Brian Lenihan Jnr (Dublin West, Fianna Fail)

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

I thank the House for agreeing to discuss this Bill at short notice. The Bill is needed to allow the State through the National Pensions Reserve Fund, NPRF, to invest in Allied Irish Bank and Bank of Ireland under the terms of the recapitalisation programme announced by the Government on 11 February and debated in the House the next day.

The House will be aware of the international context in which this action is being taken. The past 18 months have been unprecedented in terms of the pressure states and financial institutions, banks in particular, have been under throughout the world. Market expectations with regard to the capital that banks should hold have altered significantly. As a result, banks have needed to compete vigorously for deposits and other forms of funding in a weakening economic environment. They have been forced to seek capital in a difficult market resulting in an array of state interventions, including recapitalisation programmes across the developed world.

The extended financial crisis has brought home to all of us the pivotal role that the financial system plays in supporting the economy. In turn, it has become clear to all that it is essential for the Government to take appropriate action to maintain the stability of the financial system. Like many other European countries, Ireland has moved to ensure the security and stability of its banking system. Throughout this process, our approach has been based on two basic principles. First, the State will not let any systemically relevant financial institution fail and, second, any State involvement in financial institutions will protect the interests of the taxpayer and have regard to legal implications and European requirements.

The Government's approach has been a considered response to a financial crisis that has resulted in state interventions across Europe and the world. Through the bank guarantee scheme, we created a space to assess the further measures needed to best protect our financial system in a strategic manner. In view of the continuing turmoil in global financial markets, the Government initiated intensive discussions with Allied Irish Bank and Bank of Ireland with a view to securing their positions. This resulted in the announcement of the recapitalisation package on 11 February.

As Deputies will recall, under the recapitalisation programme, the Government will provide €3.5 billion in core tier one capital for each bank. Of the total €7 billion, €4 billion is to be funded from the National Pensions Reserve Fund's current resources while €3 billion will be provided by means of a front loading of the Exchequer contributions to the fund for 2009 and 2010. These investments will remain part of the fund and the return earned on them will accrue to it. Funding the bank recapitalisation programme in this way strikes a prudent balance between, on the one hand, addressing an urgent economic priority and, on the other, continuing to take account of long-term budgetary stability and the sustainability of our pension system.

The total amount to be invested, €7 billion or €3.5 billion for each bank, was determined following detailed consultations with financial and property experts involving consideration of likely trends in asset values and various stress scenarios related to those. The State's investment will significantly strengthen the core tier one capital of the two banks, bringing it well in excess of regulatory limits. The State will obtain a direct return for its investment on specified terms and the banks have agreed to a customers' package containing a number of measures to improve lending in the economy, including statutory codes on business lending and mortgage arrears and a €100 million fund to support environmentally friendly investment and innovations in clean energy.

In return for the overall investment, the Minister obtains preference shares with a fixed dividend of 8%, payable in cash or ordinary shares in lieu. These preference shares can be repurchased at par up to the fifth anniversary of the issue and at 125% of face value thereafter. The Minister can appoint in total 25% of the directors to both banks and he obtains 25% of total ordinary voting rights in respect of change of control and board appointments. Warrants attached to the preference shares give an option to purchase up to 25% of the ordinary share capital of each bank existing on the date of issue of the new preference shares.

The recapitalisation will ensure the two main banks in Ireland are in a position to provide necessary commercial credit facilities to their customers and the economy generally. In line with this, the banks have committed themselves to increasing lending capacity to small and medium-sized enterprises by 10% and to provide an additional 30% capacity for lending to first-time buyers this year. If the mortgage lending is not taken up, the extra capacity will be available to SMEs. To ensure that credit is extended in an appropriate manner, statutory codes of practice on business lending and mortgage arrears have also been finalised.

Our recapitalisation programme will strengthen Allied Irish Bank and Bank of Ireland as financial institutions central to the economic future of the country. The Government is also in discussion with other relevant institutions about their respective capital positions and will take whatever measures are judged necessary in that regard at the appropriate time.

As Deputies will be aware, the NPRF was established in 2001 for the purpose of meeting as much as possible of the cost to the Exchequer of social welfare pensions and public service pensions to be paid from 2025 until 2055. As the Minister for Finance, I am required under the relevant legislation to pay 1% of GNP into the fund every year.

The principal purpose of the Bill under discussion is to amend the 2000 Act to facilitate the recapitalisation of financial institutions. The Bill amends that Act so that, in respect of credit institutions listed on a stock exchange, the Minister for Finance may, in the public interest and in particular circumstances, give directions to the National Pensions Reserve Fund Commission to make investments in such institutions and to underwrite their share issues. It may also give directions on the holding, management and disposal of such directed investments. An investment in a listed credit institution made by the commission on foot of a direction from the Minister is referred to in the Bill as a "directed investment".

The Bill will enable the Minister to make additional payments into the fund for the purpose of a directed investment in a listed financial institution and to transfer into the fund a shareholding or other interest held by him or her. If the total payments or transfers in any one year are greater than 1% of GNP, the excess will count towards the requirement to make annual contributions to the fund in future years.

For example, this year, the annual contribution from the Exchequer to the fund will amount to approximately €1.6 billion. This amount was provided for in the 2009 budget last October. The €3 billion contribution from the Exchequer to the cost of the recapitalisation of AIB and Bank of Ireland will be composed of the €1.6 billion and an additional amount of some €1.4 billion that will count towards the Exchequer contribution to the fund in 2010.

The Bill has a number of other provisions. Perhaps the most notable is the proposal to amend the Markets in Financial Instruments and Miscellaneous Provisions Act 2007 to provide for greater transparency in terms of trading in financial instruments. This provision will enable the Minister for Finance to make regulations requiring certain information relating to transactions in financial instruments to be disclosed to the Financial Regulator, the market or both. The intention is that this will allow the introduction of regulations requiring disclosure of contracts for difference.

Let me turn now to the provisions of the Bill in more detail. Sections 1 and 2 contain the usual standard provisions necessary to explain certain terms used in the Bill. Section 1 links the Bill to the 2000 parent Act while section 2 amends the Act by inserting definitions of a number of technical terms used in the Bill, such as a "Commission investment vehicle", "directed investment", "listed credit institution" and "regulated market". Section 3 extends the functions of the commission so as to enable it to manage directed investments. It amends the commission's functions to take account of the investments to be made by the commission in accordance with a direction by the Minister for Finance. It enables the commission to have regard to such directed investments when determining the investment strategy for the fund.

Under the 2000 Act, the commission is precluded from investing in Irish Government securities. Section 3 contains a technical provision to clarify that the reference in the principal Act to those securities means debt instruments issued by the Exchequer.

Currently, the commission can only accept contributions from the Central Fund. This section will enable the commission to accept funds or assets for the benefit of the fund from sources other than the Central Fund if so directed by the Minister. This technical provision is the counterpart of the provision in section 6, which will allow the Minister for Finance to transfer shareholdings and other assets to the fund.

This section of the Bill also enables the commission to advise the Minister at his or her request on a proposed directed investment. This will, for example, enable the commission to carry out the necessary due diligence on Allied Irish Bank and Bank of Ireland before the actual recapitalisation. The Bill will also enable the NPRF Commission to underwrite issues of securities.

I am including this measure in the Bill on an enabling basis, lest the need arises to have the National Pensions Reserve Fund Commission underwrite a capital raising issuance by a financial institution. I must emphasise this is not something I propose to do; I am merely taking the opportunity to include the provision on a contingency basis now that the NPRF legislation is being amended.

The Bill also allows the commission to form a company or other body corporate. This will allow the commission to set up special purpose investment vehicles where it is more efficient for the commission to invest through such a structure. At present, the commission is precluded from controlling a company. Section 15 of the National Pensions Reserve Fund Act 2000 prohibits the commission from controlling a company or acquiring a shareholding of such size that the commission would be required to seek to take control of the company. This is appropriate given the purpose of the fund as the commission's role is to invest for the optimum return and not to get involved in managing companies. However, it is necessary to lift this restriction in two instances, the first being when the commission sets up a special purpose investment vehicle as I have just described. The second is where the commission is required to invest in a credit institution on foot of a direction from the Minister or, in other words, when the commission is facilitating the State recapitalisation by investing in the banks.

I should emphasise at this point that the State does not intend to take control of the recapitalised financial institutions. The recapitalisation of AIB and Bank of Ireland is to be based on the State taking preference shares in those institutions, rather than ordinary shares. However, if the fund was to underwrite a future share issuance by these institutions, it is possible that the fund's overall holding could constitute a controlling interest. Once again, I must emphasise this is not something I propose to do; I am merely providing for it in the Bill on a contingency basis.

I am proposing that certain statutory provisions in company and takeover law should not apply where the commission is required to invest on foot of a direction in the public interest in a financial institution as part of the recapitalisation programme. The proposed amendments would ensure that investments by the NPRF in the financial institutions on the scale now envisaged would not be impeded by procedural delays.

Accordingly, section 5 of the Bill provides that certain provisions of competition and takeover law and section 7 of the Credit Institutions (Financial Support) Act 2008 do not apply in respect of an acquisition or proposed acquisition by the commission of an interest in a traded credit institution or a transfer into the fund of the Minister's interest in a listed credit institution, if the acquisition or transfer results from a directed investment. Section 7 of the Credit Institutions (Financial Support) Act 2008 essentially provides that the Minister for Finance is to take over the role of the Competition Authority in respect of the merger or acquisition of a credit institution in the current banking crisis. I am providing that this section will not apply where I am directing the NPRF Commission to recapitalise the credit institutions on the basis that it is not necessary.

The section also provides that nothing done by the Minister, the commission or a commission investment vehicle for the purposes of a directed investment in a traded credit institution will constitute a reorganisation measure for the purposes of certain European Communities regulations. The Bill seeks to ensure that contracts previously entered into between recapitalised banks and third parties are uninterrupted so as to permit the orderly continuation of the banks' operations, notwithstanding that the shares in, and control of, the bank have transferred to the commission.

Section 6 of the Bill amends section 18 of the principal Act in a number of respects. First, it amends section 18(2) of the principal Act by allowing the Minister to make the annual contribution of 1% of GNP in a lump sum or in instalments at any time during the year, rather than in equal quarterly instalments. The Act of 2000 provides for a contribution from the Exchequer to the fund each year of an amount equal to 1% of GNP, to be paid in equal quarterly instalments. To allow more flexibility, I now propose a technical amendment in order that the annual contribution need no longer be paid in equal quarterly instalments. This change would, for example, allow the Minister to pay the contribution in a single instalment early in the year, if funds were required in the context of bank recapitalisation.

Second, section 6 amends section 18(5) of the principal Act to enable the Minister to transfer into the fund a shareholding or other interest held by the Minister or his or her nominee, for example, the National Treasury Management Agency, and to contribute to the fund by paying a sum into the fund. Third, section 6 provides that such transfers or contributions may be taken as satisfaction or part satisfaction, as the case may be, of the Minister's obligation under section 18(2) of the principal Act to make annual payments into the fund. If the total contribution exceeds the amount required to be paid into the fund in any one year, the excess shall be taken in satisfaction or part satisfaction of the amount required to be paid in any subsequent year. Fourth, section 6 provides that stamp duty shall not be chargeable on any instrument giving effect to a transfer by the Minister into the fund. As ownership of the fund is vested in the Minister, there is no basis for stamp duty being payable when the Minister is transferring a shareholding in his name to the commission for it to manage and invest on his behalf. Section 6 also provides that any commission investment vehicle which may be established is owned by the Minister.

The National Pensions Reserve Fund Act 2000 provides that the National Pensions Reserve Fund Commission controls and is responsible for the investment of the national pensions reserve fund, subject to the level of risk involved being acceptable to the Commission. This effectively is a commercial investment mandate. The concentration of significant investment in a particular sector or small number of institutions could be construed as contrary to this strictly commercial mandate. Accordingly, section 7 amends section 19(1) of the principal Act so as to provide that the commission's strictly commercial investment mandate will not apply in the case of directed investments.

The preparation of this draft legislation provided an opportunity to consider once again the position regarding ethical investment. As Members will be aware, when the fund was being established, the scope for introducing an ethical investment policy was considered at length. In the event, it was decided that it would not be practical or appropriate to constrain the fund in this way and, consequently, the NPRF legislation provides for a commercial investment mandate without an explicit ethical component. In the intervening years, there has been significant debate on the issue within institutional and sovereign investors as to how they should be expected to invest the funds they manage on behalf of the ultimate owners of those funds. There have been considerable developments in thinking in this area and the National Pensions Reserve Fund Commission has itself taken a number of initiatives to integrate environmental, social and governance considerations into its management of the fund. In the light of this ongoing debate and having regard to the experience of other countries with sovereign investment funds, it is my view that this matter requires further consideration.

Given the sensitive and urgent nature of the legislation now required to facilitate the recapitalisation of the financial institutions and the complexity in drawing up a responsible investment policy that will work in practice, it would not be appropriate at this time to include such a provision in this Bill. However, given the importance of the subject and to advance matters, I will establish an interdepartmental committee to examine the issues further. The group will report to me within three months of its establishment and will be open to receiving the views of interested parties.

Section 8 is the key section in the Bill as far as recapitalising the credit institutions is concerned. I have indicated previously that I intend that the National Pensions Reserve Fund Commission should be the agent of the State in providing the additional investment needed to capitalise the financial institutions. This will require the National Pensions Reserve Fund Act 2000 to be amended to give the Minister for Finance the power to direct the commission to make, hold and dispose of investments in the financial institutions as necessary.

Accordingly, section 8 amends the principal Act to provide that the Minister, in the public interest, having consulted the Governor of the Central Bank and the regulatory authority, may, in specified circumstances, direct the commission to invest on specified terms and conditions in certain listed credit institutions and to underwrite or otherwise support the issue of securities in such listed credit institutions. The section also enables the Minister to give a direction to the commission on the holding, management and disposal of, and any voting rights attaching to, a directed investment on such terms and conditions as are specified in the direction. The exercise of these powers will be subject to the normal EU state aid approval process.

This section also provides that the Minister, the commission, a commissioner, the manager of the fund and staff of the manager shall not be taken to be shadow directors within the meaning of section 27(1) of the Companies Act 1990 of a company or its subsidiary in which the commission has made a directed investment.

Section 9 of the Bill amends the Taxes Consolidation Act 1997 to provide that the same exemptions from taxation that apply to the National Pensions Reserve Fund Commission shall apply to any "commission investment vehicle", as defined in section 2 of the Bill. Section 10 amends the European Communities (Markets in Financial Instruments) Regulations 2007 to clarify that the National Pensions Reserve Fund Commission and any commission investment vehicle which may be established are not subject to the regulations. This is a technical provision. For the avoidance of doubt, it provides that the commission and any commission investment vehicle are not investment intermediaries in their role of investing the fund on behalf of the Minister.

I propose to amend the Securitisation (Proceeds of Certain Mortgages) Act 1995 to facilitate the winding-up of Ulysses Securitisation plc. This is a securitisation vehicle which was established in 1995 to borrow for the Exchequer using the cash flow from local authority mortgages to guarantee repayment of the bonds issued by Ulysses Securitisation plc. The bonds issued by the company have been repaid and it is now proposed to wind up the company. The provision proposed in section 11 of the Bill is a technical change to the legislation to facilitate the winding-up of the company and provide that any remaining assets of the company on its winding-up will be transferred to the Minister for Finance or to such other body as he may direct.

See this speech in context