Michael Noonan (Limerick City, Fine Gael)

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

The regulatory failures of the financial crisis have been the subject of extensive and objective analysis. The reports from Professor Patrick Honohan, Messrs. Regling and Watson, the Nyberg commission and the Moriarty tribunal point out the problems to be addressed. Poor supervision, an overly-deferential attitude by regulators, poor assessment of risks and a lack of follow-through on enforcement all played a part in the financial crisis.

The Central Bank (Supervision and Enforcement) Bill 2011 draws on the lessons from that experience. It involves a careful overhaul of the statutory basis for the Central Bank's regulatory powers.

The Bill brings clarity to the Central Bank's ability to set requirements. It provides for good information flows and objective analysis to support regulatory supervision. Where things go off course, there is provision for prudential intervention and corrective action. Where the law is broken, there are effective and dissuasive, yet proportionate, sanctions. There are also provisions dealing with restitution and costs after the fact. I should add that my Department and the Central Bank are currently examining further proposals which I may bring forward on Committee Stage.

However, this is not a piece of crisis legislation. It provides a long-term regulatory framework to underpin the regulation of more than 14,000 regulated financial service providers in Ireland which will be covered by the Bill. That includes insurance companies, investment intermediaries, bureaux de change, securities and investment firms and banks.

A financial service involves making money from money and this requires an element of risk taking. Risk to investors, risk to consumers and risk to the financial and economic system. The Bill must provide a prudent yet flexible basis for regulating a sector that is varied, fast-paced and ever-changing. That regulation must be prudentially-based, ensuring that firms identify, monitor and control risk both for their own good and to prevent spillover into the wider sector and the economy. However, it must also ensure effective oversight of regulated firms to ensure proper management of risk by them.

No doubt some will raise the issue of under or over-regulation. The choice between regulation and business success is not black or white. Sound regulation ensures that those well-run firms who abide by the rules do not suffer a competitive disadvantage. It requires balance, proportionality and judgment. A regulator must have the qualities of a good referee; he must establish his authority, have eyes in the back of his head and keep the game flowing.

The National Competitiveness Council has identified the need for robust financial services regulation as key in improving the export competitiveness of the Irish financial services sector. It has stated that "Reform of the regulatory environment to ensure greater transparency and to rebuild trust in the system is critical to sustain and further develop the sector".

Earlier this year the Taoiseach launched the Strategy for the International Financial Services Industry in Ireland 2011-2016. The strategy sets out a vision for the future development of the IFSC, with the goal of creating 10,000 net new jobs over the next five years. One of the drivers of growth identified for the IFSC is a credible, responsible and proportionate regulatory regime.

Under the relevant European treaty provisions, the European Central Bank must be consulted on proposed legislative changes affecting national central banks. The ECB published a positive opinion on the Bill on 9 September in which it stated that "the ECB welcomes the draft law as enhancing the supervisory and enforcement tools available to the Central Bank of Ireland".

Of course, legislation alone will not be enough to address the failures of the past. In recent years the level of regulatory activity has intensified with increases in staff numbers and skill levels at the Central Bank. On-site inspections and review meetings have gone from 606 in 2009 to 1,046 in 2010. Staff levels increased by 17% in 2010 to 1,226.

The Central Bank has published an enforcement strategy for 2011 and 2012 setting out its strategic approach to enforcement for the benefit of consumers and the integrity of the Irish financial services sector as a whole. The Central Bank has also taken a number of measures under its new approach to banking supervision. During 2011 it has re-organised its internal banking supervision structures and it has invested heavily in training all supervisory staff. A panel of risk advisers with specialist and industry expertise has been in operation since September 2010.

I will provide an overview of the provisions of the Bill. Part 1 deals with technical matters such as the interpretation provisions and the commencement of the Bill. Of note within the interpretation provisions is the definition of Irish financial services law as this concept recurs throughout the Bill. The term is used as shorthand to refer to the various instruments which make up the body of financial services law and includes the various enactments which regulate each of the sectors of the financial services industry as well as the Central Bank Acts themselves. An important lesson from the financial crisis is the need for the Central Bank to have access to an independent expert view of the position of financial service providers.

Part 2 provides that the Central Bank may require a regulated financial service provider or a related undertaking - referred to as the "reviewee" - to commission and pay for a report from an independent expert, who is approved by the Central Bank. These reports may be used, for example, for diagnostic purposes to identify risks or issues of concern, or for remedial purposes to follow up on an earlier problem. The Central Bank will prescribe the purpose, scope and form of the report, which must be prepared by someone appearing to the Central Bank to have the necessary skills for the job. The person must also have sufficient detachment to ensure the objectivity of the report - this is important to avoid conflicts of interest or the risk of client bias.

The reviewee will be responsible for the cost of preparing a report. In my Department's consultations with the industry this point was raised a number of times. Of course, I am sensitive to the issue of placing costs on firms. For that reason, a number of features have been included in the Bill which do not appear in the equivalent UK provisions. Before requiring a skilled person report, the Central Bank must first have regard to whether some other of its powers are more appropriate; the relevant knowledge and expertise of the reviewee to do the report itself; the cost implications for the reviewee; the reviewee's resources; and the benefit to the reviewee of the report, for example, where the report leads to an improvement in its systems. The provision has been carefully balanced to meet the regulatory need for objective analysis with the cost burden on firms. It also ensures that the cost is borne by the firms being reviewed rather than by the sector at large through a regulatory fee.

One of the distinctive features of Irish financial services legislation is its sheer volume and complexity. There are over 250 separate Acts, statutory instruments and directives to be navigated and understood. Many of these have been amended time and time again, leading us to the point where even the most nimble legal brains have had some difficulty identifying what the law states. A full consolidation of the relevant legislation will be a substantial task but one that it is intended will be undertaken in due course.

In the meantime Part 3 begins the process of simplification and clarification as far as it relates to the powers of persons appointed by the bank to gather information. The Statute Book contains some 20 different regimes setting out the powers of authorised officers in the banking, building society, insurance, investment and others sectors. This can create confusion for the regulated financial service providers who must comply with the law, and makes the business of information-gathering needlessly complex from the Central Bank's point of view. Part 3 seeks to replace almost all those different regimes, by taking the most useful features of each to create a single regime.

The Bill sets out the persons to whom the authorised officer provisions apply. These include a regulated financial service provider; a related undertaking; any person who holds relevant information; and administrators, special managers and liquidators. An authorised officer may enter a premises being used for the business of a financial service provider or related undertaking or where relevant records are kept. However, an authorised officer cannot enter a private dwelling without a warrant or consent.

Among other things, an authorised officer may search, inspect and secure the premises; inspect and copy records; question persons on action or records; and request a report. This part also provides that an authorised officer may attend meetings of a regulated financial service provider. It is an offence to obstruct or provide false or misleading information to an authorised officer carrying out the functions under this part. Section 6 provides a saver provision in regard to authorised officer powers exercised under enactments now being repealed.

Part 4 provides protection from civil liability and employer penalisation for whistleblowers. Schedule 5 sets out the redress available to employees for penalisation. The provisions are flexible enough to provide for protections outside the strict employer-employee context. The identity of whistleblowers is not to be disclosed without their agreement unless it is necessary to ensure the proper investigation of the matter concerned.

The Bill also provides a mandatory disclosure regime for those performing pre-approval controlled functions - these are prescribed senior or influential positions within financial service providers. Failure to make such a disclosure without reasonable excuse could be grounds for an investigation and action under the fitness and probity regime.

Part 5 deals with the bank's power to give directions. The Central Bank already holds a range of sectoral powers to issue directions and these are not being repealed. The intention of this power is to enhance the bank's capacity to make regulatory interventions across the range of its responsibilities in specified serious circumstances. The bank may issue a direction where it is found that a regulated financial service provider or related undertaking is unable to meet its obligations to its creditors or customers, not maintaining adequate capital or other financial resources, failing or likely to fail to comply with financial services law, or jeopardising the rights and interests of its customers.

A direction by the bank must be made in writing to the regulated financial service provider or related undertaking and can include a direction to refrain from providing a financial service for up to 12 months; to raise and maintain capital or other financial resources; to comply with requirements and conditions imposed by financial services legislation, or to make required modifications to its business practices and dealings with third parties.

A regulated financial service provider or related undertaking may apply to the High Court within 14 days to have the direction set aside. Similarly, the bank may apply to the High Court for an order to enforce a direction made to a regulated financial service provider or related undertaking. Following a direction made by the bank, the consent of the High Court is required before any person may commence or continue proceedings for the winding-up, dissolution, receivership, bankruptcy or related proceedings of a regulated financial service provider or related undertaking. Part 6 of the Bill provides for extended powers for the Central Bank to make regulations to ensure the proper and effective regulation of the financial services industry.

The nature of modern financial regulation both in Ireland and internationally is such that there is a need to provide a mechanism for the regulator to issue binding requirements on matters of detail, procedure and standards across a range of areas. The approach in the Bill allows the primary legislation to set out the policies and principles within which these more detailed requirements may be set out; in other words, the Oireachtas draws the picture and the Central Bank colours it in.

Some of the matters covered in this Part of the Bill may already be the subject of Central Bank codes. The Bill provides a mechanism for these requirements to be set out in a more formal way through regulations. This approach also brings greater clarity to the scope of the Central Bank's powers to impose regulatory requirements in this way.

The areas in which the Central Bank would be empowered to make regulations include the management and mitigation of risks; administrative, accounting, auditing and reporting arrangements; the training and qualifications of those working in the financial sector; protections for consumers including provision for customers in financial difficulty; the making of loans and other credit facilities; related party lending; and switching.

When making regulations, the Central Bank must consider the need to ensure that the requirements imposed by the regulations concerned are effective and proportionate, having regard to the nature, scale and complexity of the activities of regulated financial service-providers or the class or classes of regulated financial service-providers to whom the regulations apply. The Bill also provides for consultation with the Minister for Finance and broader consultation before the introduction of regulations. Once made, the regulations must be laid before the Houses of the Oireachtas.

Part 7 of the Bill deals with enforcement. Section 44 allows the bank to publish a notice warning the public where it reasonably believes a company is providing a regulated financial service without proper authorisation. Section 45 provides for restitution where a regulated financial service-provider has been found to have committed a breach of Irish financial services law and has become unjustly enriched or other persons have suffered loss. The Bill provides that the Central Bank may apply to the High Court for a restitution order to require the regulated financial service-provider concerned to provide to the Central Bank an amount equal to the unjust gain or loss, which the Central Bank would then distribute to persons who have suffered a loss as a result of an offence. This Part also provides for the bank to recover the costs of an investigation from a regulated financial service-provider convicted of an offence. It is only fair that the burden of funding the investigation of serious wrong-doing falls on the offender rather than law-abiding financial service-providers. Section 47 provides an assurance to all those who may be requested to provide information to the Central Bank in the course of carrying out its regulatory functions that they will not have any liability in contract or tort to employers, customers, counter parties or anyone else, for having provided that information.

Part 8 of the Bill deals with amendments to the administrative sanctions regime provided for in Part IIIC of the Central Bank Act 1942. Administrative sanctions may be imposed on regulated financial service-providers by the Central Bank for prescribed contraventions of Irish financial services legislation in accordance with Part IIIC of the Central Bank Act 1942. The changes proposed in this Bill are intended to increase the penalties the Central Bank may impose for breaches of the law by all regulated financial service providers affected. A number of technical changes are provided for in this Part including enhancements to the bank's powers to compel witnesses to attend before an inquiry under Part IIIC; clarification of the situation where individuals are party to breaches of Irishfinancial services law by regulated financial service-providers; and improved powers to ensure compliance with an agreed settlement. Significantly, the Bill doubles the maximum levels of financial sanction to €10 million or 10% of turnover, whichever is the higher, for a body corporate and €1 million for a natural person. Part 8 also provides that the Central Bank may suspend or revoke an authorisation as a sanction. This decision would be appealable to the Irish Financial Services Appeals Tribunal.

Part 9 of the Bill deals with miscellaneous matters. The first item, co-operation with overseas regulators, provides that the bank may use its information-gathering and authorised officer powers to collect information in co-operation with overseas regulators. In doing so the bank must be satisfied that the overseas regulator it is assisting is duly authorised to perform corresponding functions in its jurisdiction. In some instances the Central Bank may require the overseas regulator to contribute towards the cost of an investigation being undertaken at its request. This provision is necessary to allow the Central Bank to become a signatory to the multilateral memorandums of understanding of the International Organisation of Securities Commission and the International Association of Insurance Supervisors. There is also an amendment to the Personal Injuries Assessment Board Act 2003 to allow the Governor of the Central Bank to nominate an employee of the Central Bank for appointment as a member of the Personal Injuries Assessment Board.

The Schedules to the Bill provide largely for repeals, revocations and amendments to various Acts and Statutory Instruments consequent upon the changes set out in the Bill.

On publication, I referred the Bill to the Commission on Credit Unions for a recommendation on its application to credit unions. In its interim report, the commission recommended that the powers and functions intended under the Bill should be applied to credit unions. The commission noted that there is an urgency to the issues involved. However, the commission could not arrive at a single position as to the statutory mechanism for applying these powers and functions to credit unions, in other words, whether these powers would apply through this Bill or the credit union-specific legislation being prepared. I will give this issue further consideration as work on both Bills progresses.

This Bill is essential if we are to rebuild confidence in our financial system. The Bill's importance is underlined by its inclusion as a structural benchmark in the EU-IMF programme. My Department has been engaged in consultation with various stakeholders since publication of the Bill and I remain open to considering constructive suggestions whether made inside this House or otherwise. I commend the Bill to the House.

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