Brian Lenihan Jnr (Dublin West, Fianna Fail)

The Central Bank Reform Bill 2010 is the latest part of our legislative response to this most serious economic and financial crisis in which regulatory failures played no small part. There are indications that the economy may be over the worst and the latest data provide grounds for optimism about our short-term economic prospects. As the international recovery gains momentum, we should see a full year of economic growth in 2011. In that context, I welcome international recognition of the credibility gained by this country in both addressing the fiscal crisis and in stabilising the banking sector. Just last week I heard Ms Gillian Tett, the respected commentator from the Financial Times, refer to Ireland as the country that has acted most decisively in dealing not only with our fiscal difficulties but also in addressing our financial crisis by measuring the extent of the problems in our banks and moving decisively to recapitalise them. Last week's CSO national accounts figures for the first quarter of 2010 show that gross domestic product expanded by 2.7% between the final quarter of last year and the first quarter of this year. This provides concrete evidence that the co-ordinated measures taken by Government to address competitiveness, the public finances and the banking system are paying off, with improved confidence and clear evidence of a return to growth in output. The latter is an essential prerequisite for employment growth. The CSO figures suggest the prospects for growth this year are somewhat better than previously assumed. They also show that exports are performing strongly while consumer spending has stabilised. This, coupled with the figures for consumer confidence since April, bodes well for the remainder of the year.

Unemployment is unacceptably high. The best way to create and protect jobs is to return to growth in output. Every measure the Government has taken in the past two years was aimed at getting those who have lost their jobs back to work. The CSO figures show that the policies we have been pursuing are the right ones and that we must continue with our plan. In the period 2011 to 2014, it is expected that growth will return to the economy on an annual basis and that sustainable growth in tax revenues will resume.

The Government is keen to ensure this momentum is maintained by the reform and reconstruction of the financial system. The reform of financial regulation is on the agenda of political leaders worldwide and has dominated political discourse in the United States and the United Kingdom as well as at multilateral forums such as the EU and the G20.

The Central Bank Reform Bill 2010 is a crucial step in a comprehensive programme to put in place a domestic regulatory framework for financial services that meets the Government's objective of maintaining the stability of the financial system, provides for the effective and efficient supervision of financial institutions and markets, and safeguards the interests of consumers and investors. This is the first step in a three-stage legislative process to create a new, fully integrated structure for financial regulation. It provides a statutory basis for the new structure that will replace the existing Central Bank and Financial Services Authority of Ireland, CBFSAI. A second Bill, to be published in the autumn, will enhance the powers and functions of the restructured Central Bank in regard to the prudential supervision of individual financial institutions, the conduct of business, including the protection of consumer interests, and the overall stability of the financial system. A third Bill will consolidate the existing statutory arrangements for the Central Bank and in respect of financial regulation in the State.

The Central Bank Reform Bill underwent an extensive examination in Dáil Éireann during nine days of debate. I thank Deputies on all sides for their contributions to that debate. I look forward to constructive engagement with Senators on the Bill in this House.

We know from the two preliminary reports into our banking crisis that the regulatory system was wholly inadequate and badly in need of reform. A good start was made to the reform process by the appointment of Professor Patrick Honohan as Governor of the Central Bank and Mr. Matthew Elderfield as Financial Regulator. Both of these appointments have boosted public confidence in the system. The bank has also moved to bring high calibre expertise into its organisation through recent senior appointments in the areas of market supervision, enforcement and risk assessment.

The Central Bank Reform Bill 2010 provides the job specification for these important positions. It sets out a fit-for-purpose, unified Central Bank which will ensure problems do not develop in the cracks between organisations. As the Governor of the Central Bank observed in his recent report, the complex structure which obtained in the CBFSAI "could have exposed the system to the risk of some ambiguity in the assignment of responsibilities". He also stated that "few would now defend the institutional structure invented for the organisation in 2003". The Central Bank recently published an ambitious new approach to banking supervision under a four-part plan to institutionalise the lessons from the financial crisis. This plan is predicated on the changes to the supervisory structures brought about by the Bill.

The Financial Regulator recently completed a consultation process on a new code of practice for corporate governance which proposes new standards for Irish boardrooms and which will be implemented from October. Once the Bill is enacted, the way will also be clear for the introduction of a new fitness and probity regime to ensure those in positions of responsibility meet the high standards expected of them.

The head of financial regulation has also announced a review of the approach to how overcharging is dealt with under the consumer protection code. He has stated that it is clear from recent cases that change is needed in respect of how firms deal with charging and pricing issues and he is conducting a review to resolve overcharging problems and to strengthen the grounds for enforcement action.

It is clear we need to put legislation in place without delay to ensure the reconstituted Central Bank will have the legislative backing it requires to deliver on this ambitious programme of reform. We must emphasise to the industry that the old way of doing business is over and that all has changed in the world of financial regulation.

The two preliminary reports on the banking crisis by Professor Honohan and Messrs. Regling and Watson present an expert analysis and assessment of the issues. The Government welcomes the reports and commends the analysis of the issues undertaken by their authors. Their findings provide the basis for the preparation of terms of reference for a statutory commission of investigation.

The reports have drawn attention to a number of significant issues that require further consideration, including bank practices, risk management and governance failings in the covered institutions, the performance of the Central Bank and the Financial Regulator, and the role of fiscal policy and the macroeconomic management of the economy overall. The Government has accepted the findings of the reports and has referred them to the Oireachtas Joint Committee on Finance and the Public Service. I attended meetings of the committee on two occasions, most recently yesterday, and have had very constructive discussions with its members on the scope of the terms of reference for the commission of investigation. The Government decided upon those terms of reference this morning. A motion providing for the establishment of the commission of investigation will be tabled in the House in the days ahead.

I have also agreed with the joint committee the scope of the motion of referral on policy lessons on macroeconomic management to be referred to it. These policy lessons arise from the conclusions of the Regling and Watson report and the committee has agreed to consider these issues and to report back to both Houses by 30 October next. On the basis of the committee's agreement to both of the these issues, the Government proposes to table before the end of the current session in both Houses a motion to approve the draft order to establish the commission of investigation and a motion of referral of the policy issues to the committee. I propose to set out the issues in more detail when tabling those motions.

Senators will be aware that there is to be an independent review of the Department of Finance by a small group of experts with relevant international and domestic experience. The purpose of the review is to evaluate the systems, structures and processes used by the Department of Finance during the past ten years in providing economic advice to successive Ministers for Finance and the Government.

The Central Bank Reform Bill 2010 is necessarily complex but its central aim is to put in place a unified and integrated structure for the bank. The changes to the current arrangements are the creation of a new Central Bank commission, the dissolution of the Irish Financial Services Regulatory Authority, IFSRA, the establishment of a new management structure within the bank, and the introduction of new accountability measures, particularly those which will ensure enhanced accountability to the Oireachtas.

Sections 5 and 6 carry over the terms and conditions of employment of existing Central Bank employees and set out the arrangements whereby staff of the bank may be seconded or transferred to the National Consumer Agency to carry out functions now being transferred there. Sections 7 to 12 set out the continuity provisions that enable the Central Bank to carry on various activities it is inheriting from the previous regulatory structure. These include the continuation of legal instruments, superannuation arrangements, applications for licences and permissions and regulatory actions.

Part 3, covering sections 18 to 44, inclusive, provides for a fitness and probity regime to be applied by the Central Bank. The Bill provides new powers for the bank to ensure the fitness and probity of nominees to key positions within financial service providers and of key officeholders within those providers. It was my view that rather than waiting for the next Bill, which will enhance regulatory functions, these powers should be brought forward in this legislation because of their importance in helping to set the tone of the new regulatory arrangements. These new powers for the bank will help to restore confidence in the management of financial institutions, both domestically and in international markets.

Schedule 1 contains the key reforms to the structures of the bank. Items 1 to 19, inclusive, set out various changes to definitions and interpretation provisions. Items 20 to 27, inclusive, relate to the establishment of the Central Bank of Ireland, its functions and objectives and other related matters. The bank's primary objective is to maintain price stability. Among its other objectives and functions are the stability of the financial system overall, the proper and effective regulation of financial institutions and markets, the provision of analysis and comment to support national economic policy development, and monitoring of the provision of financial services having regard to the public interest and the interest of consumers.

Importantly, item 23 inserts a new provision which puts beyond all doubt the independence of the bank, the Governor and the Central Bank commission in matters relating to the Treaty of Rome and the Statute of the European System of Central Banks. I welcome the recent opinions of the European Central Bank on the Bill. As I have indicated, I am keen to work closely with the ECB to ensure the best possible reform of the structures of the Central Bank of Ireland. The ECB's opinions are an important part of that process. The Department of Finance has been examining the opinions in conjunction with the Office of the Attorney General. Two amendments were introduced on Report Stage in the Dáil to take on board some of the main independence issues raised in the opinion. One of them is intended specifically to reinforce the Governor's sole responsibility for the performance of the bank's objectives regarding ESCB related tasks. I will consider any further legislative changes that might be appropriate, and how they might be implemented, in the context of the second Bill in the autumn.

Item 28 substitutes new sections into the Central Bank Act 1942 relating to the new board room arrangements for the Central Bank commission. The commission will consist of the Governor, who is the chairman of the commission, the two heads of function, the Secretary General of the Department of Finance and between six and eight other members to be appointed by the Minister for Finance. The Bill provides new powers to enable the commission to establish advisory groups with a specific requirement that groups be established on consumer functions and credit unions. I will return to the issue of credit unions later in this speech.

Items 30 to 34, inclusive, deal with the Governor. To underpin the independence of the Central Bank, they provide that the Governor has sole right to determine budgetary or funding issues in respect of the bank. The Central Bank Act 1942 is being amended to remove the requirement for a unanimous resolution of the board of the bank to request the removal of the Governor for specified grounds of serious misconduct. This requirement was an anomaly in the original legislation that did not make sense. In removing it, there is no diminution of the security of the Governor in his post but merely a more logical procedure for an admittedly unlikely scenario. The Minister for Finance may appoint members of the commission if he or she is satisfied that the nominees have knowledge in a relevant field of expertise, such as financial regulation, banking, insurance or consumer interests. Members are ordinarily appointed for a term of five years, except for the Governor, the heads of function and the Secretary General of the Department of Finance, who serve as members for as long as they hold their respective offices. There are exclusions for Members of the Houses of the Oireachtas, the European Parliament and local authorities, as well as people who consent to be nominated to become members of those bodies. They are not eligible to hold the office of head of function or to become a member of the Central Bank commission.

Item 39 sets out the management, finance and accountability provisions for the Central Bank. I am pleased to be able to enhance the role of the Oireachtas in overseeing the performance of the bank. This was a major consideration for the Government when deciding on the crucial elements of the reform package. The bank is required to submit a strategic plan every three years to the Oireachtas, through the Minister for Finance, specifying the bank's objectives and its plans to achieve them. An annual regulatory performance statement must be prepared and presented to the Minister for Finance which will include details of the activities of the Registrar of Credit Unions. This performance statement will form the basis of an examination by the relevant Oireachtas committee which may require the Governor, the head of financial regulation or the head of central banking to appear before it to be examined on the contents of the statement. This will ensure regular parliamentary consideration of the state of financial regulation in Ireland and help to ensure there is no repetition of the mistakes of the past. A feature in the Bill relating to the performance statement is that it gives the Minister for Finance the power to require the bank to report on any matter in the statement. This important oversight provision will add to the accountability of the institution.

The bank will also undergo an international peer review of its performance by another national central bank or other suitably qualified person at least every four years. Part 5 of Schedule 2 provides for the transfer to the National Consumer Agency of certain functions formerly performed by the consumer director, such as the provision of information to consumers in respect of financial services, the promotion of the development of financial education. The supervision and regulation of products, markets and institutions from a consumer perspective will remain with the Central Bank. The consultative consumer panel and the consultative industry panel are being abolished and replaced by new and better arrangements through which the bank will have the power to establish expert groups to advise it on the exercise of its functions. Specifically, it must establish a group to advise on consumer functions. Amendments that were introduced on Committee Stage in Dáil Éireann have further strengthened these arrangements. Consumer functions will have to be planned and reported on in the regulatory performance statement. The bank's performance in this area will be subject to Oireachtas scrutiny and oversight. The bank will be required to report on all advisory groups in its annual report.

I am aware that Senators are interested in the credit union provisions of the Bill. I am a strong supporter of credit unions. I recognise their special place in communities throughout this country and their civic-minded nature. The Government is aware that banks have let us all down very badly, whereas throughout the same period the credit union movement has continued to meet its mandate and provide a valuable community-based service to its members. I reiterate that credit unions are and will remain an important part of the financial sector in Ireland. The credit union movement continues to play a critical role in meeting the financial needs of our communities. The Government is fully committed to a financial and regulatory system in which credit unions can develop and expand their activities.

The Government is seeking to copperfasten the place of credit unions in Irish life and their central role in local communities. The shock waves of the financial crisis do not necessarily respect distinctions between banks and not-for-profit and voluntary institutions like credit unions. Mistakes within the mainstream financial sector are wont to rebound without discrimination. Credit unions are seeing this in their client base and are feeling the reverberations within their own organisations. Naturally, credit unions wish to show flexibility towards those who need to reschedule loans. The Bill makes important changes to allow for this. The lifeguard also needs protection from the current, however. The Bill provides counterbalancing measures to ensure credit unions can offer assistance from a position of strength. As with any counterweight, calibration is the key to striking the right balance. The changes introduced since the publication of the Bill achieve this balance by ensuring that any additional regulatory requirements are proportionate to the flexibility being introduced and the associated risks. This Bill is not about pitching banks against credit unions. It is about fashioning a space for credit unions to help those in need without exposing the system to destabilising forces that would weaken the ability of the credit union movement to continue its valuable work.

As this is an issue on which Senators may wish to focus, it is worthwhile to take a moment to outline in more detail how the changes being put before the House evolved. There have been extensive and detailed consultations with the credit union representative bodies on the measures being introduced. Following general discussions in early 2009, the detailed views of credit union representative groups on the section 35 issue were sought and obtained last summer. The provisions to be included in the requirements to be made by the registrar have undergone considerable adjustment following discussions between the registrar of credit unions and both credit union representative bodies. More recently, following the publication of the Bill, I engaged in detailed discussions on the Bill with the credit union representative bodies, ILCU and CUDA. I met each body on two separate occasions in May and June of this year. I have also met members of the Joint Committee on Economic Regulatory Affairs on this issue.

Having reflected on the views expressed, I introduced eight measures on Report Stage in the Dáil to amend significantly the section 35 proposals in the Bill as published. I will set out the eight measures for the House. The proposed sections 35A and 35B in the Bill as published are deleted. The easing of section 35 lending limits is now linked directly with the necessary balancing provisions in a cohesive framework within section 35. A specific statement is introduced in section 35(2C) to provide that the Central Bank may give notice to credit unions with regard to lending requirements only where it considers it necessary for the adequate protection of members' savings. A further new provision means that in applying requirements in respect of lending by credit unions, the Central Bank must have regard to the lending framework provided for in section 35. Wider powers originally intended for the Central Bank in relation to loans, or specified classes or types of loans, under section 35A(1) as published have been dropped. Wider powers to enable the Central Bank to impose requirements other than by making rules under section 35A(3) as published have also been dropped. The systems, controls and reporting requirements originally provided for in section 35A(1)(f) are now specifically tied into the lending requirements in the section. The Central Bank must establish an advisory group on the exercise of its powers and functions relating to credit unions.

I wish to make it clear that I have gone a long way, having listened to the concerns that were expressed, but I am limited in what I can do. Credit unions cannot be entirely free of financial regulation. The regulator has written to me about his concerns in these matters. As Minister, I have a duty to act on his concerns. I am only prepared to act on them in the context of maintaining a vibrant and viable credit union movement. Taken together, the eight measures represent a significant change which will establish a lending framework through which the Registrar of Credit Unions can give notice of requirements arising from the relaxation of lending limits in section 35 in a prudent, balanced and proportionate manner, but no more than that. Reasonable conditions and generous transitional arrangements will also apply. The new advisory group will provide a forum through which the bank will access the views of credit unions in a more effective and direct way. These changes go a considerable way towards meeting the concerns of credit unions.

At the same time, there is an irreducible minimal level of protection which depositors, credit union members and the public are entitled to expect. Overall, the measures contained in this Bill provide for this level of protection.

This Bill is urgent and essential. I am confident the approach we are taking is the correct one and that the new structures we are putting in place will help to ensure a robust regulatory system which will win confidence at home and internationally. I look forward to hearing the views of Senators and commend the Bill to the House.