Joe Costello (Dublin Central, Labour) | Oireachtas source

It gives me great pleasure to be able to introduce this legislation on Second Stage in the Seanad.

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

The Central Bank (Supervision and Enforcement) Bill draws on the lessons from that experience. Combined with the Central Bank Reform Act, the Bill hands the Central Bank a strong set of powers to enable it to undertake effective supervisory interventions. The Act was a crucial first step in the introduction of a new, fully-integrated single structure within the Central Bank. It provided a statutory basis for a comprehensive domestic regulatory framework for financial services and set out new powers for the Central Bank to ensure the fitness and probity of nominees to key positions within financial service providers.

The Bill strengthens the ability of the Central Bank to impose and supervise compliance with regulatory requirements and provides it with greater access to information and analysis, which will underpin the credible enforcement of Irish financial services legislation in line with international best practice. These reforms in banking regulation and supervision are in line with the major programme of international change and reform since the financial crisis.

The reforms being made under this Bill must be viewed in the context of a busy and successful EU agenda on financial sector reform under the Irish Presidency. The Presidency succeeded in concluding a number of strategically important reforms of financial services. We negotiated an agreement on the single supervisory mechanism, one of the main cornerstones of a banking union. This will provide for the European Central Bank, ECB, to act as supervisor for systemic important banks throughout the Union. We also reached an agreement on the capital requirements package, which will ensure that European banks hold enough good quality capital to withstand future economic and financial shocks. Under our watch, member states have agreed in principle the markets in financial instruments regulation and directive. On the markets side we have reached agreement with the European Parliament on the transparency directive. On the consumer side, the mortgage credit directive has been concluded.

The Bill is complex and far-reaching legislation. It is the result of an extensive collaboration exercise between the Department and the Central Bank. It has involved two consultation exercises with industry, first on the published Bill and later on the Dáil Committee Stage amendments. Overall, there has been widespread support for the Bill inside and outside the Oireachtas. The ECB was also very positive towards it, welcoming the legislation as enhancing the supervisory and enforcement tools available to the Central Bank.

I will now give a brief overview of the principal provisions of the Bill. Part 2 provides a new power for the Central Bank to require financial service providers to commission an independent and objective report on any aspect of their business. This is essentially a new way for the Central Bank to collect information and insights about financial service providers. This new power will complement the Central Bank's information gathering powers, but is not meant to take the place of direct regulatory oversight, such as authorised officer powers. This power is modelled on a similar regime that has operated in the UK's financial system during the past decade, with some modification to ensure that it is used in a balanced and proportionate way.

It is envisaged that such reports would cover a variety of purposes, for example, controls over data security and prevention of money laundering. Other areas would include adequacy of systems and controls, corporate governance, compliance and risk management arrangements. A key plank of the proposal is that the financial service provider would nominate a reviewer to undertake the preparation of the report, but the reviewer would be subject to Central Bank approval. A number of safeguards have been included in the proposal enabling the Central Bank to take account of any potential conflict of interest on the part of the reviewer. There is also provision for direct discussions between the Central Bank and the reviewer on completion of the report to pick up on any issue of interest.

Part 3 of the Bill amalgamates the Central Bank's consolidated authorised officer powers with its new information gathering powers across all of its statutory measures. This new Part is designed to reflect the fact that, in the course of performing its functions under the Central Bank Acts, the Central Bank receives information through a variety of means. These include statutory measures requiring the provision of information, information obtained by an authorised officer in the course of an inspection and information obtained through the receipt of regulatory returns.

The importance of having access to vital information has been raised in numerous reports on the financial crisis. For example, the report by the Central Bank Governor, Professor Honohan, pinpointed a lack of regulatory information as one of the contributory factors to the financial crisis. At EU level, the De Larosière report pointed to serious limitations in the supervisory framework and the information that was available to supervisors. The UK's Turner report also stressed the importance of having sufficient regulatory information in order to be able to create a stable and effective banking system.

This informational Part will also enable the Central Bank to request the preparation of forecasts, plans, accounts or any other document, which is an integral part of an effective information gathering power. This will allow the Central Bank to obtain explanations and analyses as opposed to just historical data. Part 3 also includes provisions on legal professional privilege. This will enable the Central Bank to apply to a court for a determination as to whether any information to which a person refuses to give access is privileged legal information.

Part 4 of the Bill is in response to calls for better communication between auditors of financial institutions and the Central Bank.

In 1999, the Comptroller and Auditor General, C&AG, noted that there was scope for requiring external auditors to report to the Central Bank on matters of prudential concern. The C&AG also referenced the provision of additional assurance by auditors to the Central Bank regarding the implementation of an adequate internal control structure. Furthermore, the Honohan, Nyberg and Regling and Watson reports on the financial crisis all referenced the role of auditors in the collapse of the banking system. Under the provision, the Central Bank may issue a notice to the auditor of a regulated financial service provider requiring an examination and a report on compliance with key regulatory requirements. These requirements could include accounting standards, internal control mechanisms and governance issues.

Part 5 of the Bill addresses a key missing feature of our financial regulatory system by introducing protection for whistleblowers. It will provide protection from penalisation for persons who, in good faith, bring issues of concern to the attention of the Central Bank. Such protection is essential to encourage disclosures and to prevent unjust penalisation of those who take action in the public interest to highlight wrongdoing. There are extensive protections already in place on a sectoral basis. However, no such protections are available in the financial sector. The Minister for Public Expenditure and Reform is bringing forward whistleblower protection legislation which will address this issue on a more comprehensive basis. However, it is important to introduce protection in the financial sector in the meantime. This part also provides that the Governor would be required to prepare a report for the Central Bank commission on action taken or not taken on foot of protected disclosures received by the Central Bank.

Part 6 provides a statutory basis for customer redress in circumstances where there is a widespread or regular event. Examples could include overcharging or a computer system failure which causes customers to suffer damage. Currently, the main statutory avenue for dealing with such complaints is through appeal by each customer to the Financial Services Ombudsman. This is clearly not an ideal approach. Under this provision, there is a process by which the Central Bank can examine what has happened, determine whether redress is warranted and, if necessary, put in place the necessary arrangements to provide redress to those affected.

Parts 7 and 8 concern the Central Bank's powers to give directions and make regulations respectively. The power to issue regulatory directions is a central provision in the Bill and allows for early intervention by the Central Bank in specified serious circumstances. These are important regulatory tools which allow the Central Bank to take action where there is an unacceptable build-up of risks or non-compliance. The regulation-making powers in the Bill will enable the Central Bank to migrate, over time, from a system based on codes to requirements based on regulations. Such an approach will bring greater transparency for customers on the scope of requirements and the extent of protections available. It is anticipated that many of the current codes will remain in place for the time being, but it is expected that the Central Bank will move to a system based on regulations on a phased basis over time.

Part 9 deals with enforcement. This part includes two powers of note. First, a provision enabling the Central Bank to apply to court for an order restraining conduct that constitutes a contravention of financial services legislation, regardless of whether the person is a regulated financial services provider. Furthermore, it includes a provision allowing the Central Bank to apply to the High Court for a restitution order against any person who has been unjustly enriched, or caused another person to suffer loss or detriment.

Part 10 provides for the regulation of debt management and bill payment firms. This Part is also in response to a Private Members' Bill introduced in Dáil Éireann by Fianna Fáil. A new category of regulated business will be incorporated into the existing regulatory framework in Part 5 of the Central Bank Act 1997. The introduction of this new category of regulated business will ensure that such firms are subject to powers in other pieces of financial services legislation. These include fitness and probity powers in the Central Bank Reform Act 2010 and administrative sanction powers under the Central Bank Act 1942.

Part 11 deals with amendments to the administrative sanctions regime provided for in Part 3C of the Central Bank Act of 1942. The most notable change is a doubling of the financial sanctions that can be imposed. In the case of a financial service provider who is a natural person, i.e. a sole trader, the maximum financial sanction increases from €500,000 to €1 million and, in the case of a firm, the maximum fine is at least doubled to the greater of €10 million or 10% of turnover.

Part 12 amends various pieces of financial services legislation. Of particular note is the proposal enabling the Financial Services Ombudsman to publish information on the complaints record of firms against whom complaints are upheld. This was also the subject of a Fianna Fáil Private Members' Bill in Dáil Éireann. This will enable consumers to analyse the performance of all financial service providers and help them to make informed choices when choosing a provider or a product.

Part 13 amends various other pieces of legislation. Of particular note are amendments to the planning Acts and the landlord and tenant Acts to protect the interests of the Central Bank around security requirements of new developments or claims of tenancy rights.

The Minister for Finance has previously indicated his intention to bring forward a proposal to enable credit institutions from non-EU countries to apply to the Central Bank for authorisation to operate a branch in Ireland. This proposal will be brought forward in this House next week by way of a Committee Stage amendment. The thrust of the proposal is that the authorised branch would continue to be the subject of prudential regulation in its home country, with the Central Bank responsible for regulating conduct of business in Ireland. This approach mirrors the passporting arrangements which already apply within the EU. The approval of the bank branch would remain at the Central Bank's discretion and subject to whatever conditions it deems fit. The amendment will include a number of safeguards to ensure that the Central Bank can be satisfied that the standard of regulation and depositor protection in the home country is at least as robust as the regime which applies within the EU.

Financial services regulation is an evolving process, as demonstrated by the plethora of new developments at EU level. This Bill and the reform Act equip the Central Bank with a significant suite of powers to complement its supervisory and enforcement regimes. Our future as an international financial centre depends on having a credible, responsible and internationally respected regulatory regime. However, it also requires balance, proportionality and judgment. In bringing forward this Bill, the Government has sought to introduce a new structural and regulatory environment to ensure that the domestic regulatory framework for financial services would contribute to the maintenance of the stability of the financial system. I believe this Bill achieves that. I commend it to the House.