Wednesday, 10 October 2018
Markets in Financial Instruments Bill 2018: Second Stage
The Markets in Financial Instruments Directive II, known as MiFID II, is the cornerstone of European Union financial markets legislation, covering the regulation of investment services providers. It is changing how markets operate for the better, ensuring safer and more transparent markets across the EU. MiFID II represents a major piece of financial markets reform and is ambitious in its scope. It seeks to make financial markets more efficient, resilient and transparent in a number of ways, namely: by the introduction of rules to keep pace with technical developments such as algorithmic trading - I got that term right, having had serious a row with its pronunciation during the debate on the Bill in the Dáil - which has the potential to cause systemic risks; by involving transparency and oversight of financial markets and, for the first time, establishing the principle of transparency for non-equity instruments such as bonds and derivatives; by introducing measures to deal with excessive volatility; by improving conditions for competition in the trading and clearing of financial instruments; and by building and strengthening investor protection rules.
The directive was transposed into Irish law by way of statutory instrument in August of 2017 and entered into application on 3 January. However, it is necessary to provide for criminal sanctions and penalties in respect of infringements outlined in MiFID II via primary legislation, hence the need for this Bill. It provides that a person guilty of an offence under certain provisions of the MiFID II regulations, such as operating without authorisation, is liable on conviction on indictment to a maximum penalty of €10 million and-or imprisonment for ten years. This is a continuation of the criminal sanctions regime that existed in Irish law under our MiFID I regime.
While the main part of this Bill is the introduction of criminal sanctions under MiFID II, the Bill also contains amendments to definitions in the Credit Reporting Act 2013 and the Financial Services and Pensions Ombudsman Act 2017. The Credit Reporting Act provides that the Central Bank of Ireland shall establish, maintain and operate a database of specified personal and credit information known as the central credit register. The purpose of the register is to ensure that credit providers will have access to the most accurate and up to date information regarding a borrower's total debt exposure when considering an application for credit, or when an existing loan is in arrears or being restructured. It has been advised by the Office of the Attorney General that the definition of "credit" included in the Act, which was intended to exclude trade credit from the scope of the central credit register, would also unintentionally exclude hire purchase and similar credit agreements. The amendment to the Act included in this Bill remedies the issue.
The Bill also makes an amendment to the definition of "long-term contract" in the Financial Services and Pensions Ombudsman Act 2017, which refers to the European Communities Life Assurance Framework Regulations 1994. The policy intent was to capture life assurance contracts of all durations, including open-ended products. It subsequently emerged that the European Union (Insurance and Reinsurance) Regulations 2015 implementing the Solvency II directive superseded the 1994 regulations for many insurance undertakings. This Bill amends the definition to ensure that products to which the 2015 regulations apply are also included in the definition. The purpose of this amendment is to grant access, on a statutory footing, to the Financial Services and Pensions Ombudsman for consumers wishing to make a complaint about these products.
Subsequent to the publication of the Bill, a further issue emerged regarding paragraph (a) of the definition. Where a product was understood by the consumer to be expected to last for more than five years and one month but did not have a fixed term, the Financial Services and Pensions Ombudsman decided that such a product would not be a long-term financial service because it did not have a fixed term as required by definition. There was no policy intent to exclude these products so it was agreed on Committee Stage that a further amendment would be made to the definition to include longer-term services whose term was not actually fixed. This arose particularly in the context of whole-of-life policies and the revised definition will allow the Ombudsman to investigate complaints about them where he considers that it is appropriate for him to do so. Specifically, he has the discretion under section 51(2)(iii) to investigate cases within "such longer period as the Ombudsman may allow where it appears to him or her that there are reasonable grounds for requiring a longer period and that it would be just and equitable, in all the circumstances, to so extend the period". The revised definition in the Bill will mean that whole-of-life policies come within the definition of "long-term financial service" and, therefore, the Ombudsman will have the necessary power to investigate these cases.
I will now provide a short outline of the Bill. Sections 1 and 2 contain the Short Title of the Act and a provision dealing with expenses incurred in the administration of the Act. Sections 3 and 4 repeal the criminal sanctions and penalties contained in the Markets in Financial Instruments and Miscellaneous Provisions Act 2007 and provide for further definitions. Section 5 provides for the definitions and details of fines and penalties that I have already outlined in relation to infringements of MiFID II. Section 6 allows the Central Bank to charge fees in relation to its functions under MiFID 2. Section 7 contains an amendment to Schedule 2 to the Central Bank Act of 1942. Section 8 amends the Credit Reporting Act 2013, as I have already outlined.Section 9 contains an amendment to the Financial Services and Pensions Ombudsman Act 2017.
I thank Senators for the opportunity to address the House on the Bill. I look forward to debating the measures it contains and i commend it to the House.
I thank the Minister of State for his contribution. It was comprehensive and outlined much of what is needed in the context of this particular legislation. As he pointed out, the directive has already been transposed into Irish law by means of statutory instrument. However, the Bill before us is necessary in order to provide for the criminal sanctions and penalties for infringements outlined in MiFID II. The Minister of State also highlighted the changes that will come about in the long term. At the relevant joint committee, the Minister of State and I discussed the regulation of long-term policies and how far people could go back in order to investigate. I welcome the reference to that in the Bill.
I will not go on about the various sections because the Minister of State covered them well. Fianna Fáil will be supporting this important Bill. It is noteworthy that the Bill provides for significant penalties in respect of conviction on indictment. There are technical issues to do with the Credit Reporting Act and the Financial Services and Pensions Ombudsman Act 2017 that were discussed previously. It is important to have criminal sanctions for people who misbehave and it is important there is sufficient supervision to ensure that people are doing what they are supposed to be doing. I welcome the progress of the Bill, which will protect investors and those involved with these products.
I thank the Minister of State for coming before the House and I welcome this amending legislation.
The Minister of State referred to whole-of-life policies and the fact that the ombudsman will be able to investigate complaints relating to them. Prior to becoming Minister of State, Deputy D'Arcy was a pioneer in this area. I know a man who contributed to a whole-of-life policy and who, coming into his 80s, was told he had put more money into the policy than the actual value of the policy. He was also informed that if he did not continue to pay exorbitant premiums, the policy would go. That needs to be looked at and it is welcome that the individual to whom I refer can now go to the Financial Services and Pensions Ombudsman.
The Minister of State also referred to improving transparency for the financial markets and establishing the principle of transparency for non-equity instruments such as bonds and derivatives. Prior to the crash, financial stability reports published by the Central Bank referred to products being invested in derivatives. In many cases, those derivatives were sub-prime bonds, loans and mortgages invested in the UK and, in particular, in the US that were bundled. I welcome this transparency for which provision is made in the Bill.
Could the Minister of State indicate which financial institutions will be required to make information available for inclusion on the central credit register? The latter falls into the same bracket as the insurance register in the context of examining claims and so forth. Who will be responsible for maintaining the database relating to the central credit register? Who will own it? Who will have access to it? How long before it will be put in place? Will it include details on all financial instruments? Will it be accessible to members of the public? This is a great innovation but I would like information on the practicalities involved.
The main thrust of the Bill relates to criminal sanctions. Those sanctions are welcome. The Bill is a further step in tackling the kind of white-collar crime which, to date, has been overlooked. There is a massive contradiction in someone who steals a loaf of bread from a supermarket being deemed to be guilty of more criminal intent than an individual who steals from the pension funds of hard-pressed people. The first person may be stealing the loaf of bread to feed his or her family. In terms of scale, the individual stealing from the pension fund could not be accused of doing likewise. I always look for equity. If someone steals something, regardless of whether it is a large or small item, he or she should be held accountable. However, in the context of scale, there has clearly been a need to take action in respect of white-collar crime. I welcome the further strengthening of the measures which are already in place and which were introduced by this Government and that which preceded it.
I again thank the Minister of State for attending and I commend the Bill to the House.
I welcome the Bill, which Sinn Féin will be supporting. The Bill is quite technical in nature and is the first step in a process for which Sinn Féin has been calling for a long time. My colleague, Deputy Pearse Doherty, attempted to have the definition of whole-of-life policies amended because companies were still using the lack of clarity to avoid legislative provisions and Sinn Féin supported the Government amendments on Committee Stage in the Dáil. I will examine what the Minister of State said in terms of shoring up the definition.
The most important aspect of the Bill relates to the requirement that a customer must be informed if, for example, a provider of mortgages has a share interest of over 25% in an insurance company it recommends to that customer. This practice was recently found to be illegal in the context of a case that was eventually settled out of court. Relatively little is known about the case because it was settled out of court. The Central Bank cannot tell us any details about its investigations into the individual financial institutions even after the individual involved had made a disclosure to it. People will find that difficult to believe. A financial institution that broke the law by not informing a customer that it had a stake in a product it was recommending was taken to the High Court, lost the case and launched an appeal. The appeal was withdrawn and an out-of-court settlement, with a gagging order attached, was arrived at. People are asking why all of this is happening behind closed doors.
Out of this long process, there is nothing to dissuade the financial institution from repeating the same trick. Hundreds of people made disclosures to the Central Bank on this issue, but no one knows about this because the bank cannot provide updates on its investigations into the disclosures. The Minister and my colleagues will be aware of that on foot of what has been stated by officials from the Central Bank who appeared before the Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach. It is astounding that we cannot be told the identities of these institutions. It is also astounding that there is a collective in place and that there is protection in respect of the type of behaviour to which I refer.Where is the protection for consumers? If consumers knew of the behaviour of a particular institution, they would be much better placed when making their choice of financial product provider.
The Bill seeks to shed light on the many financial transactions that take place every day and to attach clear financial and custodial penalties. In this country, we are still not comfortable with the idea that a banker in a suit can do time in prison for taking part in a practice that "everyone was up to", which seemingly makes it okay.
This culture needs to change. With an increasing amount of primary legislation pertaining to consumer protection, especially regarding financial products, is there now a need for a consolidated Act? The Companies Act 2014 consolidated all previous Companies Acts. While it runs to thousands of pages, it is the go-to unitary legislation for anyone involved in corporate governance. The legislation is needed to attach criminal sanctions to crimes listed in the Markets in Financial Instruments Directive II or MiFID II. If the Government can specify criminal sanction for a financial crime, does it intend to apply this to other criminal actions in the financial and banking sector? My colleague, Deputy Pearse Doherty, has a Bill on the Order Paper which would make it a criminal offence to lie to the Central Bank. After many sessions in the finance committee trying to get to the bottom of ever-increasing insurance costs and resolving the tracker mortgage scandal, people will want to know that those who break the law face sanctions such as the penalty of up to ten years in prison and-or a fine of up to €10 million provided for in the Act.
Recently, the finance committee considered a large report from the Central Bank into the problems of the culture and management in the pillar banks that led to many of these scandals. The Central Bank told us that it is waiting for legislative changes to take place before it can pursue individuals for their actions in scandals such as the tracker mortgage issue. For this reason, I ask that as well as ensuring that this legislation progresses, we look at the many other changes that need to be put in place. We also need to see legislation on class actions progressed. My colleagues, Deputies Pearse Doherty and Donnchadh Ó Laoghaire, have drafted this legislation and are seeking support for its progression through the Oireachtas as soon as possible. Today's Bill is welcome but should only form a small part of the change of culture which is backed up by sanction and investigation.
I thank Senators for progressing the Bill in the manner in which they are doing so. I will stay with today's Bill. Senator Conway-Walsh asked several questions about other legislation. As I do not have the relevant information available to me, I do not propose to comment on the matters raised. The Bill makes it an offence to intentionally mislead the Central Bank. It is, therefore, very important legislation. While the MiFID legislation has been transposed, what has not been transposed is the criminal sanction, which is a fine of up to €10 million and-or jail time. Without this, the other legislation is much less powerful. While MiFID is concluded, finished and operational, it is also important that we progress this Bill through the Houses.
Approximately 500 lenders and creditors are included on the credit register. In the future they will provide data regarding the outstanding credit agreements. These are banks, credit unions, firms that have acquired loan books from Irish institutions in recent years, licensed moneylenders, local authorities and the National Asset Management Agency, NAMA. If the proposed amendment is enacted, higher purchase companies, those that provide personal contract plans, PCPs, and financial leasing companies will also be required to provide data to the central credit register, CCR.
Who can access the data? Credit information subjects are in a position to access their data on the CCR and to obtain their own credit reports. This is similar to the way it used to be with the credit bureau. One can request one's own information to be made available. The Act provides that the first report each year would be provided free of charge. The Central Bank has indicated that, subject to a fair usage limitation, individuals may access their credit report at any time free of charge. Lenders will be required to, or may in certain circumstances, access the credit register when an individual or other credit information subject applies for a new loan, has an existing loan restructured or has arrears on an existing loan. Apart from a lender in the above circumstances, no other party, such as an employer, landlord or any other person or entity, can access the individual's credit data.
Who owns the information? The Central Bank owns the information on its central credit register and is responsible for the protection and processing of the data held on the CCR. What type of loans credit does the CCR hold information on? It collects loans information on most types of loan and credit agreements of €500 or more. This includes mortgages, personal loans, credit card overdrafts, business loans, moneylender loans and the like, so that involves most of what we are providing for.
I want to touch on the issue Senator Kieran O'Donnell raised about whole-of-life policies. I think it was when we were finishing up the legislation on the Financial Services and Pensions Ombudsman that the issue of whole-of-life policies was raised. There was an issue as to whether they were covered. They are covered. We are strengthening the definition now. Even previously, though, I have been pretty strong in my views on this.
Were products mis-sold? It is for the Financial Services and Pensions Ombudsman now to investigate this in the context of whole-of-life policies. One issue of which I was unaware is that there is no such thing as a whole-of-life policy. It is reviewed every five years. On the basis of that review, the premia increase. I must admit that I found it disturbing that some elderly people were finding it was so expensive to keep the pot alive that effectively the financial institution was consuming the whole pot. This is particularly unfair - that is a personal view - but it is for the Financial Services and Pensions Ombudsman to consider these matters. The ombudsman has considered three cases to date and did not choose to go ahead with any investigation. Again, it is neither for me nor this House to instruct the Financial Services and Pensions Ombudsman as it is his or her decision to investigate or not. The legislation, however, is absolutely clear that the ombudsman has the authority to do so.