Thursday, 20 June 2013
Central Bank (Supervision and Enforcement) Bill 2011: Second Stage
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.
I welcome the Minister of State, Deputy Costello, to the House. Fianna Fáil supports this Bill. As promised by Fianna Fáil prior to the last election, we are endeavouring to be a responsible Opposition party and to be constructive.
As mentioned by the Minister of State in his opening speech on the Bill, the Fianna Fáil Party spokesperson on finance in the Dáil, Deputy Michael McGrath, previously introduced two Private Members' Bills, the thrust of which were accepted by the Minister for Finance and are now incorporated into Part 10 of this Bill dealing with the regulation of debt management firms and Part 12, dealing with the publication of information on how companies are operating the remit of this legislation so that people will know which financial institutions are stepping up to the plate and which are falling short. That is important.
The Minister of State also referred in his opening remarks to the deficiency in current legislation and regulation, particularly during the period of the Celtic tiger. This was not necessarily the fault of the regulations in place. We can make all the laws we wish to strengthen the powers of the Central Bank. However, what is important is application and oversight of those regulations. The Minister of State mentioned earlier that the financial services sector and financial services regulation is an evolving process. It is important the Department of Finance keeps a watching brief on this, that we remain ahead of the curve as much as possible and seek to introduce further amendments or legislation should that be deemed necessary.
Undoubtedly, we are a long way down the road of improving our regulatory structures and we, as the main Opposition party, will play a constructive role in bringing forward our ideas and legislation which we would hope would be accepted where the Government sees merit in them, as the Minister for Finance did with two legislative measures here.
This Bill is the second legislative measure brought forward to strengthen the Central Bank and its regulation following the Central Bank Reform Act 2010, which effectively dissolved the Irish Financial Services Regulatory Authority. The staffing and skill levels within the Central Bank and the previous regulatory authority were brought to the fore in many reports. Even prior to that, when Members across all parties, myself included, questioned the previous financial services regulator back in 2007 and 2008 in the Committee of Public Accounts, we raised concerns about the skill levels within these organisations. It is important to note that the appointment of Mr. Elderfield by my former colleague, the late Brian Lenihan, was recognised as a very good appointment. It brought forth a culture change within that organisation and ensured an increase not just in the number of staff, which is significantly higher than was employed in previous years and is very important, but also in the skill level and skill mix within the Central Bank.
Never again can we have a situation whereby the smaller firms, and I speak from experience in my previous profession, were subject to very heavy regulation but the banks and large corporations were effectively trusted to self regulate and do the right thing. We should never again lull ourselves into a false sense of security. Regardless of whether it is our two pillar banks or foreign institutions operating in this State, we should not take an institution's word for it regarding what it is doing or that it is following the regulations as it should. There is a great deal more work to be done not just by the Irish Government but also by the European Union to ensure there is a properly functioning European Central Bank with proper powers to oversee all other central banks within the European Union. Most of us remain critical of the slow pace at which the EU and the ECB have dealt with the financial crisis and some of the issues that have still not been dealt with five years later.
In the context of bringing forward good legislation such as this, none of us should forget that the people who are suffering because of these failures are not just Irish citizens but people across Europe. For that reason I earnestly ask the Minister, in advance of the publication of the statutory code of conduct on mortgage arrears later this month, not to allow the banks to have the major say in what is contained in that code of conduct. The previous Government and successive Governments allowed banks to have a major say in what should be done in the Irish market. We should not be driven by the banks telling us as legislators, and the Government and the Department of Finance, what should be contained in statutory codes of conduct. I await the publication of that code with interest. I hope what I am hearing about aspects to be included in it is not correct, such as allowing the banks for the first time to revoke people's tracker mortgages in certain instances and removing the protection from customers regarding the level of contact an institution can have with a mortgage holder.
This country still has not grappled with the mortgage crisis. There has been an increase of almost 45,000 in the number of people in arrears in the last two years. The situation will continue to get worse. I urge the Minister and his colleagues in the Government to be brave in what they do later this month and to try to tackle, once and for all, what I acknowledge is a very difficult situation. The failure of our institutions to assist those in financial difficulty, regardless of what legislation and regulation is in place, is basically proven by the fact that there have been a little more than 150 split mortgages offered to the many thousands of people who are in financial difficulty.
I realise I a straying a little from the content of the legislation, but this is all connected. We will table some amendments on Committee Stage and I note the Minister has advised that the Government will also table amendments on that Stage. Should there be no Seanad after this Dáil, I wonder what will happen if the Government was obliged to make amendments on important legislation such as this. Would that just be rammed through the Dáil as well, with a nod and a wink from everybody? However, that is a matter for another day. I thank the Minister for his statement and reiterate my party's support for this legislation.
This is very important legislation. It is a pity it was not on the Statute Book a number of years ago as we might not have ended up in the current mess. The mess is due to a failure not just of politics but also of the regulatory regime that was in place. Indeed, it is more accurate to say there was no regulatory regime in place.
I did not hear all of the Minister's speech. However, as Senator Barrett and I have said previously, in this small city there has been a far too cosy relationship for too long between the bankers, regulators and primary legal companies who advised the Department of Finance, the Central Bank and the banks. The Minister mentioned it too in respect of the auditors. It beggars belief how the auditing regime was allowed to continue and that nobody has been brought to task about how the auditors were satisfied with what happened and how it was almost facilitated. I look forward to a significant tightening up in that area, in particular. Dublin is a small city and when one is involved in a sector in this city one finds that too many people know each other. Indeed, occasionally some legal companies were advising both the financial institution and the Central Bank.
I greatly welcome the whistleblower section. This State does not have a great history of whistleblowing. To some extent people who carry out that action, even though they are doing the right thing, are treated badly afterwards. It is as if they cannot be trusted. We are slowly getting to the position we should have with regard to giving people the protection that is required if they are acting in the general interest rather than in the interest of an institution.
The Minister concluded by saying something that I consider to be crucial in this Bill. He said it requires balance, proportionality and judgment. That is true. We are anxious to tighten up the regime but we do not wish to make it so tight that it does not allow the important financial sector to trade. I saw a note from the Central Bank yesterday which stated that the investment funds resident in Ireland at the end of the first quarter this year have increased by €82 billion and that the net asset value at the end of that quarter is €1,014 billion. It is a huge industry that is crucial for this country and employs many people as well. While it is absolutely essential to ensure we get this legislation correct, the Minister's point about balance, proportionality and judgment is also relevant. I look forward to dealing with these issues in more detail on later Stages.
I wish to raise a matter which I consider to be relevant. The code of conduct for mortgage arrears is obligatory for the financial institutions that have a banking licence from the State, but something has been brought to my attention on more occasions than is satisfactory.
There are people within financial institutions whose clients are coming to the bank because of mortgage distress but they are not being informed about the mortgage arrears resolution process, MARP. I am making a very serious accusation that there are individuals within financial institutions who are not telling people in mortgage distress about the mortgage process which they are obliged to disclose. People are not being given the information.
I raised the matter on the Order of Business last week and to my dissatisfaction, I have again received a call from a constituent where it became clear the person in question knew nothing about the MARP or the code of conduct for mortgage arrears from the Central Bank. If somebody working for a bank is doing a job contrary to rules and regulations that we know and understand are intended to help a client in mortgage distress, the bank worker should be fired. That would send a very clear message to anybody who may be trying to make a name within a financial institution that he or she is tougher than other guys and is able to get more money from people than others. It would be a good message to send to individuals within a bank. The ultimate sanction in these cases is that a banking licence can be revoked but that is very unlikely; an ultimate sanction for an individual is a sacking.
That is not on the books or within this legislation, and perhaps this is not the appropriate Bill for such a measure. Nevertheless, I am glad to raise the matter when there are officials from the Department of Finance in the Chamber. It is not good enough and the next time I find an individual from a banking institution is doing this to citizens and constituents of mine, I will name him or her in the Chamber.
I know the Cathaoirleach will not be pleased with that but I have had enough of bankers and bank employees doing whatever the hell they like. There must be a sanction and I implore that it be made possible - perhaps in this Bill - that such action can be punished by a sacking. I seek the Minister of State's opinion and I hope he will advance my opinion on the matter, particularly the case of people being badly treated by banks.
I welcome the Minister of State responsible for multi-tasking, as he seems to come here with many portfolios. He is always welcome. When we first met, the Minister of State was visiting Trinity College and we had some great discussions. When Trinity got some public assistance in the early 1950s, it was interesting that a condition was that the public assistance could not be used to increase the pay of the senior people in the university. If we could do that 50 or 60 years ago, why was it not done with banks later? The view of this House is to very strongly support the Minister in every way in bringing the sector under control, given the immense damage it has done to the country. It is not just a case of €64 billion and it is probably heading towards €90 billion when we take out NAMA-related and other assistance. I am happy that the bill for Ulster Bank goes to the British taxpayer, as that bank was performing in the same kind of reckless way. Towards the end of the Bill it deals with licensing of foreign banks and it is a pity they were not all foreign banks so that some other taxpayers would be picking up the bill. Unfortunately, it has become clear that Irish people are incompetent in the banking area and we may have been better off if we had never come up with the pillar bank idea. There are fears that it will become a duopoly that will demonstrate faults even worse than those outlined by my colleagues, Senators O'Brien and D'Arcy.
The Minister of State has mentioned the people who have investigated this issue and I would add the Wright report, which shows a lack of qualified people in the banks, the Central Bank and the Department of Finance. We cannot have people with qualifications in the classics, law or theology running the sector, and I know this is being addressed within the Department. I do not think the Governor of the Central Bank, Professor Honohan, was in Trinity when we were there but he has moved from being a colleague of mine in that economics department and has tried to recruit people appropriately. The idea that there would be a transfer of people without qualifications and who did not know what was going on between the Department of Finance and the Central Bank is appalling.
When I first came to economics, people like Professor Louden Ryan, Professor James Meenan and Professor Paddy Lynch moved from being eminent in Irish economics to being on the boards of banks. That custom seemed to stop and the banks stopped publishing the Irish Banking Review, which was an internationally rated journal. It is almost as if they did not want to know any economics, and in the way they conducted themselves that certainly showed. In books, musicals and plays the population of this country really resents the way those incompetent people foisted the cost of their activities on taxpayers.
I very strong agree with the Minister of State's comments on Part 4 of the Bill, when he mentioned that 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". I know of a case where a person in a remote county was before a disciplinary proceeding for having the wrong books for a cattle market or petrol station so how come the big four companies who prepared the accounts for Irish banks do not seem to be amenable to any sanctions at all? There are cases in other jurisdictions where people given dud advice by auditors sued the auditors and were recompensed. Is there a case even now that the Irish Government was sold a pup when those bankers went into Government Buildings on the basis of audited accounts that we now know were works of fiction? It is fair to say that our mutual friend, the late Brian Lenihan, was repeatedly fed misleading information by banks and he bore that cost to his own health afterwards. Let us have the auditors on trial for what they are doing. There have been excuses that the books were taken as they were and stamped, leaving them as audited accounts, but how widely blinkered were these people?
The Seanad has been unfairly accused, in the Taoiseach's attempt to abolish the House, of having done nothing to prevent the excesses of the Celtic tiger. Ever since we have arrived, all 60 of us have worked to assist the Minister of State and his ministerial colleagues in dealing with the matter. We have a Fiscal Responsibility (Statement) Bill that would place a stop to the Government giving out money in certain cases and the Mortgage Credit (Loans and Bonds) Bill is based on the Danish mortgage system. I gather that there are officials who would promote that system of 20% deposits, leaving much less default and smaller bubbles. We have also proposed a Bill to split institutions into a utility bank while getting rid of casino banks. We have had discussions with officials in the Department of Finance this week and the next meeting will be in July. I would appreciate it if the Minister of State could communicate to the Taoiseach that we have helped, doing everything we can in that respect. We have been most responsible in assisting the Government in dealing with an appalling inheritance of incompetent bankers and regulation of banks.
This problem is not just confined to Ireland, and the Minister of State is probably aware of the conflict in the United States that Mr. Bernanke referred to yesterday when he argued that Wall Street rules over Main Street, with quantitative easing making stockbrokers and those in the financial sector massively wealthy over a period of months. Mr. Bernanke has indicated that he wants to turn off that system.
In one of yesterday's newspapers, the trustees of the pension fund criticised Aer Lingus for not putting in enough money. Do trustees bear no responsibility?
Are they financially responsible if they pay out more than is in the fund, if they bankrupt it and if they keep giving added years to present people at the expense of future generations? Pensions trustees should be subject to the new much stricter regulations because they have been guilty of the malpractices that we all know about.
I hope that the insurance problem has been solved. We have had the ICI affair, the Allied Irish Banks scandal, the Quinn affair and the PMPA went bust. The FBD is the only indigenous insurance company left. Obviously that is a record of bad, incompetent regulation of an insurance business that kept going bankrupt and it is only now that we are getting our act together. The industry should be supervised by the Central Bank.
I have mentioned accountants, pensions and actuaries. I shall make an economic point about competence. One has got to recruit at the higher level of PhD. The same point was made in the Wright report, a study of the contrasts between the regulatory authorities in Canada and here. As the Minister of State knows from his visits, Canada has an admirable financial system that did not experience our problems. In Canada over 40% of people working in its regulatory agencies have a PhD in economics compared with 5% or 6% in Ireland. There has been a huge cost to the economy. It might be a good investment to send our people to the colleges such as Harvard and Yale to pick up these qualifications.
I welcome the Minister of State's speech and I shall make some concluding remarks on the legislation, particularly on whistleblowers. I spoke to one of the writers on the area, Estelle Feldman. She said that the problem is nobody protects the whistleblower after he or she blows the whistle and nobody reforms the "whistle blown upon" organisation, if I may call it that. She wondered whether there is follow-up when a whistle is blown. Another example is the McErlean case that was mentioned in the document drawn up, in the usual helpful way, by the staff of the Oireachtas Library & Research Service. Can we make whistleblowing useful in this task?
As the Minister of State will have gathered from my colleagues earlier, we all support this overdue legislation. We are in the fifth year of this crisis but I am not so sure that the corporate culture of the banks has changed. If it takes a message from the Seanad and Leinster House to change their ways then I am delighted to assist him in sending that message.
I welcome the Minister of State to the House. It is always good to see him here. I also welcome this complex and dense legislation. It must be viewed as an intricate legislative super structure that surrounds the Central Bank and financial legislative items. Several hundreds of these items or threads could permeate the legislative structure of the financial services. The date of the Bill is 2011 but it has only arrived in the House today and that goes a long way to explaining its intricacy.
The Bill's passage through the Dáil was fairly trouble free and I wish to acknowledge that the Bill enjoys the support of all sides in both Houses. I know that Fianna Fáil, an Opposition party, tabled some prescient amendments in the Dáil. The Minister, in his wisdom, decided to accept most of them and incorporated them into today's Bill. That was a welcome development.
I do not need to remind Members why the legislation is necessary so I shall not dwell on the matter. I have a few technical questions for the Minister of State. Section 21 relates to the powers and functions of the authorised officer and mentioned "a regulated financial service provider" or the "former regulated financial service provider." Is the provision similar to sections 7 and 8 by providing retrospective legislation? If so, that is welcome. Hopefully, it is also wise.
It is welcome that the authorised officer has wide-ranging powers under the Bill’s provisions. Were such powers available to the Central Bank and other regulatory authorities and wielded in an appropriate manner, would they have set off an early warning of the financial armageddon lurking beyond the horizon? Do these regulatory powers go far enough to allow another such scenario to be detected? I hope that one will not arise again.
I wish to make a point on general legislation on the Central Bank and regulation. As a national central bank, the Central Bank forms part of the European system of central banks. Can this legislation or any related legislative provision reach into the area that examines the management, mismanagement, governance or misgovernance of parts of an Irish bank that operates in the EU but not in this jurisdiction? What is the relationship between this Bill and the legislation on such issues? For example, there seemed to be peculiar behaviour at Anglo Irish Bank Austria as late as end of summer or early autumn 2008. It had deposits of more than €1 billion, yet Anglo Irish Bank’s directors had indicated to our Government that it was experiencing a liquidity problem. We now know that it was not a liquidity problem. At that most critical point, Anglo Irish Bank Austria sold its deposits. At the very least, this was peculiar.
Had this legislation existed at the time, could our Financial Regulator, observing peculiar behaviour outside this jurisdiction by a body licensed as a bank or incorporated in Ireland, have acquired information to determine what was happening? Will the Bill allow for that in the future?
I welcome Part 5 on whistleblower protection, but the issue is more complex than the Bill allows. I welcome the Minister of State’s remark that further legislation to protect whistleblowers more robustly is on the way.
I wish to cite an example of a whistleblower who made it known to the regulatory authorities in 2007 that there was a suspected breach of liquidity ratios by a bank operating in the Irish financial services sector. At the time that he made his allegation, he was the person responsible for ensuring liquidity ratios were not breached and, as such, would have been sanctioned by the criminal justice system. The protection offered to him in one respect was not offered under other criminal legislation. Naturally, he went no further with his complaint. These issues are complex and intricate, but the Bill is welcome.
Part 10 requires regulation of debt management companies. This morning, Senator Harte and I held conversations with representatives of the industry. They expressed their concern that the current lack of regulation in the area leaves wide scope for less-than-optimum practices. Like us, the industry welcomes the proposal on a robust regulatory system.
I will enjoy Committee Stage. I thank the Minister of State.
I welcome the Minister of State to the House. My party supported this Bill in the Dáil and will support it in the Seanad. Previous speakers noted we had a lax culture of enforcement and supervision, and cronyism in the banking sector, in this State for far too long. This led to the collapse of the banking system and, conversely, the collapse of our economy and the consequences that flowed from it. I support anything that improves supervision and enforcement within banks.
Several Senators asked if this goes far enough. More work remains to be done on supervision of the banks and changing the culture of the banks, which is the most important aspect. At the heart of the problem in the banks is a culture within them. I raised this point with the CEO of AIB in his meeting with my party. It is important each bank looks at its culture and practices. The State must ensure the Central Bank has robust supervision and enforcement mechanisms but we must also put responsibility on banks to ensure the culture in the banks is what it should be.
We had competition between banks during the Celtic tiger years, which led to dodgy practices. There was also competition within banks between staff and pressure was put on employees to reach targets, achieve sales and provide loans to people who should never have had loans. That must change. While we can do as much as we can at the level of the State and pass legislation for supervision, we must change mindsets and cultures in the banks. That is more difficult and challenging but is also important.
The Bill goes some way to rectifying the bad culture we had. Vigilance is key and we must keep the legislation under review and ensure it is being reinforced in the spirit and the letter of the law. The most important thing is that it is implemented so that we have the resources and capacity to ensure we have proper supervision. That was one of the failures of the past. One of the failures of the past was the close relationship between the regulator and the banking sector. We must examine the separation of that relationship and healthier relationships for the State and the customers. We must have best practice rather than what passed as enforcement and scrutiny of the banks during the Celtic tiger years.
I also welcome the protection and provisions concerning persons reporting breaches, or whistleblowers. I put this point to the CEO of AIB with regard to putting responsibility back on banks to see what they have done. It is important the Government continues to do this. We are bringing in senior bankers and asking them how they have changed the culture in their banks across these issues. They should be accountable to us, particularly the banks that have taken huge amounts of taxpayers' money. The Bill addresses some of the issues and provides long overdue protection to whistleblowers. This is important because where there are bad practices in banks, it should be exposed and people should have the freedom to expose it without suffering as a consequence. I welcome the protection for whistleblowers.
I welcome the accommodating attitude of the Minister when the Bill was passing through the Dáil. A number of recommendations by my party and Fianna Fáil were accepted. My party recommended that reviewers be subject to adequate punishment and recommended allowing the Financial Services Ombudsman to include a description of the complaints upheld. These suggestions were accommodated by the Minister. The Fianna Fáil initiative on naming and shaming and bringing debt management companies into regulation are important additions to the Bill. The Minister accepted these suggestions in an accommodating way. I hope the Central Bank acts swiftly and brings debt management companies under regulation as soon as possible.
I will press two outstanding issues and I hope the Minister can accommodate us. We see no reason debt collectors cannot be brought directly under the remit of this Bill. The Department of Justice and Equality has a role to play but the purely financial service that debt collectors provide means they can be brought within the remit of this Bill. We will table amendments in the Seanad as the Bill progresses to Committee Stage. We wish to see the Financial Services Ombudsman empowered to name and shame without preconditions. This means removing the three complaints rule, which we do not see as being of real value. We see problems with it, although I can understand its logic. I read the contributions made in the Dáil on Second Stage and on Committee Stage. I can see the logic but allowing the Ombudsman to name and shame should be an important part of improving supervision.
This is comprehensive legislation that is, as Senator Gilroy said, to be welcomed and supported. Anything Members can do to improve the supervision of the banking system is important. At some point, the economy will recover to the extent we need it to and there will be an uptake in the housing and property markets. We will get to the stage where the banks will lend more but it is also important not to revert to how it was, where it was far too easy to get credit. Banks were sending false cheques to people and they were invited to contact the bank to get €10,000, €20,000 or €50,000. It was very irresponsible. Cheap money was being thrown at people and we can now see the consequences of it. It also shows the cosy culture between a small number of developers and banks that were really developer banks. There were competing with each other and lending to developers in a crazy way. We know the consequences of it. A huge amount of work remains to be done and the real test will be when there is economic recovery. We will then see whether the checks and balances are robust enough to protect us from what happened in the State in the past.
I welcome the Minister of State to the House. I was often in the House to hear him speak when he led from the benches where Senator Cullinane is now sitting. He did so ably and well in the term when I was there. I am glad to have him back in his current capacity. I have read the speech of the Minister of State and I am sorry I was not in the Chamber. There are too many things going on simultaneously.
I welcome the Bill, which is extensive, complex and detailed. Worthwhile effort was made at ministerial level. Senator Cullinane referred to the willingness displayed in the other House to accept amendments. We all realise the appalling mess we inherited because supervision and regulation were non-existent. The cosy culture relationship that existed between the Central Bank, the banks and the people asleep at the wheel was shocking. It will take years to recover from this. The Bill attempts to lay down proper impositions and supervisory compliance and regulation. For those reasons, in common with other speakers, I welcome the Bill.
I also welcome the provisions for reviewers of each financial institutions. I also welcome the guarding against conflicts of interests. We will have the opportunity on Committee Stage to comment on matters in more detail. It is sad to say that we need protection for whistleblowers. There is something of an anathema in the Irish culture towards whistleblowers. Sadly, these measures are necessary as we see from instances that have been highlighted in the not too distant past. It was necessary for someone to blow the whistle because of what happened.
Hopefully, it will be less necessary in the future but I welcome the powers in the Bill in this regard.
There are competition problems in banking and there will continue to be so. The Irish banking market is so small, particularly now, that foreign-owned banks operating here may wish to be out of the market. Hopefully, we will manage, either through coaxing, cajoling or whatever is required, to keep some of them here. I welcome what Mr. Duffy and others have achieved in AIB. State ownership of that bank will continue for a long time while it is downsizing. I am glad that in the other pillar bank, Bank of Ireland, the State’s equity stake is now only 15%. Hopefully, within 12 months that will have been wiped out and the State will have received a proper and worthwhile return in regard to its necessary investment in that bank. Those investments were necessary because one cannot have a functioning economy without a banking system. No matter how we criticise ourselves, it was necessary to keep these two pillar banks.
The head of the Credit Review Office, John Trethowan, recently called for the threshold for appeals to be increased, a call with which I agree as the current threshold is inadequate. There are many stable indigenous small and medium-sized businesses whose credit requirements are not being met by the pillar banks. These businesses need assistance in accessing credit, particularly seasonal credit. I know of these problems coming from Kerry, the heart of Irish tourism. I hope the Minister will review the threshold for appeals with a view to extending it.
There is no point in going back on the past but the banks effectively did as they liked which turned into a herd culture. We have read so many books, articles and reports on the banking crisis. The Minister referred to the reports by Professor Patrick Honohan, Klaus Regling, Max Watson, the Nyberg commission and the Moriarty tribunal which pointed out the problems we had. Maybe we will have the proposed Oireachtas banking inquiry. If we get some further benefit from it, I would welcome it too. I believe it is necessary to have such an inquiry to make a clean breast of matters. It is important it has proper terms of reference and the sooner it is dealt with, the better.
I look forward to dealing with detailed amendments on Committee Stage.
I thank all Senators who contributed to the wide-ranging debate on this legislation. I also welcome the complimentary remarks they had for the text of the legislation and the manner in which the Minister for Finance, Deputy Noonan, dealt with it. It is positive that several Private Members’ Bills from various parties covering the regulation of bill payment firms and the publishing of complaints against financial firms by the Financial Services Ombudsman, as well as other proposals, have been incorporated in the legislation.
All Members referred to how the checks for the banks, the regulatory process and the auditors were inadequate and how light-touch regulation ended up being no regulation. There was poor supervision and a deferential attitude on the part of the regulators with poor assessment of risk. It is almost difficult to imagine such a perfect storm of inadequacy, failure and negligence which brought about the current crisis. The proposals in this Bill go a long way to dealing with these problems on foot of the Central Bank Reform Act 2010.
Senator Darragh O’Brien referred to the new statutory code of conduct on mortgage arrears which will be published later this month and said it should direct the banks in as strong a manner as possible. Senator Michael D’Arcy gave examples of the heavy-handed manner in which some of the banks are still operating when dealing with mortgage arrears. He asked that the statutory code of conduct should be sufficiently strong to ensure the bankers treated citizens in a proper and fair fashion. That is being worked on and I am sure it will be a strong code.
Senator Michael D’Arcy also asked about the sacking of bank employees who do not inform customers about their rights under the mortgage arrears code. The fitness and probity regime allows for the Central Bank to investigate employees of financial institutions who breached the requirements of the code and remove them from their roles. There is existing legislation that covers that area. However, we must make sure that cases where customers have come under pressure from their lending institutions to take a particular course of action that may not be in their interest are dealt with effectively.
The Professor Honohan report, the Nyberg report and the Regling-Watson report on the financial crisis all reference the role of auditors in the collapse of the banking system. That should not be the case. Auditors should have been watchdogs. They have the accounting mechanism but nevertheless, as Senator Barrett said, they appeared to be works of fiction in many cases. In regard to the big four auditors he suggested, perhaps rather strongly, that the Irish Government was sold a pup and that the audited accounts were works of fiction. The point is well made that the auditors did not do anything to prevent the crisis taking place and that some of the audited accounts left an awful lot to be desired.
The Bill makes a number of changes to address the role of auditors but the broader issues on this matter fall under company law and not the Central Bank Acts. Nevertheless it has been dealt with fairly strongly and no doubt the message has gone out loud and clear at this point in time. The same situation pertains in relation to pensions. Pensions are regulated by the Pensions Board and not the Central Bank. Again, this matter was raised by a number of Senators, including Senator Barrett.
All Senators who contributed referred to whistleblowers. We are all in favour of protection being given to whistleblowers. We are all in favour of the need for whistleblowers to be provided for in the relevant legislation in order that inside information, where misdeeds are taking place, should come into the public domain and the particular improprieties, frauds or misdeeds can be dealt with. It is difficult to find a mechanism whereby the whistleblower is adequately protected because whistleblowers by their nature find that the forces within the area in which they are working tend to close in on themselves and to react against the whistleblower. An important provision that must be included in the Bill and in all legislation is that whistleblowing is a good practice for citizens. Where misdeeds are taking place it is the duty of citizens to blow the whistle where they have information that would bring to light something that is wrong. That is often where we do not provide sufficient protections. In this case, the Bill is amended in order that the Central Bank commission will hold the Central Bank to account and follow up in respect of this matter. There is an attempt to deal with the issue as strongly as possible. I remember dealing with the issue very strongly in 2005 when the Garda Síochána legislation was introduced and how whistleblowers might be protected and more measures put in place to do so.
Senator John Gilroy asked if foreign companies are covered. The Bill allows for improved co-operation with international regulators and also applies to "related undertakings" of Irish firms so that the Central Bank has the full picture of the firms it regulates. Therefore, it applies to international companies for improved co-operation with international regulators as well as our new regulations that are in place. There is also the question of retrospection in respect of a former financial service provider. Unfortunately, there cannot be any retrospection in law without incurring the wrath of the Constitution. Former financial service providers need to be covered in order that a firm cannot evade sanctions by handing in its authorisation so that it can avoid responsibility for what it did in the past. Nevertheless the acts that took place in the past are covered by law and can be pursued in any case but the Bill per seis not retrospective.
Senator Cullinane suggested that the rule whereby there would have to be three complaints should be removed. That matter was considered in detail by the Minister and he concluded that in the requirement to have three complaints before bringing the matter into the public domain, it was necessary to have some protection. For example, there is a need to protect to some degree a small operator in a small provincial town or village suffering reputational damage over a single complaint. The single complaint might not be enough to warrant bringing damaging information into the public domain in relation to a particular small service provider in a small area. The protection of having at least three complaints would appear to be a reasonable way of going about it.
Senator Paul Coghlan made it clear that the banks and the financial institutions had let us down. That is the message that has come through in the overall discussion on the legislation. I am not sure if I have covered all the issues raised. It is clear that we have had a cosy club for far too long where people could operate with relative impunity and where self-regulation or light regulation was the order of the day. That can no longer be the case and that is clearly spelled out in every single provision of this legislation.