Dáil debates

Thursday, 28 January 2010

2:00 pm

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

Photo of Martin ManserghMartin Mansergh (Minister of State with special responsibility for the Arts, Department of Arts, Sport and Tourism; Minister of State with special responsibility for the Office of Public Works, Department of Finance; Tipperary South, Fianna Fail)
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On behalf of the Minister for Finance, I welcome the opportunity to debate the proposals put forward by the European Commission and the report thereon by the Joint Committee on European Scrutiny, details relating to which were very ably outlined by Deputy Perry. I thank the committee for its report, which, drawing on the lessons learned from the banking crisis, clearly highlights the importance of these measures for strengthening the supervisory framework for financial regulation in the EU. In overall terms, as described in the committee's report, the proposals aim to put in place an EU supervisory structure for financial services which will be significantly enhanced and better able to meet the challenges of effectively regulating and maintaining the stability of the single market in financial services in the EU.

The Commission's proposals are a direct response to the report of the high level group on financial supervision in the EU - the so-called de Larosiere report - which was published on 25 February 2009. This report made significant recommendations on the future direction of financial regulation in the EU in light of the global financial crisis. In June 2009, the European Council invited the European Commission to make proposals based on the recommendations set down in the report. This suite of five proposals, which were published on 25 September 2009, represents the Commission's response to the European Council's invitation.

These legislative proposals have the objective of creating a strong, robust and more uniform EU-wide system of financial supervision by developing a single rule book for financial regulation and securing better co-operation between the national supervisors in respect of the oversight and supervision of large, complex cross-border financial groups. For the benefit of the House, the proposals envisage the establishment of a European systemic risk board, ESRB, to monitor and assess risks to the stability of the financial system as a whole - what is referred to as "macro-prudential supervision" - and to provide early warning of systemic risks that may be building up in the financial system and, where necessary, recommendations for action to deal with these risks; and a European system of financial supervisors, ESFS, for the supervision of individual financial institutions - what is referred to as "micro-prudential supervision" - consisting of a network of national financial supervisors working in tandem with the new European supervisory authorities, namely, a European banking authority, EBA, a European securities and markets authority, ESMA, and a European insurance and occupational pensions authority, EIOPA, which will be created by the transformation of the existing committees for the banking, securities and insurance and occupational pensions sectors.

The establishment of the European systemic risk board will address what has been identified as a major priority in the strengthening of financial regulation internationally, by ensuring that there is a strong focus on the stability of the overall financial system alongside closely monitoring the soundness of individual financial institutions. The creation of the ESRB is in line with several international initiatives that have been put in place for this purpose, including the creation of the Financial Stability Board by the G20 countries. The heads of the European Central Bank, national central banks, the European supervisory authorities, as well as national regulatory bodies will participate in the European systemic risk board. To achieve its role, the ESRB will have the power to issue non-binding recommendations and warnings to member states, including the national supervisors, and to the European supervisory authorities, the response to which will be closely scrutinised by a "comply or explain" mechanism.

With regard to the proposed European system of financial supervisors, ESFS, the three authorities will take over all of the functions of the three existing EU committees of national supervisors for banking, securities and insurance which currently have advisory powers and aim to foster supervisory convergence, best practice and the convergence of regulatory outcomes. It is proposed that the new authorities will have significant additional competences, including resolving cases of disagreement between national supervisors where legislation requires them to co-operate or to agree; contributing to ensuring consistent application of technical Community rules through, for example, peer reviews; developing proposals for binding technical standards that respect better regulation principles; and a co-ordination role in emergency situations. Furthermore, the European securities and markets authority will exercise direct supervisory powers for credit rating agencies.

As Deputies may be aware, all these issues were the subject of consultation with key stakeholders in Ireland at the time of the publication of the de Larosière report and received largely positive feedback from stakeholders. The Government has been a very positive supporter of these proposed reforms, and particularly welcomes the closer involvement of the European Central Bank, especially with regard to monitoring possible instances of systemic risk.

A strong robust and credible framework for EU financial supervision will strongly underpin the Government's proposed reform to the existing legislative framework governing the structure of the Central Bank of Ireland and the Financial Regulator. The Minister for Finance will very shortly seek Government approval for the heads of a Bill to reflect these proposals. The intention is to have this Bill enacted by Easter or shortly thereafter.

The Commission's proposals were agreed by EU Finance Ministers at ECOFIN meetings late last year, and were endorsed by the European Council of 10 and 11 December 2009. This agreement at ECOFIN will form the basis for negotiations with the European Parliament as part of the co-decision process. It is likely that the negotiations with the European Parliament will continue until the middle of this year. The Commission plans to have the new regime in place by the start of 2011.

I welcome that the joint committee's report strongly supported the broad thrust of the EU proposals, recognising the need for a step-change in the capacity of the current nationally-based supervisory systems to work in concert to address threats to financial stability in the EU overall which in the context of the operation of the Single Market often cannot be contained within national borders. The committee's report does, however, raise some very important points on certain aspects of the proposals. One of the most valuable relates to the speed at which the reforms are being introduced and in the context the risk of insufficient parliamentary scrutiny at national level, a matter mentioned in Deputy Perry's speech. This assessment is clearly worthy of significant reflection. These reforms will determine the future shape of financial regulation and financial supervision across all EU member states. Ireland as a significant international centre for financial services in the EU has a particular interest in ensuring that the EU cross-border system works effectively and efficiency.

The pace at which these detailed proposals have been developed and agreed stresses the priority afforded by all member states to responding to the serious weaknesses disclosed by the financial crisis in existing EU supervisory and regulatory arrangements. The swift progress in advancing these reforms communicates a clear signal internationally that Europe is responding very actively and energetically, focusing on what is a major element of the very extensive programme of financial sector reforms identified by the G20. This will help copper-fasten the reputation of the EU financial services on the international stage and has therefore a significant benefit for confidence in and the development of international financial services in Ireland. It is important to stress that, notwithstanding the speed at which these proposals have moved forward, significant time and attention has been devoted in individual member states and at EU level to ensure that the package of measures is equipped to meet the challenging set of objectives they are designed to meet.

As indicated earlier, work on finalising the proposals is now entering a new phase as the European Parliament commences its scrutiny of the Council's proposals and I would certainly expect - and all the indications are - that in line with the joint committee's recommendation the European Parliament is ready "to apply the full rigours of its scrutiny process to this legislative package".

Clearly, as indicated in the committee's report, in ideal circumstances there would have been more opportunities for further parliamentary scrutiny at national level. The urgency with which these proposals need to be progressed to underpin confidence in EU financial regulation has constrained what has been feasible. However, accepting these constraints, it is important to stress that very substantial work has been carried out by our committee system - and in particular by the Oireachtas Joint Committee on European Scrutiny, as manifested in its report and the debate we are having today - to assess the Commission's proposals. These proposals have now been examined by three Oireachtas joint committees - the Joint Committee on European Affairs, the Joint Committee on Finance and the Public Service, as well, of course, as the Joint Committee on European Scrutiny. This examination has helped contribute to Ireland's participation in the negotiations carried out at Council level.

I also note what Deputy Joe Costello said on the Order of Business this morning with regard to scrutiny, following the implementation of the Lisbon treaty, of the transposition of the EU directives by way of statutory instrument with specific mention among others of the floods directive, which falls under my OPW responsibilities. I noted, as he did, the broadly positive response of the Minister for Finance.

To revert to the immediate matter in hand, in terms of finalising the proposals, the ongoing negotiations between the European Parliament and the Council will determine the ultimate shape of the proposed new bodies and agreement by both institutions is required before the reforms can proceed. Negotiations with the European Parliament will be conducted under the usual protocols for such discussions, whereby the Council as a whole, represented by the Presidency, at present Spain, discusses the proposal with the relevant European parliamentary committee. We have given our full support to the Council position, and will continue to do so.

In reviewing the detailed content of the report's conclusions and recommendations there are two issues in particular that are important to comment on, and which the Chairman of the joint committee might consider as part of today's debate. First, the report notes that the size of the proposed entities might be too unwieldy. It is important to recall that the membership of the new bodies has been balanced in such a way as to protect the interests of all member states. Indeed, the committee itself in its report recommends that the Central Bank of Ireland and the Financial Regulator should play an active role in the new bodies in order to protect Irish interests - a recommendation the Government would strongly support.

In another recommendation, it is suggested that the merits of a single European financial supervisory authority should be explored, before the proposed structures are finalised, but the following recommendation welcomes the fact that the principle of subsidiarity is being respected by means of the day-to-day supervision of individual firms remaining with national regulators. If a single European regulator was established, under whatever title, it would inevitably lead to a diminution of national authority and would impact on the principle of subsidiarity. This is a very significant issue to consider, but it is for another time in the future.

The report also recommended that the possibility of establishing an EU-funded, public and independent, non-profit credit rating agency should be explored. I remind the House that an EU regulation on credit rating agencies has been agreed, and will come into operation later this year on 7 December 2010. This regulation will transform the way, in which credit rating agencies operate in the EU. This regulation will transform the way in which credit rating agencies operate in the EU.

The proposal from the committee regarding the possibility of creating a publicly-funded rating agency has not been discussed by the Government. However, in view of the imminent introduction of an EU-wide supervisory regime, there is unlikely to be much appetite among member states to examine this issue before the impact of the new regime has been assessed.

In conclusion, the proposed new EU supervisory system is another important element in the EU's ongoing response to the international financial crisis. These institutional changes are complemented by a broad range of important regulatory measures designed to address the main factors that contributed to the major disruption of the financial system. They will require changes to the Irish regulatory structures and these are being addressed by the Government, and will be announced by the Minister for Finance in the period ahead. I would like to conclude by expressing my thanks to the committee, Chairman and members for their report and I look forward to their contributions on this motion.

Photo of Joe CostelloJoe Costello (Dublin Central, Labour)
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I welcome the fact that we are having this debate in the House. It is an extremely welcome development and I hope it is the precursor to similar debates in this fashion.

I commend the work of the Chairman and the committee regarding the scrutiny conducted on this particular item. It has been very close scrutiny involving the large number of stakeholders, including the Department of Finance, the Financial Regulator, the Central Bank, the financial services sector, the Irish Banking Federation and the Irish Stock Exchange. Unfortunately, the Irish Congress of Trade Unions was not included, but it gave a written submission and had some interesting proposals as well.

What is significant about this matter being discussed in the Dáil Chamber is something the Minister of State referred to in the course of his contribution, namely, the fact that normally these matters are debated in committee, scrutinised there, referred perhaps to the relevant line Department for suggestions and witnesses brought in. All this is done at a relatively early stage and it is then sent back to the Commission and is not seen again until it appears as a statutory instrument or is to be transposed into domestic law. Literally years can go by so something very important may well be overlooked and we have to deal with it at a later date, but perhaps not adequately.

In this particular case the situation is even worse. We are now at the point of dealing with this very important package of proposals, but they will not come back to us when they leave this House today. That is the end of it; there will be no statutory instrument or transposition. These will implemented directly in domestic law by regulation from the European Union. They are going to the European Parliament and Council, and amendments will be made in tandem with discussions with the Commission, and that is the end of the matter. We all agree that we have an important package of proposals before us, in the shape of the draft legislative reform of the EU's financial supervisory and regulatory framework, so it is important that we have good scrutiny and a good debate so that we know what we will end up with ultimately.

The background to this particular package is the one we have been dealing with for the past 18 months, namely, the global financial crisis and the fall-out from the light-touch regulatory system that was in operation right across the board in member states, including the Office of the Financial Regulator and the Central Bank in Ireland. Of course, the Irish financial institutions were singing merrily along, dishing out money without any respect for the guidelines. The situation was similar throughout the European Union and, indeed, the globe. If I have one crib with the European Union it is that, to some extent, the EU and its institutions - the Commission in particular - should have been more proactive because the Common Market existed even prior to Ireland joining the EEC. The Single European Act created the Single Market. The areas we are now discussing could have been dealt with in greater depth by the various EU institutions to provide an overarching framework that might have prevented some of these occurrences had matters been dealt with adequately ten years ago.

At this stage, the economies of so many countries have been damaged, ours more than most, by light-touch regulation and the absence of a proper supervisory and regulatory framework within Irish financial institutions, with nobody outside looking in to ensure that we behaved properly. This is where these proposals come from and, as the Minister of State has indicated, it is largely the report of the committee chaired by Mr. Jacques de Larosière de Champfeu, a former managing director of the International Monetary Fund that is the backbone of the proposals we are examining. We proposed amendments arising from the intense discussions we had, but essentially the bipartite proposals remain the same, operating on macro and the micro levels.

First, there is the idea that we put in place the European systemic risk board, ESRB, which would have macro-prudential oversight of the financial system, comprising the heads of national central banks and the heads of the new bodies that are about to be set up. That overarching body would represent the European Union and its institutions as well as having representation from the member states.

The second body would involve more micro-prudential supervision, comprising a network of the member states with the three new supervisory authorities, the European banking authority, the European securities and markets authority and the European insurance and occupational pensions authority. That body would look at more micro-level operations within the member states. The two levels would be very valuable in ensuring that a proper framework is in place to conduct the business. The role of the three new European supervisory authorities, ESAs, would be doing most of the work on the ground regarding rule making, enforcement, emergency powers, dispute resolution, peer review, market analysis and information, and would be accountable and transparent before the European Parliament and the European Council.

As the Minister of State indicated, it is important in all of this that the principle of subsidiarity is not interfered with. While the ESAs have binding powers, if they are seen to be an unwarranted charge on the Exchequer, then Ireland, or whatever government is charged with carrying out a particular act, may avoid doing it. Thus, the principle of subsidiarity is not undermined and the whole area of fiscal responsibility remains with the Minister for Finance and the Government.

There are, however, powers to issue warnings and make recommendations right across the board, both at the micro and systemic levels, and all that is extremely important. There is a suggestion to the effect that we have a fairly cumbersome procedure in place and nobody really knows how it will work in practice. To my mind, while the logic is impeccable and the theory fine, what about the practice?

I believe the system will require regular review and I refer to a suggestion members made on foot of a discussion regarding another eminently logical proposal, namely, that there would be much merit in having a single European financial supervisory authority in place that would be headed by the European Central Bank. However, although such an authority would be logical, functional and operational, the Minister has pointed out that it might interfere with the principle of subsidiarity by giving too many powers that are not appropriate to the European Union, which might give rise to a charge that something akin to a federal state was being created. Nevertheless, this proposal should be examined with a view to its introduction, were this possible. A simple system certainly would be the most desirable system.

One proposal made by the Irish Congress of Trade Unions that has much merit is to consider the introduction of the Tobin tax, which is a proposal that has been talked about for many years. I note that much time has been spent discussing what happened in the banking system and why. However one central factor is that the financial systems globally, in the European Union and in Ireland let us down and abused their powers. Some recompense and redress should be made to taxpayers, whose money is being thrown out like confetti at present as though a crock of gold was available to bail out this, bolster that and guarantee the other. Why should a system not be put in place in respect of finance whereby the polluter pays? The Tobin tax enables the imposition of a tax on each foreign financial transaction. The world is full of such transactions every day given all the speculative transactions that take place, most of which are completely unnecessary but which are part and parcel of that complex arena of activity that takes place within the financial sector.

The ICTU document suggests that even were the current number of global transactions to fall by two thirds, in a single year the revenue accruing globally against the polluters would be approximately €423 billion. This money could be put forward to address the damage that has been done by the irresponsibility of the banking and financial systems and could be useful for all sorts of desirable social projects. This proposal should be considered by the global community. While the participation of groups such as the G20 and the United States probably would be required, the European Union should take the lead in this regard because there is no sanction at present. The bankers will go straight back to their old ways unless the regulatory framework is put in place with great care.

The other side of the coin is that much time has been spent in Ireland on activities such as bailing out, stabilising and guaranteeing the banks, as well as establishing NAMA to take up the toxic debts. However, the same attention has not been given to the regulation of the banks. I refer to institutions such as the Financial Regulator, the Central Bank, the banks themselves and their dysfunctional boardrooms. Moreover, not enough thought has been given to what is taking place within the Irish Financial Services Centre. A great number of transactions take place there and it is highly important for the country's economy. This issue has been left to the European Union to do and it is doing so. Consequently, this framework forms a major part of the patchwork quilt that must be put in place. In addition, Ireland must reform its own internal institutions in the context of the principles laid out in this framework.

As for the banking inquiry that has been announced, I am unsure whether it will deal with its business in the manner suggested by the Government. However, we must get to the root of what happened, why and how it happened and why it was allowed to happen. This must be done to ensure that the structures that are being put in place are meaningful and will prevent crises, the undermining of our economy, the destruction of jobs and of society in many ways, as well as the damage caused to the lives of many citizens. These are serious issues and I hope the matter under discussion today will be one of the more desirable packages of proposals that will ensure a proper regulatory and supervisory framework with which to move forward in Ireland, the other member states and the European Union as a whole.

Photo of Seán ConnickSeán Connick (Wexford, Fianna Fail)
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In common with my colleagues on the Joint Committee on European Scrutiny, I am also delighted to have an opportunity to debate on the floor of the Chamber some of the work the joint committee carries out. This is very important as the committee's members form a small and tight group of people and I compliment its Chairman on his efforts in this regard. I am delighted to have been given the opportunity to speak for a few minutes on the draft legislative package on reforming the European Union's financial supervisory and regulatory framework.

Like other Members, I am highly aware of the current situation and the global and international background to the financial crisis. In much of the ongoing debate on this issue, the Opposition conveniently tends to forget that the international banking crisis caused some of the difficulty. I imagine that were Fianna Fáil in opposition, its Members would do the same. I note that Fianna Fáil was not in operation in the United Kingdom, France, Belgium, Germany, Greece, Spain and the United States of America.

Photo of Bernard DurkanBernard Durkan (Kildare North, Fine Gael)
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It is just as well.

Photo of Joe CostelloJoe Costello (Dublin Central, Labour)
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That is the reason things are not nearly so bad there.

Photo of Seán ConnickSeán Connick (Wexford, Fianna Fail)
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Members should consider the collapse of Lehman Brothers bank in 2008. Obviously, this initially caused an extreme level of instability throughout the global financial sector. It also created significant movements of deposits, both corporate and personal, around the world and triggered runs on many banks in various countries. Ireland had its own domestic difficulties to deal with at that time, which coincided with the international financial crisis. These obviously included the collapse of the construction sector and the collapse in tax receipts, as well as the consequential heavy job losses and the lack of confidence in the economy that now is evident.

Previous policy had resulted in a low tax economy. While there has been much criticism in this regard, I note this is a young economy by world standards and as things had been going well during the previous ten years, people probably were hesitant to make changes as everyone had been enjoying the financial excesses. However, the country now has an opportunity to correct all this and to go in a new direction I believe this is being done and the Government has been obliged to make extremely tough decisions. While not all Members were very comfortable with such decisions, they had to be made in the interests of the future of the economy.

Everyone is aware of light-touch regulation, particularly in respect of the Irish banking system, which in hindsight caused much difficulty. However, the Government has moved rapidly in this regard. While I do not know whether other Members share my perception, it seems as though we have been in this crisis for ten years when in fact only a little more than 18 months have elapsed.

Photo of Bernard DurkanBernard Durkan (Kildare North, Fine Gael)
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And a long way to go.

Photo of Seán ConnickSeán Connick (Wexford, Fianna Fail)
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When one considers the scale of what happened and of what had to be dealt with, Ireland has done quite well. On 20 September 2008, the statutory limit for the deposit guarantee was increased. At the time, this measure was necessary to prevent a run on or collapse of any Irish financial institutions. On 30 September 2008, the State guarantee was put in place. Smaller countries such as Ireland and Denmark opted for State guarantees. It was easier for bigger countries to apply their own solutions as did Germany and the United Kingdom. On 3 December 2008, the names panel was set up for the purpose of selecting additional board members to the various banks. Each bank had to appoint two members to that. The members were also named for the covered institution remuneration oversight committee. These were important steps. On 21 December 2008, we had decisions on recapitalisation of the three major banks. In January 2009, we had the Government nationalisation of Anglo Irish Bank and, on 11 February 2009, the recapitalisation terms for AIB and Bank of Ireland. In April 2009, the establishment of NAMA was announced in the supplementary budget and in June 2009 the Central Bank of Ireland Commission was set up, with the reform of institutional structures of financial services in Ireland at the top of its agenda. The Government also established a single and fully integrated regulator. In November 2009, the NAMA Bill was passed and it was followed on 11 December by the revised State guarantee. On 22 December 2009, the NAMA board members were announced. This brings us up to date, to 19 January when we saw the framework for the banking inquiry approved by the Government.

All of these welcome and necessary measures were taken by the Irish Parliament in the national interest. However, we are not alone in this crisis. We were subject to what was happening in the wider world, including the European Union. The initiatives I have mentioned were taken with the support of international funding markets - we saw the effect of that in the context of the interest rates we are charged on our bonds - and the European Central Bank.

I would like to mention two of the major factors that affected the crisis in the Irish banking system. The international credit crunch was a key factor that created severe liquidity issues in Ireland and across the world. We are a small open economy and we were impacted on very badly in that regard. Another factor was that markets were concerned with asset quality and the over exposure of the Irish banking and financial system with regard to property loans, particularly in Ireland and the United Kingdom. However, I would be critical of the EU response. I felt it was slow and left us floundering. The US response seemed to be faster and more co-ordinated. Therefore, I welcome any European initiatives that will see an improvement in that area.

In 2008, interest rates could have moved quicker and we should have had more joined up thinking on coping and dealing with the financial crisis on a European-wide scale. At the time it was as if we were watching a car crash about to happen. Each country was watching every other country, banks were looking to governments and governments were looking at other governments to see how they were going to fix their particular financial difficulties.

It is with that in mind that I particularly welcome the draft legislative proposals which will reform the EU financial supervisory and regulatory framework. I welcome two proposals that have come forward from that and I also welcome the de Larosière report and its recommendations. The first proposal arising from proposed EU financial regulatory reform is the setting up of the European systemic risk board, ESRB, which will have responsibility for oversight of the financial system, particularly at the macro level. The second is the setting up of the European system of financial services, ESFS, which will involve national financial supervisors working with the European supervisory authority, ESA. It will comprise three authorities, the European banking authority, the European securities and markets authority and the European insurance and occupational pensions authority, the three ESAs.

It is important the proposed powers of the ESAs are examined and reviewed on a constant basis. The need for review has emerged from the reform process and is welcome. The rulemaking power, for example, proposes the establishment of one harmonised rulebook, which is very important. Enforcement is also important and the ESAs will ensure the coherent application of EU legislation. ESAs will also have emergency powers so that we are never again left in a position where we are seen to be floundering. They will have a large role to play in dispute resolution and peer review will play an important role.

As someone from the private sector who has discussed these issues with many others, I am aware the banking sector, through the early and mid noughties was all about competition. Bank of Ireland and AIB had the run of the markets for many years, but when Anglo Irish Bank entered the scene it was more inclined to take risks and provided many people with the opportunity to commence businesses who might not have got funding from the other banks. This created a situation where banks became competitive. They were joined by the likes of Rabobank, which took over ACC and the Royal Bank of Scotland. The frenzy then began towards the end of the noughties and the banks were chasing and competing for business.

I support all of the committee's recommendations. We live in a different world now. If we turned on our televisions we would see the American markets have already opened and later we see the Asian markets open. The Irish and European markets open on the back of what has happened in Asia the previous night and everybody waits for Wall Street to open. We live in a small world and economy now in terms of technology. Therefore, it is vital we are in a position to react as a group in a unified way. That is the reason the European Union has such an important role to play in the future development and regulation of the financial sector throughout the European Union. I welcome this particular initiative.

Photo of Bernard DurkanBernard Durkan (Kildare North, Fine Gael)
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I am glad to have the opportunity to speak in this important debate. I welcome the report and its recommendations and will just make a few comments. No issue has had more impact on the citizens of Ireland, Europe and the world than that of financial regulation, control and policy over the past number of years. It is good this House has produced a report and I congratulate the Chairman of the Joint Oireachtas Committee on EU Scrutiny on his involvement in its production.

As I have often said, I hope we have learned some lessons. The Chair is aware of how often we have come into the House and spoken about legislation or regulations and hoped it or they would solve our problems. We hope they will, but we have gone through this process many times and that has not happened. The system of regulation, as it has unfolded over the past number of years, is a cop out. It has never worked. There are more regulators walking around this country and Europe than there were in Texas after the American civil war, where there were a lot of them. It also had what were called Reconstructionists and boy do we have them here now. They are ten a penny. What I cannot understand is why we landed where we did. What is the cause of that?

Deputy Connick made a very interesting point concerning access to modern technology and the speed with which actions can take place when transferring assets and selling shares on the world markets. Many Deputies, myself included, have spoken about this in the House in recent years. It was possible to have a financial crisis worldwide in 1929 when there was no technology and when everything was done by hand. There was a previous financial crisis back in 1829 when there was even less technology. We have had many other financial crises in the meantime. There is nothing new in having a financial crisis except that it has become easier to do it. That is our problem.

When it happened here, we introduced a regulatory system. The regulatory system is a step removed from Parliament. Previously, Parliament controlled financial policy with the assistance of the Governor of the Central Bank and the Secretary General of the Department of Finance. Then we introduced the regulator and that was to be the solution to all our problems. I was one of those involved in the DIRT inquiry and this regulatory system emerged from that inquiry. The reason for this was that things had gone wrong in the banking system. 3 o'clock

This debate took place at a conference organised by the European Union in Brussels two years ago. We could not understand at the time how it took so long for people to recognise what was happening around them. It was as plain as the noses on our faces for the past seven or eight years. Deputy Connick said, and I do not blame him for doing so, that Fianna Fáil was not to blame for everything that happened all over Europe. It is just as well it was not. Imagine what circumstances would be like had it been running the whole European scene. Would that not have been fun?

Bearing in mind that I am not an expert, there are basic principles to be considered. Years ago, I was told an expert could be defined as a person who knew when to call in the experts. I must revise my thinking in this regard and the Chair will agree with me because the experts have failed miserably. Everything they said and did was wrong. Their projections were wrong. They stated the fundamentals were sound, but they were wrong in this regard also. They said there was nothing to be afraid of and that the graph was correct, but each and every one of them was wrong.

Of all the Irish commentators, only a small handful, fewer than five, exhorted us to ease up on the grounds that the finances were not in order. They were dismissed as fools and it was said that they did not know what they were talking about. They were regarded as unpatriotic and as running down the economy. It was believed they would cause a run on the euro and such nonsense. Where in God's name did all the so-called, self-appointed experts come from? They appear on our televisions every day and night and can be heard on radio programmes in the morning and middle of the day. They address us in the newspapers. The only one of them who spoke out against what was occurring was the one who now sits in the benches on this side of the House. More credit to him.

Photo of Seán ConnickSeán Connick (Wexford, Fianna Fail)
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He was wrong from 2001 to 2004. He was eventually going to get it right.

Photo of Bernard DurkanBernard Durkan (Kildare North, Fine Gael)
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He is one of the few commentators - there are approximately two others - who have been consistent about predicting what would happen to our economy. He used simple economics to do so. The rest of the so-called experts were regarded as sophisticated experts, so much so that nobody knew what they were talking about. It is now clear they did not know themselves. What an appalling crime to carry out on the unfortunate people.

What was happening was clear to all who examined the circumstances that pertained. The marriage between the property market and the banking system was the result of an appalling, abysmal decision. The Members on the other side of the House must take responsibility for it, although I do not blame any of them individually. Play-acting and finding somebody else to blame is nonsense. We can have all the regulations we want but nothing will happen to prevent a similar occurrence unless responsibility is taken politically. Nothing else matters.

The problem now is that the politicians are regarded as the people to blame. The public believe the Members of the House are to blame. The Members had nothing to do with it whatsoever; the Government, the Executive, had direct responsibility. Its job is to give direction, or none, as the case may be.

It is sad that we have so little time to talk about these issues. The economic downturn is the greatest problem to have affected this country in the past 50 years. It is likely to remain the greatest problem for another 50 unless some other idiot comes along and makes an even bigger mistake than the one that was made and leads us in the wrong direction.

Over the past eight years, it was clear to the shopkeepers in every corner shop that what was occurring would not last. Of course, most corner shops have been got rid of in the interest of so-called competition, greater efficiency and all that kind of nonsense. Anybody with a modicum of common sense was able to tell the experts where they were going wrong before they went totally wrong.

Most Members on the other side of the House are decent people. I hate to be recriminating all the time in the House against politicians. It was not politicians who were the cause of the problem but the Government, the Executive. It will continue to be regarded as the cause. The repeated failure of the parliamentary system, whereby Ministers refuse time and again to answer questions on matters for which they are accountable to the House, must be borne in mind. To what are Ministers accountable if not this House? The longer this takes place, the weaker the regulatory system becomes and the more vulnerable the economy and people become. I hope somebody somewhere will have the bravery to blow the whistle and blow out of the water the kind of codology that has been evident in this country for the past eight or nine years.

Photo of Martin ManserghMartin Mansergh (Minister of State with special responsibility for the Arts, Department of Arts, Sport and Tourism; Minister of State with special responsibility for the Office of Public Works, Department of Finance; Tipperary South, Fianna Fail)
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I thank the Chairman of the Joint Committee on European Scrutiny, Deputy John Perry, for his presentation. I thank Deputies Joe Costello and Bernard Durkan for their thoughts on the matter.

Let me deal with the end of Deputy Durkan's contribution, which I would describe as political reductionism. I followed the debate on the banking crisis in many countries. The explanations being sought in respect of the US banking crisis, for example, do not focus on the role of former President Bush. The explanations for the British banking crisis do not focus mainly on the actions of Prime Minister Gordon Brown when he was Chancellor of the Exchequer. There are arguments to be made in this regard, of course, but the problem is far more profound than Deputy Durkan alleges. This is precisely why the Government has not agreed to a crude, polemical, Oireachtas-based politicising approach interested only in simplistic arguments-----

Photo of Bernard DurkanBernard Durkan (Kildare North, Fine Gael)
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The Minister of State should not encourage me.

Photo of Martin ManserghMartin Mansergh (Minister of State with special responsibility for the Arts, Department of Arts, Sport and Tourism; Minister of State with special responsibility for the Office of Public Works, Department of Finance; Tipperary South, Fianna Fail)
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-----pinning responsibility on the Government. It is a very complex international problem.

Photo of Bernard DurkanBernard Durkan (Kildare North, Fine Gael)
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It is a simple problem and the Minister of State knows that.

Photo of Martin ManserghMartin Mansergh (Minister of State with special responsibility for the Arts, Department of Arts, Sport and Tourism; Minister of State with special responsibility for the Office of Public Works, Department of Finance; Tipperary South, Fianna Fail)
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The Davos meeting is taking place. The people deserve more profound explanations-----

Photo of Bernard DurkanBernard Durkan (Kildare North, Fine Gael)
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They do. An election is called for.

Photo of Martin ManserghMartin Mansergh (Minister of State with special responsibility for the Arts, Department of Arts, Sport and Tourism; Minister of State with special responsibility for the Office of Public Works, Department of Finance; Tipperary South, Fianna Fail)
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-----than those that suggest the problem is all the fault of the Taoiseach, now or when he was Minister for Finance. We need to grow up in this House. The people need more than crude politicisation.

I thank Members for their considered and useful contributions, except the point made by Deputy Durkan to which I referred. The tone of the rest of the debate was absolutely sensible and I had no problem with the points being made. I thank the Joint Committee on European Scrutiny and the other Oireachtas committees for their role in the process. When dealing with EU frameworks, one very often needs more than one committee. I will respond to as many of the Deputies' points as possible in the time available to me.

These proposals aim to put in place an EU supervisory structure for financial services which is significantly enhanced to meet the challenges of effectively regulating and maintaining the stability of the single market in financial services in the EU.

The legislative proposals aim to create a strong, robust and more uniform EU-wide system of financial supervision and oversight by developing a single rulebook for financial regulation and by securing better co-operation between national supervisors in the supervision of large and complex cross-border financial groups.

The establishment of a European systemic risk board, ESRB, combined with three new European supervisory authorities, will address what has been identified as a major priority in the strengthening of financial regulation internationally. It will ensure a strong focus on the stability of the overall financial system alongside closely monitoring the soundness of individual financial institutions as well as a more co-ordinated approach to the day-to-day supervision of financial institutions, particularly by the creation of a single rulebook. It is also in line with several international initiatives including the creation of a financial stability board by the G20.

The heads of the European Central Bank, national central banks and the European supervisory authorities, as well as national regulatory bodies, will participate in the European systemic risk board. To achieve its role, the ESRB will have the power to issue non-binding recommendations and warnings to member states, including the national supervisors and to the European supervisory authorities, the response to which will be closely scrutinised by a complain-or-explain mechanism.

With regard to the proposed European system of financial supervisors, ESFS, the three new European supervisory authorities for the banking, investment services and insurance and pensions sectors will take over all of the functions of the three existing EU committees of national supervisors for banking, securities and insurance which have advisory powers and aim to foster supervisory convergence, best practice and the convergence of regulatory outcomes.

It is proposed that the new authorities will have significant additional competences including resolving cases of disagreement between national supervisors where legislation requires them to co-operate or to agree; contributing to ensuring consistent application of technical Community rules through, for example, peer reviews; developing proposals for binding technical standards; and a co-ordination role in emergency situations

These issues have been the subject of much debate for the past 12 months since the publication of the de Larosière report. The views of stakeholders both at national and European level have been taken into account. The meeting of the Joint Committee on European Scrutiny in December was the third occasion on which an Oireachtas committee considered this issue.

The committee's report was published earlier this month and provided a valuable contribution to the debate. It strongly supported the broad thrust of the EU proposals recognising the need for a step-change in the capacity of the current nationally based supervisory systems to work in concert to address threats to financial stability in the EU which in the operation of the single financial market often cannot be contained within national borders.

The proposed reforms to regulatory structures outlined here today are not to be regarded as the full extent of the EU's response to the crisis. At sectorial level, several other issues have been addressed, while others are in the pipeline. A new regulatory regime for credit rating agencies has been agreed and will come into operation later this year. Shortcomings in how the regime operated have been clear in the past several years. Capital requirements for banks and investment firms have been agreed and further proposals can be expected. The Commission has proposed measures to regulate the managers of hedge funds and other alternative investment funds. These proposals are being examined by working groups in Council and the European Parliament. Further work is also taking place on insurance solvency provisions. The Commission is examining the way in which derivative contracts are traded and legislative proposals can be expected later this year.

It is widely accepted that these reforms are necessary and urgent and they have received support from a wide range of interested parties. The Government regards them as important measures which will help to restore confidence in the EU's financial systems. The proposals are in line with G20 developments. It is appropriate that the reforms be implemented as a priority and the Commission's target for the new bodies to be operational at the start of 2011 is appropriate.

I thank Members for their comments on this important and urgent issue. Financial institutions and investors alike know that these reforms are coming down the track and they want to see them implemented. These reforms are a crucial step in addressing the weaknesses identified in the supervisory framework of financial regulation in the EU and the Government is fully behind them. I have sympathy with Deputy Costello's comments on discussing and scrutinising legislation, regulations and statutory instruments. This debate highlights the complex measures required nationally and at European level in this area. The causes that have given rise to this legislation and the solutions are quite complex and interconnected. They are not simple matters as they are sometimes represented.

Question put and agreed to.