misled or lied on their application forms about their capacity to borrow. Has the Minister even made a phone call since the crisis occurred to find out the risks involved in pedalling sub-prime and 100% mortgages or to ask whether applicants may have lied about their repayment capacity? Even the chairman of the US Federal Reserve, Ben Bernanke, referred recently to the dubious practice of loans being granted to people who are unable to repay them. With regard to the Bill before us, is the Minister prepared to provide a more robust regulatory framework? The era of light regulation may not be in the best interest of the banking industry if it allows the sights we have seen of people queueing on the streets to get their money back from Northern Rock.

The Irish sub-prime market is dominated by new institutions specialising in the area. If one ever watches afternoon television or listens to the radio, one will be made constantly aware of advertisements for sub-prime type lending. Sub-prime loans are being arranged through a network of mortgage brokers, some of whom are very eager to sell products. There are over 1,800 mortgage intermediaries registered with the Financial Regulator in Ireland. The market stands at around €1 billion and was expected to grow to around €5 billion. Credit is becoming more expensive and more difficult to attain and some people may have been misled into borrowing or encouraged to lie in their financial loan applications. What will happen as interest rates rise and such people feel the squeeze and what does the Tánaiste and Minister for Finance, Deputy Brian Cowen, intend to do about it? He must strike a balance between protecting people from themselves and allowing them a choice.

What steps can be taken to make ill-informed borrowers think seriously before jumping into the clutches of a sub-prime lender? Is the turmoil in the United States sub-prime market contagious? It will prove contagious if regulation in Ireland is so weak that nobody calls lenders to account when clear risks are taken. There would, in turn, be an impact on the housing market. Going back to the Minister's previous comments, as non deposit taking lenders sub-prime lenders do not fall under the remit of the Financial Regulator. Is the Minister prepared to change this? Is he prepared to bring sub-prime lenders that, effectively, operate through UK offshoots or offshore under Irish regulation? This is important and people on all sides of this House with knowledge of financial markets will agree.

In terms of financial derivatives there is an issue relating to what brokers have been selling and, in this regard, I have questions on the Financial Regulator. Some stockbrokers in Ireland have been selling financial derivatives like hot cakes. Institutions such as credit unions have had lending activities restricted and have taken in a great deal of money due to SSIA savings. To what extent have such operators been exposed due to investments made in financial derivatives on foot of recommendations made by brokers? Some Irish brokers have done very well through this trade and I am concerned about credit unions. Such institutions should be well advised on the investments they make with regard to financial derivative products that may turn out to be risky.

The Minister said earlier that those providing these products make money not only on the interest but on the selling fees and once one rolls them up and sells them on one makes more fees. If one makes €1 billion in financial derivatives the key is to roll them up and sell them on. Do we know what the picture is like for the people and institutions, such as credit unions, left holding them?

The Minister for Health and Children, Deputy Mary Harney, would gasp if I said thank God for State banks but, thank God for state banks in Germany. Where would we be if the state banks in Germany, including the state bank that owned Ormond as it went to the wall, had not rescued the bank that went under as a consequence of the Ormond Quay investment vehicle? This was a classic example of an operation set up in Ireland to provide a vehicle for investment partly because the German economy is somewhat less buoyant than the economy here. People in Germany have a tradition of saving and banks are stuffed with money so they must find something to invest in. We have had a narrow escape.

The Bill seeks to raise penalties pertaining to reinsurance and the first bad press the Irish Financial Services Centre got related to Swiss Re and other reinsurance vehicles. Risks were taken and international parent companies were very unhappy upon examination of the risk profiling involved. Our financial services industry provides many important, well-paid jobs in this country and it is something we must look after. However, regulating in such a weak way leaves us open to damage to our reputation and, in the long term, will put the industry at risk. This is an issue that has attracted almost no discussion.

Has the Minister met the Governor of the Central Bank and the Financial Regulator with regard to what has happened in the markets recently? On the adjournment last week I raised the need for an enhanced depositors' protection scheme for savers and depositors in Irish financial institutions. In the case of Northern Rock the British Exchequer and the Bank of England stepped in to cover borrowings. Our scheme is limited to 90% of deposits with an upper limit of about €20,000 and this is out of line with other schemes operating in the UK and throughout the EU. Given the closeness of financial markets here and in the UK will the Minister use this Bill to bring forward a revised enhanced depositors' protection scheme?

People queued to withdraw their money from Northern Rock in the UK but part of the problem was that the institution is almost exclusively an online bank in Ireland. There are no real branches here that people can go to and, in the early stages of the crisis, it appears Northern Rock did not have adequate phone lines or e-mail services. It was very difficult for people to get in touch with the bank. Has the Minister given any thought to how such a situation can be avoided in future? He may, correctly, say there is very high liquidity in the Irish banking system but banking is built on confidence, trust and reputation. Once confidence, trust and reputation start to unravel there can be disproportionate punishment in an unforgiving world banking sector. With this in mind, has the Minister met the Governor of the Central Bank and the Financial Regulator?

In the debate leading up to the formation of the Financial Services Authority and the establishment of the regulator, the former Minister, Michael McDowell, who was then chairman of the Progressive Democrats Party, advocated in the original report in that regard that financial regulation should be located in the Department of Enterprise, Trade and Employment because it should be heavily consumer based. The Central Bank and the Department of Finance fought successfully like lions with the Minister's predecessor effectively saying "Push off, financial regulation is the territory of the Department of Finance and of the Central Bank". As a consequence, the trend in regard to the Central Bank and the Financial Services Regulator is for the sector to remain as secretive as the Central Bank has ever been in regard to banking issues, while assuring us that they are looking out continuously for the prudential aspect so there is no run on any commercial bank. They have said there is no problem but this is the first opportunity we have had to have a conversation with the Minister on economic matters.

As an economy, we are facing a year end budget deficit of €1 billion, €500 million more than the Minister forecast on budget day. The election is over and Fianna Fáil may well smile having got past the election. It raised spending levels on the current side to 13% but what will it do to meet the challenges it now faces? Will it just savagely cut frontline services in the way we heard of health service cutbacks, thereby reducing the number of doctors and nurses in Sligo General Hospital and other vital services in places like Waterford and Kilkenny? Will we witness a strategy of slash and burn economics by Fianna Fáil now that the budget deficit has turned out to be much worse and some of the construction industry bubble has burst?

What is the Minister's financial philosophy as we face into this more straitened period? Will ordinary people bear the burden of the cutbacks in terms of their health, education, local authority services or higher charges as in the case of the banks? Food outlets drop leaflets in people's front doors advertising take away pizzas and Indian meals and along with those leaflets fall others at an extraordinary rate peddling financial services and loans. The Minister decided to stand back from regulating that kind of activity. Will he reconsider his position and have regard for the interest of not only the masters of the universe in the banks who make lots of money on these products but for the impact of such activity down the road on the economy, the financial services sector, but more particularly on people trying to secure a mortgage to buy a house? With the credit crunch, those house buyers will find mortgage costs much higher in the future because the financial services sector binged and thought it could sell anything to anyone at any price. Those involved in that sector are laughing all the way to the bank. I would be very interested to hear the Minister's response.

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