Wednesday, 7 May 2014
Friendly Societies and Industrial and Provident Societies (Miscellaneous Provisions) Bill 2013: Committee Stage
Cuirim fáilte roimh an Aire Stáit go dtí an Teach. My hope is that by discussing this issue, we will have some further thoughts on it before Report Stage. Friendly societies have been a major part of the financial life of citizens, particularly the less well-off, a contention for which I will adduce evidence later. It is proposed not to allow the creation of new friendly societies in a financial landscape that has to be described as a wilderness. Why were the friendly societies picked out in this legislation? Whatever else happens in Irish financial affairs, there will be no more friendly societies. I could nominate dozens of candidates to which the extinction clause included in the section should be applied much sooner than the friendly societies. Perhaps the Minister of State will reflect on the issue before Report Stage because, without being aggressive about it, I am at a loss to understand the reason friendly societies merit the fate that is envisaged for them in the Bill. They have done a great deal of good, certainly when compared to other sections of the financial services sector which caused a great deal of harm. I will refer to these later.
According to the explanatory memorandum, the "main amendment in the area of friendly societies provides for the closure of registration of new societies." The House should only accept this measure following the deepest consideration and debate. What are friendly societies and why does the Government not want new societies to be founded? The Registrar of Friendly Societies, Ms Helen Dixon, states that friendly societies are registered under the Friendly Society Acts 1896 to 1977 and established for various purposes, primarily to provide small life assurance benefits, sick benefits and death benefits to members, provide benefits to non-members and promote particular activities or interests. Let us dwell briefly on the primary activities to which Ms Dixon alludes. The provision of small life assurance benefits, sick benefits and death benefits appears to be a good thing. Reading Ms Dixon's reports, one does not encounter the types of conflicts and disastrous economic performance one finds in other sectors. The reason for putting an end to the foundation of any new friendly societies is not obvious from her statements.
The number of registered friendly societies is in decline and currently stands at 48. As I indicated, we should compare this sector with what has taken place in the banking and insurance sectors. The case of Setanta Insurance was raised on the Order of Business before the Minister of State joined us. In addition, a major High Court decision was made against a stockbroker recently.
We have had to pay €1 billion to insurance companies that failed. We had to intervene in the case of a credit union in Newbridge. We have no building societies left and we have a collection of zombie banks which have cost us €85 billion. In that particular landscape I do not share any sense of urgency that we should today seek that no new friendly societies should be formed.
The Public Service Friendly Society is an example of one. It had its annual general meeting in Buswells Hotel in the week before I started my research on the Bill. That society provides access to low-cost illness protection, specified illness cover, assistance in financial difficulty, travel insurance and help for members struggling with school costs. It provides advice and direct educational grants - repayable as well as non-repayable. For those who find themselves in a tight financial spot for whatever reason, the society can help. It provides a first-contact confidential service, and offers support and direction. That is obviously a very good society. Why would we not anticipate that the next generation of people would be equally adept at forming such a good society as the Public Service Friendly Society?
Across the water these societies are stronger. The UK's newly formed Financial Conduct Authority is responsible for the governance of 10,000 such societies. In the UK friendly societies manage the savings and investments of 4.5 million people with total funds of £15 billion under management. Based on the accounts of the registrar, Ms Helen Dixon, friendly societies were established to encourage self-help, personal responsibility and enable people with limited financial resources to improve their economic status. They do not have shareholders which means the full benefits of the products are passed on to their customers. They typically offer better returns, lower charges and better service than insurers with shareholders.
These are mutual benevolent societies or fraternal organisations gathering together for the purposes of insurance, pensions, savings or co-operative banking. They have a very distinguished role. A great and former Member of this House, Sir Horace Plunkett, founded such societies throughout the country, out of which grew the very strong agriculture and dairying sector, not least in the Minister of State's neighbourhood and constituency. Before modern insurance and the welfare state, friendly societies provided financial and social services to individuals. Before the development of large-scale government and employer health insurance, these societies were there. If members became sick, they would receive an allowance from their mutual society. The society might have a doctor whom the member could consult for free. We already mentioned the funeral expenses. They have also been very active in Scotland.
I place before the Minister of State that evidence of their record and what they are doing now. They do not appear to be in trouble unless the Minister of State has information as to why this section is included in the Bill. I point to what they do, the parts of society in which they work, their idealism, their solvency and their providing help for people particularly in a State that has such financial difficulties that we frequently find in this House that many of the things we would like to do are not possible. Would the development of a mutual self-help society, such as the Public Service Friendly Society, not be positive? Should we not encourage and promote the establishment of new ones, which would therefore mean not going ahead with that section of the Bill? Can we now say that no friendly society will ever be established again in Ireland? That is what this section provides for. Do we really intend to tie the hands of future generations? Would they not be just as idealistic as Sir Horace Plunkett, George William Russell and others who went before us?
Before voting for the section preventing the establishment of any friendly society in Ireland again, we should consider their record in the United Kingdom and here. We should consider their establishment by the kinds of practical patriots we so badly need. We should consider the new generation. We continually look for people with initiative and entrepreneurship, and we desperately need new financial institutions. Friendly societies have played a noble role. Who am I to say they could never do so again?
I was disturbed, as was the Minister for Communications, Energy and Natural Resources, Deputy Rabbitte, when he told the House that the banking institutions had intervened to push down the rate of interest paid in the Post Office Savings Bank. I hope it could not possibly be true that banks have put pressure on the Government to get rid of friendly societies in the same way as they put pressure on the Government to reduce the rate of interest paid in the Post Office Savings Bank. The Minister, Deputy Rabbitte, was very concerned about that.
The bank bailout bill is approximately €85 billion and we are setting up an inquiry into that today. We have paid about €1 billion in insurance - in one year Quinn Insurance lost €900 million, and PMPA and ICI lost a couple of hundred million pounds each back in the 1980s. The administrators of Quinn Insurance are suing the firm's accountants, PricewaterhouseCoopers, for €1 billion. We could go through the list of what is wrong in financial services. I would make a very strong case that the friendly societies should not be scheduled for abolition by this House of Parliament. That is why I do not support section 5.
I hope that, on reflection, all Members of the House could come back and ask cui bono; for what benefit are we proposing that a group of self-help people should never again come together for their mutual benefit? Why are we saying that we never again want a new friendly society established? Cessation of registration of new societies seems to be so draconian that there should have been a Green Paper or White Paper before proposing that it be done in section 5 of this Bill. Given the wilderness that is the Irish financial sector, what singles out friendly societies for this kind of treatment, as proposed in section 5(1)? I am not sure there will be any support for such a measure when this comes to be discussed widely in the country. We might wish to register them differently, although that is not apparent in Ms Dixon's report.
There were some scandals.
I heard a man in Spain who had taken money being interviewed by RTE. One deplores that and better regulation is needed. I praise RTE for that piece of investigative journalism. It was a long time ago. I think a youthful George Lee might have been on its perimeter. The money, however, was peanuts compared with what has happened since.
If there is a problem with friendly societies, I would be delighted to consider it but the overwhelming weight of evidence is that they were very good in the past. While they have reduced in number to 48, I would never rule out the possibility that the next generation, on whom we rely to clear up so many of the other problems that have arisen here in the past seven or eight years, would not have the idealism to reinvent friendly societies. If they did, they would run contrary to this Bill.
I would be most interested to discuss how the Minister of State proposes to proceed in this matter. I make an earnest case that these were good for the country and for their own members. They did not impose the kind of burden on society that some of the other financial institutions, which behaved disgracefully, did.
I thank the Senator for proposing this amendment. To be fair to the Government side, we addressed many of those questions on Second Stage and given that this is Committee Stage, I will begin by giving the rationale for section 5 and then give a brief overview of some of the issues raised by the Senator.
Section 5 provides for a very significant change to the Friendly Societies Act 1896, that is, the cessation of registration of any new societies under this legislation. Only a few societies, 47, remain in existence. There have been only three new entrants in the past nine years giving a clear indication that the friendly society model is no longer favoured by newly-establishing organisations. The current legislation does not provide for prudential supervision of friendly societies by any public authority. This is a source of some concern in that there is some potential risk to the interests of certain members of the public and I consider that it is in the public interest to restrict the operation of new entities in this area. That is the justification for section 5. Furthermore, certain limitations are already being placed on the activities and functioning of friendly societies by other bodies of legislation. For example, the Health Insurance (Miscellaneous Provisions) Act 2009 introduced restrictions on new bodies registering for the purpose of the provision of health insurance, that is, no new bodies may register as restricted membership undertakings; the Charities Act 2009 introduces a new charities regulatory authority and registration requirements to which several of the benevolent type societies may be subject; and the Consumer Credit Act 1995 brings a small number of societies under the supervision of the Central Bank for loans purposes.
I assure the Senator that there is no disadvantage foreseen to any would-be societies in that they can register, either under the Industrial and Provident Societies or the Companies Acts, in both instances with the added protection of body corporate status. The Friendly Societies Acts do not confer full corporate status on societies or limited liability on members. The evidence over recent years is that this has become common practice for many charities and clubs which register as limited companies. This change will mean in effect that the friendly society model will continue only as a closed group of societies, that is, the existing societies will continue in operation but no new societies will be permitted to establish.
The Central Bank regulates savings, loan and insurance activities carried out by entities involved in the provision of financial services with a view to protecting the financial interests of members of the public doing business with the provider of the financial services but not where these activities are carried out by friendly societies. This is a source of some concern to the Government in that there is some potential risk to the interests of certain members of the public and we consider that it is in the public interest to restrict the operation of new entities in this area. There is no expertise in this area in the registry of friendly societies and no existing legal basis for such supervision and it would not be practical given the number of societies involved to develop a supervisory regime within the registration of a friendly society, RFS. The most realistic institutional option for introducing an appropriate system of supervision is the Central Bank, which is at the centre of financial supervision and financial stability oversight and has a responsibility to provide, in a fully integrated and co-ordinated manner, for the prudential supervision and stability of all types of financial service within the financial system as a whole. To avoid the possibility of other bodies moving into this unregulated space, it was decided to close registrations to new friendly societies.
I hope that addresses the concerns raised by Senator Barrett in his amendment. Only a few societies, some 47, remain in existence. There have been only three new entrants in the past nine years and that must indicate that newly-establishing organisations no longer favour the friendly society model. We feel strongly that no new societies may register in the future as friendly societies.
I thank the Minister of State. The Public Service Friendly Society promises guaranteed acceptance for its health benefits. That arose because Government was concerned about selectivity in the area and it brought in a lot of legislation. That is a minor point.
There seems to be a complete difference of opinion between what is done in the United Kingdom and here. I hope the Government’s concern with new entities does not reflect any pressure from banks because we are sowing the seeds of far more financial troubles in this country with the pillar bank strategy. This will be an appalling duopoly. Senators referred on the Order of Business to foreign banks withdrawing from their regions. I am sure the expertise lives in the Central Bank now but we recall the 84 times when the official in a recent High Court action could not remember anything. That was not much in the way of regulatory expertise. We are assuming a completely different kind of Central Bank from the one that featured recently in the courts. That was abysmal regulation.
I will speak with the Minister of State between now and Report Stage so I will not press this amendment. The Minister of State knows my concerns. Why are the friendly societies regarded as an avenue for malpractice and so on? Might they be better regulated? Might we learn something from the UK experience, which I quoted and which will be available in the Official Report? Compared with what has happened in the rest of the financial services, these were much more idealistic and still are. They are formed by people acting in a co-operative manner for their mutual benefit.
That is something we might consider.
As of today, we have raised thoughts about how friendly societies might be preserved, protected and grow. I may speak with the Minister, as we do when we meet in the corridors around here, to see if we can deal with the fears he has mentioned. Is the House correct in assuming new friendly societies would represent a threat to people's well-being and livelihood? That would be said but compared to some of the people on the list, any damage - which is minuscule compared to the major benefits - would pale into insignificance. For example, one institution was led by a man who has stated he does not want to give any evidence about his activities to these Houses of Parliament, and people have said such things before. In all of this I remain an advocate of the friendly societies. I will think about what the Minister of State has indicated before now and the next Stage. I certainly would not have chosen them as a target, stipulating that from this day we will never again allow friendly societies to be established in this jurisdiction.
I will continue on the same theme, if I may. This concerns cessation of formation of new separate loan funds, and after the coming into operation of this Bill, one may not form a separate loan fund. If a party has one already, it will be permitted to keep that in existence. This means we do not want existing societies to develop into more lending, although we may need that in future. The Minister for Finance is considering what kind of financial influence Ireland will have but as we want to cease having new societies, the existing societies will not be allowed to form new separate loan funds. That may be an important function which could be badly needed in the Irish economy in the years ahead, particularly if we end up with two pillar banks and no building societies, along with the other difficulties we have mentioned.
Why would one stop new funds being set up when the activity of running such funds now is perfectly lawful? I have not heard any evidence that there is any misappropriation of those funds. What problems are we addressing in the section? It seems that an existing friendly society - there are 48 detailed in the annual report but only 47 remain - want to set up loan funds while satisfying the needs of members, with a better track record than most financial services in the country, why would one seek to shut off the possibility? This is to repeat the arguments made in opposition to section 5.
I thank the Senator for his comments. The Senator is effectively opposing the proposal to prohibit the establishment of new loan funds where a society does not currently operate a loan fund, and the Government does not agree that this section should be omitted. Section 6 places a restriction on existing societies establishing a loan fund as provided for in section 46 of the principal Friendly Societies Act 1896 where they do not already have such a fund in place. This change will not impact existing societies which currently have a fund in place. As I mentioned previously, such activity is not subject to prudential supervision by any public authority, and whereas the European Communities (Consumer Credit Agreements) Regulations 2010, in amending the Consumer Credit Act 1995, bring a small number of societies under the supervision of the Central Bank for loan purposes, I am of the opinion that societies not already active in this field should not be permitted to extend their remit.
It is very important from a consumer protection view that the provision of loans to individuals should be a regulated activity. It is not desirable that societies should be in the business of making loans without reasonable protections being afforded to the individuals accepting the loans, and this is generally accepted by societies themselves, as only three of the 47 currently operate loan funds.
The section effectively provides that where a friendly society does not at the time of the passing of this Bill operate a loan fund as provided under section 46 of the Friendly Societies Act 1896, such a society may not establish a loan fund after the coming into operation of this Bill. It does not affect the operation of an existing society currently operating a loan fund.
Last week at a meeting of the finance committee I tried to raise the kind of rules mentioned by the Minister of State. A representative of one bank indicated it was currently giving 90% loans on properties and lending up to 4.7 times income. The correct ratios should be 2.5 times income for 80% loans. In introducing a Bill in this House I indicated that such a system operates in Denmark. I can see a housing bubble developing again if banks continue to offer 90% loans while offering to pay stamp duty. As the Governor of the Central Bank mentioned, we do not have laws against reckless lending, unfortunately, and he would probably like macro-prudential rules. We sent our thoughts on the Bill to Brussels and the officials from the Department of Finance probably intervened in meetings rather than going a more direct route.
If there were rules, the three friendly societies interested in this and the 44 which might become interested could devise sensible rules for lending. In the configuration of Irish banking and the need for all forms of credit - other than bailing out banks - we will need new financial architecture anyway. I would not like to rule out the friendly societies from being part of this. As with the previous section, I will not formally oppose it. I will consider what can be done on Report Stage. It is probably not as major a point as the previous issue, which restricted any new friendly society. Somebody will be required to lend responsibly in the society after the incredible damage done by reckless lending, which has yet to be punished and see proper regulation. There may be possible benefits from the work of friendly societies, and I am impressed by what the Public Service Friendly Society sent me. We need a wider view of the new financial architecture. Friendly societies extending loans under some kind of supervision as mentioned by the Minister of State, could be a beneficial act, so we should not shut it off. I may discuss this with the Minister of State before the next State.
The Senator mentioned the supervisory regime or lack thereof. Nobody in these Houses of the Oireachtas would disagree with the Senator's critique of the lack of supervision.
There is no question or ambiguity about that but for the purposes of the Bill it is important to note that we are seeking to move to a situation whereby one recognises the 47 that are in existence and those that have loan funds, but one ensures that the changes to the legislation are being made as a preliminary step in the process of establishing a system of the most appropriate supervision of certain existing societies, especially operating in the area of financial service provision. That is the ethos under which we are trying to introduce the legislation. It is intended that the group of societies would be subject to Central Bank supervision and that this would be the closed group.
I accept the points made by the Senator. I do not think anybody in the House would disagree with him on his critique of the system up to now but what we are seeking to do is to ensure the system is fit for purpose, notwithstanding the fact that these friendly societies go back to the 19th century and there is a particular ethos around them. The Senator speaks to my own geographical area of north Cork. I remember names such as Nora Herlihy and Horace Plunkett among others that are synonymous with movements such as this. We do not seek to lose sight of that either but what we want to do is ensure we have an appropriate model for the 21st century and that is what we are trying to achieve in the Bill.
This section abolishes the requirement for societies to submit at least once every three years a return, or triennial return, of the members and their holdings to the registrar. That seems to go against what the Minister of State said in that it is relaxing the conditions. If we have fears, let us see who the members are every three years and what their holdings are. I support what the Minister of State just said in suggesting that the amendment weakens regulation when it is the case that we should not weaken the regulation.
Section 11 provides for the removal of the requirement for societies to submit at least once in every three years a return to the members and their holdings to the registrar. It is known as the triennial return. The co-operative sector has sought the abolition of the requirement and argue that the information is out of date too quickly to be useful, and imposes an unnecessary administrative burden on societies. There is general agreement that the return serves no useful purpose and, accordingly, it is proposed to remove the requirement. The removal of the requirement is balanced by the provision in section 10(g) for a right for non-members to inspect the books containing the names of members and their holdings in shares at the registered office of the society. Members already have a similar right.
This section is modelled on the like section in the Companies Acts. Information is therefore available to both members and non-members on a current information basis, which would render the triennial return unnecessary. Section 11 relates to the industrial and provident societies, that is, co-operatives and societies that are not friendly societies.