Dáil debates

Thursday, 28 January 2010

EU Scrutiny Report: Motion

 

2:00 pm

Photo of John PerryJohn Perry (Sligo-North Leitrim, Fine Gael)

I move:

That Dáil Éireann notes the report of the Joint Committee on European Scrutiny, EU Scrutiny Report No. 29: COM (2009) 499, 500, 501, 502 & 503 - Draft legislative package on reforming the EU's financial supervisory and regulatory framework.

I welcome this debate today on a package of EU legislative proposals which will have wide-ranging implications for the system of financial regulation both within Ireland and at European level. The Joint Committee on European Scrutiny recognised the importance of these proposals, which form one of the EU's main responses to the global financial crisis. This crisis has had a terrible effect on the livelihoods of many in Ireland and throughout the Union.

The committee, therefore, scrutinised the proposals in detail and held a public hearing with the main stakeholders, including the Department of Finance, the Office of the Financial Regulator, the Central Bank, the Irish Banking Federation, Financial Services Ireland and the Irish Stock Exchange. We also received a detailed submission from the Irish Congress of Trade Unions. I would like to thank all those who contributed to the preparation of the committee's report and, in particular, the Department of Finance for its ongoing assistance with the work of the committee.

The main purpose of the committee's report is to inform the Minister's position on these important set of proposals in the Council of the European Union. Unfortunately, it was not possible for the committee to consider these proposals in detail before the Council came to its position. Progress on this package of legislative proposals has been swift by EU standards. The Council's aim is now to reach agreement on the proposals with the European Parliament by the end of its first reading which will probably be completed in May or June this year. Although I acknowledge the urgency of the situation in respect of the financial crisis and the need to restore confidence in the financial markets with a view to providing credit to the real economy, I am concerned that these very important proposals are being rushed. More often than not, rushed legislation leads to poor legislation.

The lack of proper scrutiny by the national parliaments may result in unintended consequences. We must be careful that the proposals do not have a negative impact, however unintentional, on the competitiveness of financial services, especially on smaller and niche activities which are the life blood of a small market like Ireland. I am confident that our MEPs will ensure that these proposals are subjected to the full rigours of the European Parliament's scrutiny process and that the interests of smaller member states like Ireland are taken fully into account. I hope that the committee's report will assist them in this important job. I also urge the European Parliament to organise a joint parliamentary meting with the national parliaments to discuss this package of legislative proposals before it completes its First Reading.

Notwithstanding this concern, there are many aspects of these proposals which should be welcomed. One of the key failings leading to the financial crisis was that while key macro-prudential risks in the financial area were identified accurately and commented on in the various fora, there was no mechanism to ensure that these risk assessments were translated into corrective action. That should be emphasised. The establishment of a European systematic risks board, proposed in this draft legislation, should provide a mechanism to assess and address vulnerabilities at the level of the European financial system which can, as we have learned, have a knock-on effect on national financial systems.

In addition, the micro-prudential co-ordination envisaged in the proposals for each of the proposed European supervisory authorities in the banking sector, the pensions and insurance sector and the market and securities sector should offer more robust regulation. The powers of these new authorities will be extensive, up to and including issuing legally binding decisions to national regulators and even to individual financial institutions. The proposals will enable the EU, through these new authorities, to act more swiftly and coherently in emergency situations and to intervene in the settlement of disputes which may emerge between national regulators.

In addition, the authorities will be able to carry out peer reviews of national regulators. This is critically important in light of what happened in this country, with light-touch regulation. These peer reviews will cover issues such as the resource and governance arrangements of national regulators and will pay particular attention to the effective application of EU legislation and the capacity to respond to market developments. I believe that this function should assist the Office of the Financial Regulator in performing its role more effectively and I hope it will ensure that the serious shortcomings evident in our system of regulation will never occur again. It is to the dismay of so many people, who lost a great deal of money, that so much went on under light-touch regulation. We now see the fall-out from that, even today, with the NAMA board and the lack of critical funding for small businesses. Unfortunately, the system is not functioning correctly at present.

Probably one of the most important duties to be undertaken by the European supervisory authorities is the development of a common technical standard with a view to the preparation of a single, harmonised rule book for Europe. This is critically important. This should ensure the consistent, coherent and effective application of EU legislation in the area of financial regulation across the member states. It should lead to a less fragmented approach to financial regulation as compared to the current approach which is nationally focused and does not reflect the globalised nature of our financial system. We have been part of the European movement for 30 years but the situation whereby we had no coherent regulation should never to allowed to happen again.

Globalisation is a reality but unfortunately this reality is not reflected in our financial regulatory system. As a small open economy, Ireland has benefited immensely from globalisation but we have also felt more acutely the effects of the global financial crisis. We need a globalised financial system to support a globalised trading environment but this requires that we have a matching regulatory system. National governments were forced to take action in order to avoid a total meltdown of the financial system because there was no cross-border resolutions system to respond to crises in individual countries. Therefore, it is very important that the reform of the EU's financial supervisory and regulatory structures, as proposed in this legislative package, is pursued in tandem with reforms in other parts of the world, in particular in the United States. The EU must take a leading role in fora such as the G20 and the IMF in order to influence positively the direction of financial regulatory reforms. This is also important from the perspective of preserving the EU's competitiveness which is critical in the area of financial services. We should be careful not to run ahead of others, otherwise we might see financial institutions and, ultimately, jobs leaving the EU to other parts of the world where financial regulation is less stringent. It is a very fine balance.

While this package of proposals is to be generally welcomed, smaller member states like Ireland must remain vigilant, given the inevitable reduction in national autonomy and control. While the committee is satisfied that EU action as proposed here is justified given that the day-to-day regulation of individual institutions will remain with the national regulators, it is concerned that the interests of countries the size of Ireland can sometimes be lost in the politics of national agendas and the focus on trade. That is inevitable in initiatives of this nature.

I welcome the fact that national regulators and central banks will be represented on the main decision-making boards of the authorities and on the European systemic risk board. The Office of the Financial Regulator and the Central Bank and Financial Services Authority of Ireland must play an active role in these new bodies in order to ensure that the country's interests are not overlooked.

To guard against any concern that the interests of particular member states would be given priority due to their size, the new bodies envisaged under these proposals must be fully independent and accountable. They must be able to act without hindrance when they perceive a systemic risk building in a particular member state or institution. If they consider that an institution is posing a threat, they must be able to say so, without fear or favour, and they must be in a position to take direct action. They must also be accountable and open to scrutiny.

I welcome the fact that the regulation establishing the European systemic risk board stipulates that it must report regularly to the European Parliament and the Council. That is extremely important. This obligation should also be extended to the European supervisory authorities.

There are concerns that the structures of the new bodies proposed under the legislative package are too unwieldy. For example, the main decision-making body of the European systemic risk board will have 61 members. The size and scale of the new structures may limit their ability to take quick and decisive action necessary during a crisis. The European supervisory authorities may only serve to continue the fragmented nature of financial regulation in Europe, particularly in view of the fact that they will be divided across three sectors and will also have functions in common.

An alternative proposal for delivering a more integrated and effective regulatory regime would be the establishment of a single European financial supervisory authority under the auspices of the European Central Bank. This authority would have effective executive powers over banks, insurance companies and other financial institutions. While such a structure must be careful to respect the core principles of subsidiarity and proportionality, it would appear to have some merits. The committee is, therefore, of the view that such an alternative should be at least explored before finalising the structures as proposed in the legislative package.

I wish to make a number of comments on specific aspects of the EU proposals. I agree that the safeguard clause which will ensure that the decisions of the authorities will not impinge on the fiscal responsibilities of the member states and which is contained in these proposals is necessary. However, the committee is concerned that if this clause is invoked too often, it could reduce and weaken the effect of the authorities and, therefore, undermine the very purpose of the proposals. It is important to guard against individual member states abusing this safeguard clause to protect their own national interests to the detriment of the EU's financial system, as a whole, or those of other member states.

The committee welcomes the proposal relating to the establishment of stakeholder groups for each of the European supervisory authorities. Given the impact of the financial crisis on the real economy and the burden it has imposed on all sectors of society, it is important that all sectors should have an opportunity to influence the systemically important areas of finance. Supervision and regulation should not simply be left to the closed community of financial networks and experts. Representatives of the public interest, such as the social partners, should be involved in the area of financial regulation, supervision and risk management. The stakeholder groups offer an opportunity to cater for this and will also assist in keeping each of the authorities accountable for their actions or lack thereof.

The committee welcomes the proposal to make the European Securities and Markets Authority responsible for the supervision of credit rating agencies. This builds on the EU regulation adopted last April which obliges all such agencies operating in the EU to register and comply with a set of rules. There is no doubt that credit rating agencies contributed significantly to the financial crisis. Critically, they underestimated the risks posed by complex financial products. The main credit rating agencies are profit-led companies, the revenue of which comes from the same financial institutions which seek to have these agencies rate their products. Many of the products to which I refer were subsequently discovered to be toxic. There is a damaging conflict of interest inherent in the work of these agencies. In order to overcome this and ensure that the common good is reflected in the rating of financial products, it has been proposed that the EU should establish a public and independent, non-profit making credit rating agency. This agency would be funded by the EU and would come under the supervision of its regulatory system. The committee believes this proposal has its merits and should be explored further, either as part of this package of legislative proposals or as a separate initiative.

The global financial crisis highlighted major shortcomings in the system of financial regulation at both EU and national level. It has had a significant negative impact on the real economy and on the lives of every person living and working in our communities. Reform is necessary. Some argue that the reform proposed in this legislative package is not radical enough. It is true to say that the proposed reforms are more evolutionary than revolutionary. Some people are concerned that an evolutionary approach will only return Europe and the world to business as usual until the next major financial crisis. We must be careful to guard against this because we can ill afford to deal with another financial crisis at some point in the future.

It remains to be seen whether the proposals contained in this package will be sufficient. However, I am of the view that they offer a good starting point. Above all, the reforms at national and EU level must seek to establish a regulatory architecture which will provide for a banking system that can deliver stable financing for the real economy and sustainable economic growth. The aim of any reform must be to ensure that the mistakes of the past are not repeated and that our businesses and households, which are the driving force behind our economies, have access to credit and working capital.

With this report, I hope the committee has offered an analysis and recommendations which will assist the Government and our MEPs in securing the best possible result for Ireland and its financial system. The report and today's debate on it will also help to raise public awareness regarding this important legislation, which will have significant implications for Ireland's financial system and in turn the real economy. It is vital that important EU legislation such as the proposal we are debating should be subjected to proper scrutiny by national parliaments. Since 2002, our system of scrutiny has generally been positive in this regard.

The Lisbon treaty offers a real opportunities for national parliaments to become involved in EU law making. It is essential that this House should take full advantage of those opportunities. I strongly believe that greater involvement on the part of the Oireachtas and the holding of further debates of this nature in the Dáil will make for better, more understandable EU law that reflects the interests and needs of the Irish public.

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