The Joint Committee met at 2 p.m. MEMBERS PRESENT: Deputy Thomas Byrne,  | Senator Maurice Cummins, | | Deputy Joe Costello, | Senator Déirdre de Búrca, | | Deputy Lucinda Creighton, | Senator Paschal Donohoe, | | Deputy Timmy Dooley, | Senator John Hanafin, | | Deputy Bill Timmins, | Senator Cecelia Keaveney,+ | | | Senator Terry Leyden, | | | Senator Feargal Quinn. |
+In the absence of Senator John Hanafin, for part of meeting. In attendance: Ms Marian Harkin, MEP. DEPUTY BERNARD J. DURKAN IN THE CHAIR.  Working Group on EU Financial Supervision: Discussion with Department of Finance.
Chairman: Apologies have been received from Deputy Michael McGrath and Senator Prendergast. Item No. 1 is the report of the high level working group on EU financial supervision and a statement on it by representatives of the Department of Finance who are present. We will discuss the report of the high level group on financial supervision and regulation in the European Union. Members will be aware that the high level group or the de Larosière group was established by the European Commission in response to the global financial crisis. A copy of the report was previously circulated to members. The report primarily covers the issues of how to organise the supervision of financial institutions and markets in the European Union, how to strengthen European co-operation on financial stability and oversight, early warning and crisis management and how EU supervisors should co-operate globally. It makes two main recommendations, namely, the establishment of a European systemic risk council under the ECB and a new system of financial supervision with three new European authorities, the European Banking Authority, the European Securities Authority and the European Insurance Authority. National regulators will remain in place to continue day-to-day supervision of the financial markets. The committee agreed to invite representatives of the Department of Finance to discuss the report. I welcome Mr. Liam Beausang, Mr. Colm Breslin and Mr. John Moore who are all welcome. I draw their attention to the fact that while members of the committee have absolute privilege, this does not apply to witnesses appearing before the committee. Members are reminded of the parliamentary practice that they should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable. That is the normal warning given — pre-yellow card in case anybody goes off message. I invite Mr. Beausang to make his presentation and remind members that this matter is of critical importance. This is the occasion on which Members of the Houses of the Oireachtas can comment on proposals from the European institutions, with particular reference to the financial regulatory system and the banking system generally. These issues have caused some angst, to say the least, in the past year or so. I emphasise that it is important for members to have their say, have an influence and make their presence felt. These are issues that will come back to visit somebody in this and other institutions in the future. Deputy Billy Timmins: On a point of order, before Mr. Beausang makes his presentation, will we have an opportunity to discuss the document again or is this the only occasion on which we will have an opportunity to discuss it? Chairman: We are quite short on time. Therefore, I propose, with the agreement of the committee, that we have an intensive discussion on the report today and that if we have to return to it again in a further session, we will do so, preferably this week. We do not have a great deal of time, given that the timescale is very tight. If we are to have an influence, the committee which is representative of the Houses of the Oireachtas should deal with the matters involved now. Is that agreed? Agreed. I call Mr. Beausang. Mr. William Beausang: I thank the joint committee for giving us the opportunity to appear before it to discuss the very important report of the high level group on financial supervision in the European Union which was published on 25 February and which makes very important recommendations, in particular in regard to the future direction of financial regulation in the European Union. The Department of Finance has not yet finalised its position on the report and is consulting on its recommendations. However, our initial reaction is very positive. The report strikes the right balance in proposing extensive reform of financial supervisory arrangements in the European Union, while maintaining at the heart of the regulatory system national regulators in each member state. However, for the future it is clear that national regulators must work in a closely co-ordinated and integrated fashion on the basis of much greater trust and confidence within an EU system of financial regulation where a single rule book is in place and applied in a uniform way. Discussions at EU level on this issue are expected to progress quickly. The European Commission is consulting on the report. Its consultation period expires on 10 April and its intention is to move forward to develop proposals for implementation of the report. In order to inform the Department’s contribution to the Commission’s consultation, we have asked stakeholders for their views on the 31 recommendations contained in the report. The Department has provided an initial reaction to each of these recommendations in its consultation document, a copy of which has been provided for the committee. At this stage, it is expected that draft Council conclusions will be considered at the ECOFIN Council meetings in April and May, with a view to agreeing reforms in the EU system of financial supervision at the June European Council. Before commenting on the various recommendations contained in the report, it might be useful to provide some background information for the committee on the origins of the report. Last October the President of the Commission mandated the high level group, chaired by Jacques de Larosière, formerly of the French Central Bank and the IMF, to report on a number of issues, including the following: the causes of the current financial crisis; the organisation of European financial institutions to ensure prudential soundness; the orderly functioning of markets and stronger European co-operation on financial stability oversight; and early warning mechanisms and crisis management, including the management of cross-border and cross-sectoral risks. The report provides a thorough analysis of and commentary on the causes of the current problems. On the basis of its analysis and assessment of the weaknesses in the current system, it presents a broad range of recommendations relating to important technical features of the existing regulatory regime and also for a phased and measured reconfiguration of the current system of financial supervision in the European Union. The recommendations relating, in particular, to what is described in the report as EU supervisory repair would have important implications for the whole of the European Union, including Ireland. In this context, I draw the committee’s attention to the proposed creation of a European systemic risk council and the transformation of the existing level three committees of EU financial supervisors for the banking, insurance and investment services sectors into three new European authorities, with a legal role and responsibility for achieving convergence of supervisory standards and guaranteeing strong co-operation between national supervisors. As I mentioned, the report contains 31 main recommendations, many of which contain a number of sub-recommendations. Therefore, the actual number of recommendations probably exceeds 100. It will require a major effort to work through all of the elements of the recommendations in order that there is a strong common understanding among all member states of the detailed design of the de Larosière report. All of the recommendations are important for the development of an effective EU financial regulatory regime. Many of them are in regard to specific sectors, for instance, the solvency II proposals for insurance companies or credit rating agencies which were already under consideration by the EU institutions. Recommendations in regard to hedge funds are also very important and are being examined. However, others, especially with regard to the proposed new supervisory structures, are new and more radical. I would like to concentrate on the recommendations which refer to reform of the EU supervisory structures. I draw the committee’s attention to recommendations 16 to 24 which, in our view, are the most important in the report. In overall terms, they propose: the establishment of a new European systemic risk council under the auspices of the European Central Bank; that an effective risk warning system be put in place; and that a European system of financial supervisors be established. In the first stage, in 2009-10, the powers of national supervisors should be strengthened and aligned. A harmonised rule book should be developed which would comprise a single EU rule book for financial regulation. The work of the existing level 3 committees of EU financial supervisors, on which each member state’s regulatory authorities are represented, should be placed on a firmer footing and benefit from EU funds. In the second stage, between 2011 and 2012, the level 3 committees should be transformed into authorities, with a specific legal basis and new legal powers which are not available to the existing committees. The new authorities would have binding powers on mediation, supervisory standards and technical decisions regarding specific financial institutions. The authorities would also be granted powers on colleges of supervisors and the licensing and supervision of EU wide entities such as credit rating agencies. National supervisors would continue to be responsible for the day-to-day supervision of firms in their jurisdictions. These are very important issues. At this stage we would strongly support this type of approach subject to certainty, for example, on the legal basis for these changes and appropriate accountability arrangements. A significant amount of careful work will be required to align the role and responsibilities of the new bodies with the role and responsibilities of member states in such areas as crisis management and resolution. As ever, the details in any future European Commission proposals will be crucial. Recommendations 16 and 17 should be considered together. In these, the group has proposed the establishment of a European systemic risk council, ESRC. It would be under the auspices of the ECB and it is proposed that it would be chaired by the President of the ECB. Its role would involve macro-prudential analysis and providing early warnings of financial risks. It could issue recommendations in the form of instructions to national supervisors. The proposed composition of the ESRC means that national supervisors would not be members of it — they would just be represented by the chairmen of their EU Level 3 Committees of EU Supervisors. The creation of the ESRC does not directly involve the transfer of national powers to a new body. However, it might be noted that the last indent of recommendation 17 appears to give the new body powers over national supervisors. Recommendations 18 to 24 should also be considered together. The report envisages a two-stage process. In the first stage, national supervisors would be strengthened to upgrade the quality of supervision in the EU; as the committee will be aware, the Government is currently considering proposals for the reform of the institutional structures for financial regulation in Ireland. All national regulatory authorities should have attractive, modern personnel policies, facilitate staff exchanges with the private sector and align competences and powers on the basis of the most comprehensive system in place in the EU. The EU would work towards the harmonisation of financial regulation and consistent supervisory powers and sanctioning regimes. In the second stage, between 2011 and 2012, the three level 3 committees would be transformed into three new European authorities, managed by a board comprised of the heads of the national supervisory bodies. The authorities would have a range of key competencies, including: the power of legally-binding mediation between national supervisors; the adoption of binding supervisory standards; the adoption of binding technical decisions applicable to individual financial institutions; and the oversight of colleges of supervisors. The authorities would have the power to adopt interpretations of EU rules which would be legally binding for national supervisors. This aspect of their proposed role could raise some legal doubts which will require clarification as, in principle, it would override the exclusive competence of the European Court of Justice to interpret European law. Recommendation 23 may already have been overtaken by events. It recommends the immediate establishment of a high-level group to come up with a detailed implementation plan for the second stage before end-2009. However, the Commission, in its communication of 4 March 2009, stated that it intends to opt for a one-stage process, not a two-stage one. It is fair to say that member states have differing views on this issue. A harmonised rule book would remove many of the discretions or exemptions that currently exist in EU law. Member states have sometimes used these discretions other than when objectively warranted by specific national factors. However, there are occasions when discretion is required to take account of the different legal regimes that exist throughout the EU. The report recommends that greater use be made by the EU institutions of regulations for enacting EU financial services legislation, which would not require transposition and would apply directly to all member states. The existing committees of supervisors for the banking, insurance and investment services sectors, the so called “level 3 committees”, would have their roles strengthened in the short term, with a view to replacing them within four years with new authorities with a legal foundation. We support the establishment of the new authorities on the basis that the development and implementation of a single rule book could not be achieved otherwise. We would have to give very careful consideration to the type of powers that would be bestowed on them. Several member states have raised the question that if the authorities had powers to overrule national supervisors and the use of such powers resulted in, say, the collapse of an institution, who would bear the cost of that collapse? The binding nature of these new powers is a concern for many. The question has also been raised whether a single authority, rather than three, would be preferable in view of the large measure of overlap and co-ordination that will be required in any event. The European Commission wants these new authorities to be established as soon as possible, whereas the report recommends a two-stage period of approximately four years. We would prefer the two-stage approach. We are concerned that a too hasty decision on an EU-wide architecture could have unintended consequences and might cause more harm than good. A period to allow for considered debate and evaluation of the options appears to us to be the most sensible approach. However, it is important to bear in mind that, in the interim, progress would be achieved by strengthening the existing level 3 committees. It is a phased implementation, which will also allow all the issues relating to the boundary between the roles of the authorities and that of member states to be examined and solutions found. The new authorities would also be responsible for supervising entities that operate on an EU-wide basis such as credit rating agencies. The European Commission’s proposal for the regulation of credit rating agencies will, hopefully, be agreed in the near future and the new authorities would be ideally placed to be play a supervisory role for them. I highlight the fact that this is a report which was prepared for the European Commission. Although the report contains many recommendations, no legislative proposals are on the table at this time. The European Commission has presented its initial positive reaction to the report and is expected to present a suite of legislative proposals in the coming months. The Department of Finance has a very positive view of the report and believes the recommendations cover the main areas that need to be addressed, in the short and in the medium term. We would be happy to answer any questions the committee might have. Chairman: I thank Mr. Beausang. I propose that we have an initial discussion on this statement and we will then draw inspiration from the condensed report produced by our resident policy adviser, which is an excellent road map. We will come to both of those in due course. Deputy Billy Timmins: Is it not possible for us to deal only with the broad concept because there is a significant crossover between Mr. Beausang’s statement and the report? Chairman: I seek the committee’s preferred option as to how the policy body should have a bearing or influence on what our European colleagues propose. One of the experiences we should have learned from in the past is that where no input was made, we did not exist. If we do not exist, we have a problem and, therefore, it is up to ourselves. Senator Cecilia Keaveney: I am not a member of the committee. This debate refers to the European dimension to financial institutions. The Belfast Telegraph is running a series of reports this week on illegal cross-Border transactions, one of which relates to money laundering. In addressing the supervision of financial institutions, are currency exchange bureaux, which are still in operation, covered? I am not sure whether this is pertinent to the debate. However, I must provide proof of my identity to deposit money in a bank, yet I can change any amount I wish in an exchange bureau. Did such bureaux come under the group’s remit? Deputy Joe Costello: I thank the departmental officials for their presentation on the high-level working group. It is a timely document and appears to be a departure from the existing view of the Commission, in particular the view of Ireland’s Commissioner, Mr. Charlie McCreevy, a great champion of light regulation and supervision. It sets out a complex and detailed set of structures in terms of regulation for the future in all key financial institutions, including the banking, insurance and credit sectors. I hope it signals a new departure in the European Union and within our national structures. The proposal is for a tripartite approach to the issue. A single authority was mentioned. It appears to me that each national Government will be required to put its house in order arising from the provisions of this report and that the European Union will deal with a broader level of supervision. Whether a European Union regulator, a single entity similar to the European Central Bank, with overall responsibility in this area is required, the complexity of today’s presentation in terms of the three levels of authority proposed would suggest that is not the case. Perhaps the delegation will set out its views on a European-wide regulator. In the context of what is happening in terms of G20 and the forthcoming talks in London, is it possible this proposal will be moved up a peg to, say, a global regulator given President Obama has been speaking in those terms? Is this the type of structure envisaged as part and parcel of the overall structure? I like the idea of a harmonised rule book. Perhaps the delegation will say if it is true that there is no need for any legislation to be transposed and the reason for this is that no specific proposal has been put forward for an EU regulator that would impact in each member state in terms of supervision of existing and new regulatory frameworks established therein. It appears to me this type of development would be best dealt with through domestic legislation and at European level. An EU directive might be the way forward. Obviously, we want results and action fairly quickly. Deputy Billy Timmins: Deputy Costello has covered a number of the points I wished to raise. I thank the delegation for their presentation. On global regulation as referred to by Deputy Costello, is it realistic to expect a global regulator will be established and does the delegation believe there is need for such a body? Also, will Europe get agreement on the recommendations in this report? Is there much divergence between countries in this regard? The G20 summit will take place next Friday. On the requirement for a one-voice one-regulator approach, is this the agreed document to achieve this and if so, are we too late in making submissions on it? Chairman: No. Deputy Billy Timmins: How does the document agreed at the Council of Ministers meeting on 18-19 March, which will be presented at the G20 summit, differ from this document, if at all? Perhaps the delegation will also give us their view on our credit rating, which was reduced yesterday, in terms of its implications for Ireland. How do we compare with other European countries in terms of financial supervision? I refer to recommendation 6, that the competent authorities must have sufficient supervisory powers. Do our competent authorities have sufficient regulatory powers? Is the Department or the Minister of the view that they do not have such powers? Is it a long-standing view that they do not have such powers or is this a view which follows on from the recent crisis? The recommendation refers to the compensation initiatives which must be aligned with shareholder interest. I ask for the delegation’s views on this recommendation with respect to the capping of salaries in the banking institutions. It refers to an assessment of bonuses needing to reflect performances. What does this mean? Does the delegation think the current bonuses are too extreme? There is a reported difficulty with a replacement chief executive for Irish Nationwide because an individual would not take up the position because the remuneration was not sufficient. Recommendation 11 deals with this subject and I ask for the delegation’s views. With regard to recommendation 21, I ask the delegation to explain in more detail the concept of the supervisory college and the extension of this principle. Deputy Timmy Dooley: I welcome the presentation by the Department of Finance. While I welcome the opportunity to discuss what Deputy Timmins referred to as the broad parameters behind ensuring that the European Community works cohesively towards the resolution of what is a hugely significant problem, I would want to know from the gentlemen concerned if there is an ongoing communication with the appropriate committee in this House which is the committee dealing with banking and finance. Has the delegation been before that committee? While this is of a European nature it is certainly not within my competency to deal with the in-depth financial regulatory points. I hope the Department and that committee will begin a process of interaction for dealing with the stakeholders. It has been identified that the Department is dealing with the stakeholders with regard to each of the individual recommendations. I do not think the Chairman suggests that this committee would discuss the meat, so to speak, of those deliberations. However, there is a requirement and perhaps a necessity for that level of interaction to take place in public. We could perhaps direct to that committee that a continuation of the discussions take place before the banking and finance committee to thrash out with the relevant stakeholders and the Department the views expressed in what appears to be a very comprehensive analysis of the recommendations. I reiterate the point made by Deputy Costello with regard to the global nature and this may be outside the remit of the delegation but it needs to be said. While it is obvious the European Union is trying to put its house in order, the one thing this financial crisis has shown all of us is that it is neither a national nor a European issue but rather a world-wide issue and it is clear the European Union acting on our behalf, needs to address it in the context of the G20 summit later this week. I ask for the delegation’s comments on those points. Senator Déirdre de Búrca: I thank the speakers for the presentation which contains very interesting proposals in the summary. I wish to raise some broad points. The document refers to what is being discussed as a phased and measured reconfiguration of the current system of financial supervision in the EU. At a later stage it is stated that the EU would work towards the harmonisation of financial regulation and consistent supervisory powers and sanctioning regimes. It appears to me that this is quite substantial. We were talking about setting up three European authorities with the power to introduce EU rules that would be binding for national supervisory authorities, with the power to sanction national supervisory authorities. My understanding was that the fiscal competence was very much an area that rested with member states. It seems like the European Union is getting involved in financial regulation and supervision that borders on assuming a certain level of competence. Mr. Beausang mentioned that some of these changes would be agreed at the June Council. I assume, therefore, that the existing treaties allow this to happen. I would like him to deal with this issue. Would the Lisbon treaty have any implications for the changes being proposed? Mr. Beausang talked about the level 3 committees being strengthened and the new European authorities emerging at a later stage. To whom will these authorities be answerable? He has mentioned they will be under the auspices of the European Central Bank. We are all aware of its independence. Are we agreeing that the new EU authorities will be independent of political control in the way that the European Central Bank is? Mr. Beausang has mentioned the Department favours a two-stage approach. It seems that would be the most sensible approach. There is a danger in agreeing to something in the light of the unfolding economic crisis that may over time be seen as not being as beneficial at a national level as it might be. Taking time to do it and doing it in a measured way is a good idea. Senator Paschal Donohoe: I welcome the presentation. I have three specific points to make on the report and one question. The creation of more than one authority has been referred to as a tripartite set-up. My understanding of much of the analysis that has taken place regarding the regulatory failure in different economies up to this point is that we have had too many regulatory bodies, each of which has a small piece of knowledge and none of which is able to see the big picture. In Ireland the Financial Regulator oversees one aspect, while the Central Bank oversees something else. My understanding is that in Britain there is the Bank of England and the Financial Services Authority, each of which was reaching a different conclusion in looking at a different part of the picture. We should have one body doing all of this. Every time we come across a problem we seem to want to create more than one organisation to deal with it. We should have one body in place which sees the big picture and can respond to what is happening and pull all the levers or give politicians the options to pull all the levers. My second point is about the valuation of financial instruments here. I refer to recommendations 4 and 8 that deal with derivative and securitised products. I am reminded about what I believe Warren Buffet said about the derivative industry. He described it as a weapon of mass destruction pointed at the global economy. We have derivatives worth multiples of the combined national incomes of the world. Nobody understands them, how they work or how they hook up with each other — or at least not enough people do. Recommendations 4 and 8 are pivotal to this. We need to accelerate this work in order that we know the value of the products available and understand them. We need to ensure we are not caught in a web of connections that nobody understands and that can pull the entire show down. My final point concerns recommendation 11 on compensation incentives. The point is made that they should be better aligned with shareholder interests and principles regarding financial sector compensation. We also need a broader consideration. Some of the banks we are discussing are so important to the Irish and global economies that mere consideration of shareholder value and interests is not enough. Whether it is an Irish bank or a global bank, if it were to fall over — some already have — the considerations should not be for the shareholder but for broader society and the national or global economy. I strongly believe the way we pay people will have to reflect the fact that while the shareholders of the bank are important, the wider economy is our biggest concern. I have made an input into this report, but I would like to ask a question about a slightly different matter. Is it the case that the working group was the first body of this type to be established without an Irish representative since last year’s referendum on the Lisbon treaty? Did the lack of Irish representation on the group which produced the report have any effect on the recommendations made? Deputy Thomas Byrne: I welcome the report and the Department’s initial response to it. Following the Minister’s interview with the Financial Times on St. Patrick’s Day, is there further scope for him to promote Ireland as a country interested in prudential regulation? We need to emphasise the need for good and strict banking regulation into the future. As Senator Donohoe said, Ireland should promote itself more effectively on the international market. We should be seen to be taking a lead, for example, by pushing the Commission to hasten the provision of the legislation that will be needed after the period of consultation has come to an end. |