Simon Harris (Wicklow, Fine Gael) | Oireachtas source

I am pleased to present the Finance (Miscellaneous Provisions) Bill 2015 to this House. At the outset, it should be noted that this Bill is very much of a technical nature and is designed primarily to address certain national and international obligations arising from a number of issues associated with the EU financial services legislative and transposition agenda. There is also a technical amendment to the National Treasury Management Agency (Amendment) Act 2014.

There are five parts to the Bill. Part 1 - preliminary and general - covers sections 1 and 2, which are provisions of a standard and general nature. Part 2 - agreement on the transfer and mutualisation of contributions to the Single Resolution Fund - covers sections 3 to 5 and is necessary in order to enable the ratification of this intergovernmental agreement which is required to allow the Single Resolution Mechanism to operate. Part 3 - deposit guarantee scheme - covers sections 6 to 14 and involves a number of amendments to the Financial Services (Deposit Guarantee Scheme) Act 2009. These are necessary for two reasons: first, to put in place a transitional funding arrangement for the new deposit guarantee scheme contributory scheme in order to underpin it while its accompanying fund is being built up; and, second, to amend section 8 of the aforementioned Act in order to address ECB concerns regarding monetary financing in circumstances where the Exchequer is required to recoup the Central Bank where it contributes its own resources towards a deposit guarantee scheme compensation event. Part 4 - continuation of insurance regulations - covers sections 15 to 21 and the Schedule and is necessary in order to ensure the continuation of insurance regulation for companies outside the scope of the Solvency II directive, which is due to come into force at the start of 2016. This will apply only to insurance entities below a certain premium threshold or in wind-down. Part 5 - technical amendment to the National Treasury Management Agency (Amendment) Act 2014 - covers section 22 and is necessary in order to remove any potential ambiguity with regard to whether a directed investment made by the National Pension Reserve Fund Commission and subsequently transferred to the Irish Strategic Investment Fund, ISIF, pursuant to the National Treasury Management Agency (Amendment) Act 2014 remains a directed investment for the purposes of that Act.

I wish to emphasise the importance of an early completion of the passage of this Bill to enable implementation of significant elements of the EU financial services legislative agenda. This will underpin the stability of the financial system and increase the protections available for insurance policy holders, investors and depositors. In particular, I wish to highlight the need to ratify the intergovernmental agreement before 30 November 2015 as failure to do so would almost certainly lead to a delay in the implementation of the Single Resolution Mechanism.

I will now go into more detail on the main provisions of the Bill. The purpose of Part 2 is to enable the ratification of the intergovernmental agreement through the lodgment of the appropriate documentation with the general secretariat of the Council of the European Union. The intergovernmental agreement was negotiated in order to enable the Single Resolution Fund - a key element of the Single Resolution Mechanism - to be operationalised with effect from 1 January 2016. Its primary purpose is to transfer the contributions raised at national level, in accordance with the bank resolution and recovery directive and the Single Resolution Mechanism regulation, to the Single Resolution Fund and to facilitate a transition period of eight years to full mutualisation of the fund. It also prescribes how the Single Resolution Fund will operate during the transition period.

The agreement, which is relatively short at 16 articles, was negotiated to deal with a concern of certain member states that these changes could not be accommodated within the Single Resolution Mechanism regulation as, in their view, Article 114 of the Treaty on the Functioning of the European Union did not provide an appropriate legal basis to do so. Consequently, it was agreed that this issue should be dealt with through an intergovernmental agreement which would be formally ratified by each member state. The legislation covers just the core points of function of the Minister and the power to spend. The remaining commitments in the agreement are binding on the State at the state level and do not, therefore, require domestic legislation to give effect to them.

I would like to say a few words about the Single Resolution Mechanism in order to give Senators a sense of the importance of this intergovernmental agreement. In this regard, the Single Resolution Mechanism is the second pillar of the banking union and will ensure that if a bank subject to the Single Supervisory Mechanism, SSM, faces serious difficulties, its resolution will be managed efficiently with minimal costs to taxpayers and the real economy through a single resolution board and a Single Resolution Fund financed by levies imposed on the banking sector.

What this means in practice is that should any of our four major banks get into financial trouble, the decision about putting it into resolution will be made by the single resolution board rather than our domestic resolution authority. In addition, where bail-in of shareholders, capital instruments and eligible liabilities is insufficient to cover losses of the bank in question, there will be access to funds from the Single Resolution Fund. This will contribute to breaking the link between banks and the sovereign, something I know Senators on all sides of this House would like to see, and should help avoid a repeat of many of the issues faced by countries during the recent deep financial crisis. It should be noted that the target level for the Single Resolution Fund is at least 1% of the amount of covered deposits of all credit institutions authorised in all of the participating member states, which is to be reached at the end of eight years. This is estimated to be in the region of €55 billion. We estimate that the contribution of Irish banks to the Single Resolution Fund will be €1.8 billion over the eight years, which amounts to approximately €225 million a year. The contribution of international banks to this

overall total is likely to be significant - in the region of at least 50%. Unfortunately, it is not possible to be more precise on this matter at this stage.

On the question as to whether a fund of €55 billion is sufficient, it should be noted that at the time of the negotiation of the Single Resolution Mechanism regulation, there was considerable discussion around this issue. However, the general view that emerged was that much of the losses of a bank should be covered by the bail-in of shareholders and creditors in line with the general philosophy underpinning the Single Resolution Mechanism regulation and the bank recovery and resolution directive. In this regard, a contribution to loss absorption and recapitalisation equal to an amount of not less than 8% of the total liabilities, including own funds of the institution under resolution, measured at the time of the resolution action, must be used before the Single Resolution Fund can contribute. This is a significant contribution to loss absorption and should in many instances mean that the use of the fund will not be needed. Therefore, in this context, the view of most member states was that a fund of €55 billion struck an appropriate balance between the need to establish a credible and effective fund while at the same time not overburdening the banking sector from a contribution perspective.

As mentioned at the outset, the purpose of Part 3 is twofold - first, to put in place a transitional funding arrangement in order to underpin the new deposit guarantee scheme while its accompanying fund is being built up; and, second, to amend section 8 of the Financial Services (Deposit Guarantee Scheme) Act 2009 in order to address ECB concerns regarding monetary financing in circumstances where the Exchequer is required to recoup the Central Bank where it contributes its own resources towards a deposit guarantee scheme compensation event.The transitional funding arrangement is covered by sections 6 to 11, inclusive. Their primary purpose is to create a new legacy fund into which an amount equal to 0.2% of covered deposits of credit institutions will be transferred from the existing deposit guarantee fund known as the deposit protection account, and to establish under what circumstances money can be paid out from this new fund. The background to this proposal is the transposition of the DGS directive which is proceeding in parallel to this legislation. The directive will change the nature of our deposit guarantee funding arrangements from what is currently a ring-fenced deposit held by credit institutions in the Central Bank to a contributory fund. The difference in approach is significant and without this legislation we would be required to return all the deposits in the deposit protection account to credit institutions. The legacy fund is therefore necessary to ensure that we continue to have access to an adequate level of alternative funding during the period the new contributory fund is being built up.

The key sections for the transitional funding arrangement are as follows. Section 8 - amendment of section 3 of Act of 2009- amends section 3 of the Financial Services (Deposit Guarantee Scheme) Act 2009 by providing for the establishment by the Central Bank of a new legacy fund to which I have referred. Section 9 - amount to be maintained in deposit protection account - amends the Financial Services (Deposit Guarantee Scheme) Act 2009, by replacing the existing section 4. It provides that a credit institution shall not carry out the business of such a body unless it has transferred 0.2% of covered deposits from the deposit protection account to the legacy fund on a date determined by the Central Bank.

Section 10 - order of payments - provides for the insertion of two new sections, 5A and 5B, into the Financial Services (Deposit Guarantee Scheme) Act 2009. The purpose of section 5A is to set out the order of payments in the event of a deposit guarantee scheme compensation event arising, to ensure a level playing field between existing credit institutions and new entrants to the market, and to provide that the amount a credit institution holds in the legacy fund is reduced on a yearly basis by its annual contribution to the contributory fund. The purpose of section 5B is to provide a basis for the return of legacy fund deposits, where there is any remaining, after three years to a credit institution which has ceased to carry on business.

Section 11 - charges on deposit protection account, etc-amends the Financial Services (Deposit Guarantee Scheme) Act 2009, by replacing the existing section 6. It provides that any deposits by credit institutions in the legacy fund are protected from charges being placed upon them other than by the Central Bank.

There are two aspects to the amendment of section 8 of the Financial Services (Deposit Guarantee Scheme) Act 2009. The first involves a reduction in the time period from three months to two weeks within which the Central Bank is recouped by the Exchequer in the event that it contributes its own resources towards a deposit guarantee scheme compensation event. The second involves the deletion of the words "with the approval of the Minister"for such recoupment. These changes are covered by section 12. The background to these changes is a result of an initial advice from the Central Bank which indicated that the ECB was unhappy with the length of time for recoupment of three months. Consequently, this change was made in the first draft of the Bill, and in the interim, the Minister sought a formal opinion from the ECB on this article. In response, the ECB confirmed that the two week period for recoupment was satisfactory, however it pointed out that as the purpose of this provision is to reimburse the Central Bank for short-term loans it has provided to the DGS, the repayment from the Exchequer has to be automatic in order to comply with the prohibition on monetary financing as outlined in Article 123 of the Lisbon treaty. Consequently it suggested that the words "with the approval of the Minister"be deleted from article 8. As a result of this opinion, the Minister for Finance moved an amendment to delete these words on Committee Stage in the Dáil, as he is of the view that he could not proceed with legislation which would otherwise be in contravention of EU law.

In regard to Part 3, members should note that section 13 provides for the insertion of a new section, 8E, into the Financial Services (Deposit Guarantee Scheme) Act 2009. Its purpose is to enable the return of any money recovered by the deposit protection account to credit institutions after the coming into force of this Bill which results from a successful claim by the Central Bank against credit institutions or their liquidators which had commenced prior to its enactment. This provision is necessary, because credit institutions will at this stage be holding their requisite balance of 0.2% of covered deposits in the newly established legacy fund, and will therefore not owe it any more money.

Part 4 - continuation of insurance regulations, sections 15 to 21, inclusive - is for the purpose of establishing a regulatory regime for insurance undertakings that will be outside of the scope of the Solvency II directive. The directive excludes certain undertakings based either on size - small insurance undertakings below a certain insurance premium threshold - or on the basis that they will have wound down their operation in advance of 1 January 2019. It is essential that we maintain the current regulatory regime for such undertakings so as to ensure that there are no unregulated insurance undertakings in the State from 1 January 2016, when the Solvency II regime comes into effect. As the current regulatory regime is governed by EU directives that are to be repealed by the Solvency II directive, continuation of that regime can only be done by primary legislation.

The key sections are as follows. Section 16 deals with the continuation of certain regulations. The Solvency II directive repeals a number of EU directives relating to insurance and reinsurance. Section 16 continues in force the regulations transposing those repealed directives in respect of the undertakings excluded from the scope of Solvency II. Section 17 - portfolio transfers - ensures continuity and ease of reference, the provisions in the Solvency II directive governing portfolio transfers will also apply to the relevant undertakings covered by this Bill.

The Schedule lists all the revocations to be carried out in terms of the current regulations as all or parts of those regulations are no longer necessary. Part 5 is a technical amendment to the definition of a "directed investment" at section 37 of the National Treasury Management Agency (Amendment) Act 2014. Paragraph 22 of Part 6 of Schedule 4 of the National Treasury Management Agency (Amendment) Act 2014 provides that any direction given to the National Pension Reserve Fund Commission under sections 19A, 19AA or 19B of the National Pension Reserve Fund Act 2000 before the Ireland Strategic Investment Fund constitution date shall have effect on or after that date, until revoked, as if given to the National Treasury Management Agency under section 42, 47(4)(b) or (c) or 43 of the National Treasury Management Agency (Amendment) Act 2014, respectively. Section 37(a) of the NTMA (Amendment) Act 2014 provides that a "directed investment" means an investment made by the National Treasury Management Agency pursuant to a direction under section 42 or 47(4)(b) or the proceeds held by the National Treasury Management Agency pursuant to a direction under section 47(4)(c).

A potential ambiguity has been identified as to whether investments of the National Pension Reserve Fund Commission, which were directed investments at the time they were made and at the time of their transfer into the Ireland Strategic Investment Fund, are captured by the definition of "directed investments" at section 37 of the NTMA (Amendment) Act 2014. The amendment clarifies that "directed investments" made by the National Pension Reserve Fund Commission and subsequently transferred to the Irish Strategic Investment Fund by the NTMA (Amendment) Act 2014 are "directed investments" for the purposes of that Act.

While the Bill is technical in nature it is very important to provide for its swift passage in order to ensure the implementation of a significant portion of the EU financial services legislative agenda, which will result in increased protections for insurance policyholders, depositors and investors. We in this country, of all member states, know only too well the importance of putting such safeguards and protections in place for our citizens and for our financial services and for the stability of the country. I am also particularly keen that we ratify the IGA as soon as possible. This is an issue which Europe and the markets are watching closely and failure to ratify could have a negative impact on the wider banking union project.

I commend the Bill to the House.