Alan Kelly (Labour)

I welcome the Minister of State to the House. This is the first time we have had an opportunity to speak on finance related issues. The Labour Party welcomes this Bill and will facilitate its passage through the House. At first glance, it seems to be very technical, but is necessary as it aims to transpose the markets and financial instruments directive into Irish law. I can see why there has been difficulties in drafting the Bill, because it is so technical. Therefore, I understand why some parts of it may have to be re-examined on Committee Stage in the other House.

The Bill aims to identify areas in which clarification or correction were required by the Financial Regulator and the industry on the directive and related areas and I welcome a number of the Bill's aspects. It widens the range of core investment services and activities that can be carried out across the EU. This applies to both investment firms and credit institutions when providing investment services. It creates a pan-European market in investment products, replaces national rules and allows for harmonisation. This will pose many challenges to Irish firms because it will allow investment products to be sold into the country, thus improving competition. However, it also will allow for Irish firms to sell on a pan-European basis. Some challenges will arise in this regard to which I will refer later. In general however, this measure is to be welcomed.

The Bill introduces new and more extensive requirements that a range of financial firms will be obliged to adopt in respect of the conduct of their business and internal organisation. This is especially important given the issues faced by some of the firms in question which have appeared prominently in newspapers recently. It allows for further and more transparent transaction reporting by firms. It protects investors, increases transparency in respect of fees and reduces costs for users on many of the instruments sold by the firms affected. I hope this will be achieved through the standardisation of rules and dissemination of quotes etc. This issue is highly important for consumers.

I appreciate the Minister of State considered that a number of other issues should be included under the miscellaneous part of the Bill. I will not go through them in detail and acknowledge that many of them were necessary. I refer to issues such as the requirement to levy fees by the Financial Regulator, the limitation on receivers' and liquidators' access to client money, the provision of authorisation to the Financial Regulator to disclose confidential information to the National Consumer Agency, the indemnification of members of the Financial Services Ombudsman Council etc.

However, one of the Bill's core issues concerns the penalties and scale of punishments attached to the MiFID provisions. I understand this must be covered by primary legislation given the scale of penalties that will be required should some firms not conduct themselves in the manner to which they should be subject.

I refer to some important areas in respect of the Bill. I refer in particular to the capabilities of the National Treasury Management Agency. The 1990 Act enabled the Government to delegate the borrowing and debt management functions of the Minister for Finance to the NTMA with such functions to be performed subject to the directions and guidelines the Minister might give. This gave competitive deposit and borrowing facilities to local authorities. However the proposed changes will allow the NTMA to work with greater flexibility, which is welcome. This will enable it to work more extensively with semi-State organisations, universities etc. It should be acknowledged that in some cases, this may prove to be a better option in future than choosing public private partnerships.

I accept the Bill's urgency and the reason it must be enacted before 1 November. However, I have one significant concern regarding it, namely, that while Ireland will implement the directive, how will it be implemented at a pan-European level? While I am open to correction, I understand that up to nine other member states have not yet imposed the directive. The Minister of State's response should advise Members of the number and identity of such member states as well as the timing of their implementation of the directive. Moreover, will all member states impose the directive in a similar fashion or will it be done down by further regulatory constraints favouring a member state's home markets? How can this be avoided? The Minister of State should provide more information in this regard to demonstrate his certainty that this will not happen. Obviously, such a development would defeat the purpose of the entire Bill, as the harmonisation of rules seeks to avoid such activity. Can we rely fully on all member states to adhere to the directive and implement it completely? How will the EU manage to ensure the directive is put in place fully? It must provide strong direction at all times as well as imposing a code of conduct. The Minister should explain this issue.

I agree with Senator Twomey on two points. There probably should be greater debate on how Irish firms can be facilitated in this new environment. While such a debate should be held at another time, Members must consider the logistical issues and other challenges that many such firms will face in the near future. There is a need to define these areas and consider them one by one in order not to lose first mover advantage in what will be now a very competitive market. Moreover, Members must consider how best to facilitate consumers in order that they benefit from such enhanced competition. This must also be broken down to ensure that consumers enjoy better benefits.

While on this subject, I will raise some other issues of concern regarding financial markets and regulations of financial institutions that arose as a result of this directive and Bill. A recent International Monetary Fund report notes that the Irish banking system is in good health, which is to be welcomed. There is one authority, namely, the Central Bank and Financial Services Authority of Ireland. The latter supervises individual firms while the monitoring of overall financial responsibility is the role of the Central Bank. As this operates within the euro system and the European Central Bank, Ireland's regulatory framework is in good shape.

However, it is highly important to maintain confidence and some issues that have come to light in recent months have shaken confidence somewhat. Ireland must ensure this does not happen because the financial services sector employs thousands of people whose jobs must be protected at all costs. Much of this success is built on reputation and consistent confidence in the sector. This must be maintained and a number of issues must be dealt with to achieve this goal. I appreciate the Minister of State intends to introduce an amendment to section 19 on Committee Stage that will cover some areas I intend to raise. However, I will raise them to ensure they will be dealt with in some detail.

I refer to the issue of deposit protection schemes. There is a need to strike the right balance between protecting depositors and ensuring banks do not take inappropriate risks. The need for an enhanced depositor's protection scheme for savers and depositors in Irish institutions has been raised previously. The Irish scheme had been limited to 90% of deposits with an upper limit of approximately €20,000. This is out of line with schemes operating out of the United Kingdom and Europe. A standard scheme across Europe is required and the Minister of State should ascertain how this could be brought about.

Another issue concerns the need to regulate derivatives or contracts for difference, CFDs. I was startled to learn that 50% of all transactions in the Stock Exchange in recent years have involved CFDs. While I am open to correction, I understand that approximately one year ago, the Minister for Finance proposed the imposition of stamp duty on such transactions but subsequently had a change of mind, presumably following some lobbying. I understand that such instruments are now falling in popularity as the credit squeeze sets in. While many high net worth individuals have been involved, the ripple effect has resulted in ordinary citizens and small-scale investors becoming caught as a result of the high cost of lending and the consequent raising of interest rates and mortgage repayments. Consequently, this entire field requires some form of regulation to standardise its operations.

I understand the area of sub-prime lending will be dealt with in some way on Committee Stage, although I am unsure to what degree. The Minister of State is aware this is a topical issue at present about which I have great concerns. This area is growing despite contradictory views. It simply constitutes the modern-day equivalent of hire purchase schemes and concern is now rising continually. Many sub-prime offers are given out like confetti by firms. They come through the letter box as financial institutions dispense proposed loans to people who cannot afford them. They are being given out in tandem with flyers for Indian and Chinese takeaways, advertisements to have one's driveway resurfaced etc. This constitutes a form of financial confetti. Moreover, advertising for sub-prime lending organisations is being carried out by celebrities who are making proposals about which they should know better. This looks like easy money to some consumers and the schemes are marketed with a great deal of colour. Unfortunately, many such schemes prey on the vulnerable and this sector must be regulated.

The Financial Regulator has remained aloof from the sub-prime market for a long time. At present it is worth €1 billion in Ireland and is expected to grow to €5 billion in the next few years. Members should be concerned by this and must take cognisance of present developments in the US sub-prime market to ascertain how it could affect Ireland in future. In many cases, those who buy such products are financially vulnerable and lack financial sophistication according to research that has been conducted. We must acknowledge this. In some cases there is evidence that the applicants are lying, but they are getting through the net because lenders do not scrutinise their applications sufficiently. These people are lying on their application forms because they are so desperate to get the money. They need to be protected.

The Minister of State needs to strike a balance between protecting people from themselves and offering a choice. The financial services sector has binged in the sub-prime area. It was greedy and now consumers are paying. There is a credit crunch and first-time buyers looking for a mortgage are in trouble. They do not need to be pushed in the direction of sub-prime mortgages and we should ensure they are not in the future. I welcome the fact that the sub-prime sector is covered under the consumer protection code, but traders in this area should be subject to a suitability check. Perhaps the Minister of State would comment on whether this is the case. A number of bad news stories in the recent past have pushed this to the top of the agenda. I encourage the Minister of State to do all in his power to address this. Do sub-prime lenders, who in many cases sell on loans to other institutions within six months, really have an interest in checking that the people to whom they are lending have the ability to pay back the loan? I have severe doubts about this. We should not allow this issue to drift.

Some firms offer certain types of investment in overseas properties. Is it sensible to give five-year guarantees on rental income when people on an average wage in the local area could never afford to pay such rent? There are many outside factors that could cause investments such as these not to work out. The Minister of State should also consider the area of on-line trading. How are we to regulate trading websites? This is a growing concern. We should institute a requirement to retain a customer code of conduct and regulations on money laundering for purely on-line retailers. These are firms that do not have a presence in the real world but trade only on-line. This is critical to ensure confidence is maintained in the market for innovative on-line products.

The sight of people queueing outside Northern Rock recently did not create confidence in our financial institutions. In that case, the fact that the institution does not have a public face caused a panic. Has the Minister of State considered how this can be avoided in the future? Many feel that the sub-prime market was also a contributing factor in the Northern Rock crisis. I certainly believe it was a factor. In the recent past, Bank of Ireland raised interest rates for first-time buyers as a direct result of the problems in the sub-prime market. This is because the interbank market on which Bank of Ireland was trading tightened up which meant that it cost the bank more to borrow money. These costs were pushed onto its customers. I believe that what happened with Northern Rock was similar but on a larger scale. Northern Rock is an almost faceless bank, which resulted in immediate panic. This is interlinked with the matter of on-line retailers. These issues need to be addressed.

As this is the first time we have had a Minister of State at the Department of Finance in the House, I wish to raise a number of general issues. There have been warning signs about the economy for some time, including the Northern Rock crisis, the 30% fall in the Irish Stock Exchange, the credit crunch and falling property prices. There are almost 280,000 people working in the construction industry which comprises 25% of gross domestic product. We all know what is coming in terms of the number of housing units built and the impact this will have on the economy. We know growth rates will drop.

Certain promises were given prior to the general election by the Minister of State's party in Government, including a 1% cut in the top rate of tax as well as changes in the standard tax rate, PRSI, vehicle registration tax and motor tax. I presume most of these will not be achievable despite the promises made. A similar type of strategy was used five years ago. However, I am concerned about the slash-and-burn tactics that are beginning to be used by the Government. Cuts will need to be put in place but I ask the Government to ensure that these are not at the front lines in the areas of health care and education. It is important we avoid this at all costs.

I wish to raise some issues to do with the forthcoming budget so that they may be noted by the Minister of State. National development plan appraisals for building projects should be more open and transparent. There should be more accountability in this area. I ask that efforts are made to achieve this because I do not understand why we do not have more transparency. There should also be some provision for equipping construction workers with alternative skills because the level of construction work will drop over the next few years.

We all know the decentralisation situation is a mess and the origin of decentralisation scheme was mad. For example, there was no possibility that Fáilte Ireland would ever move to Mallow. We need a sustainable decentralisation programme. However, the costs involved in the current round of decentralisation are so huge — €900 million over recent years — that the Government should in this case accept its mistake, cut its losses and run.

The Minister of State stated recently that €53 million would be required this year for national roads, although €87 million was spent last year. Should this figure not increase rather than decrease? Will there be a budget underspend in 2007? If so, why? Employee pension schemes are a real concern. The number of employers offering defined benefit schemes has dropped from 67% of the total to 37% over a five-year period. We need an explanation for this. It is quite worrying because the risk is that in 30 years' time, people will wake up and realise there is no money in their pensions. We need a strategy to deal with this. I know a Green Paper on pensions was published recently, but perhaps the Minister of State would comment specifically on this issue.