Investment Intermediaries Bill, 1995: Second Stage.

Thursday, 22 June 1995

Seanad Éireann Debate
Vol. 144 No. 2

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Question proposed: “That the Bill be now read a Second Time.”

[246]Minister of State at the Department of Finance (Mr. Coveney): Information on Avril Doyle  Zoom on Avril Doyle  The Investment Intermediaries Bill is the latest in a long series of legislation required by the rapidly changing nature of the financial services industry. The Seanad recently considered the Stock Exchange Bill, now enacted as the Stock Exchange Act, 1995. This Bill has much in common with that Act, so Senators will already be familiar with many of the Bill's provisions.

The Investment Intermediaries Bill reflects the need to provide regulatory structures to keep pace with developments in financial markets as well as with developments in European law. It provides for the implementation, in respect of non-Stock Exchange firms, of two closely related EU directives, the Investment Services Directive and the Capital Adequacy Directive. These directives require particular standards of regulation for investment firms, which are defined as firms providing a range of services in relation to transferable securities. Transferable securities include the whole gamut of financial instruments traded on capital markets, from ordinary stocks and shares to the more exotic financial instruments known as derivatives.

Implementing the Investment Services Directive is very important. That directive will allow investment firms based in Ireland to have the benefit of a single passport to operate in the European Union. In other words, once such firms have satisfied the Irish authorities that they are fit to do investment business, they will be able to operate in other EU member states without having to seek a separate authorisation. The Investment Services Directive requires that firms trading in a member state other than their home member state will have to abide by local code-of-conduct rules.

The Irish financial system is modern and sophisticated. The handling of huge sums of money and complex financial instruments is a daily activity for many participants in that system. State-of-the-art information technology and skilled [247] personnel allow firms in Ireland to market their services around the world. We must ensure that the reputation of Ireland as a centre for financial services is maintained and enhanced. To do so, it is essential that we put in place a modern regulatory system which meets European standards. Moreover, we must go further than merely meeting the requirements of the relevant EU directives. This is because there are gaps which must be filled in our domestic system of regulation, in areas which are not within the scope of these directives.

Accordingly, this Bill provides a regulatory framework for a wide range of investment businesses, including not just firms covered by the directives, but also firms in the investment area which are not covered by them. For example, investment intermediaries which act primarily as conduits for business to larger financial institutions but which do not generally have any discretion in the management of clients' funds, are not covered by the directives but are dealt with in this Bill.

Deposit agents and deposit brokers who act on behalf of credit institutions will also be dealt with by the Bill. In addition, firms which have discretion over client investments and which therefore act as managers of clients' investment portfolios will also be regulated under the Bill. So will firms which only give investment advice and do not actually involve themselves in carrying out transactions for clients at all. I should mention that the Bill has been the subject of consultation with a wide range of interested bodies. These include the European Monetary Institute, which has provided a formal opinion indicating that it has no difficulties with the Bill. Copies of the institute's opinion are available.

The Bill nominates two key regulators, the Minister for Enterprise and Employment and the Central Bank. The Minister for Enterprise and Employment is already the regulator for the insurance industry and many of the firms dealt with in the Bill will already [248] be doing business as insurance intermediaries under the Insurance Act, 1989. The Central Bank is the other key regulator: it already regulates the vast bulk of Irish credit institutions as well as a range of other financial undertakings.

I now turn to a description of the basic structure of the Bill. Two main categories of firms are to be regulated by the Bill. They are not mutually exclusive — there will be some overlap. The two categories are investment product intermediaries and other investment business firms. Investment product intermediaries are firms which, for example, take and transmit orders for unit trusts to a unit trust provider, or orders for shares to a stockbroker or bank, or orders for prize bonds to the Prize Bonds Company, or which act as deposit brokers, for example, arranging for a client to make a deposit with a bank, or as deposit agent. In this instance the key example is the building society agent, prominent in many smaller towns, who acts almost as a de facto branch of a building society. Some solicitors and accountants will also fall into the category of investment product intermediaries.

All investment product intermediaries will be covered by what I will refer to as the “written appointments regime”, in other words, each will require a written appointment from any institution to whom it passes orders. The written appointment means that where an intermediary takes funds on behalf of an institution, the payment will be treated as having been made to the institution. This is an important protection for clients. The client must be in a position to show that a payment was made, and for that reason it will be an offence for an intermediary to fail to give a receipt for a payment.

Before an institution gives a written appointment to an intermediary, it must take steps to ensure that the intermediary is an appropriate person for such an appointment. The institution must, therefore, ensure that the intermediary is a member of an appropriate representative body with rules which require [249] compliance with the Bill or is regulated by an approved professional body, or that the intermediary has an authorisation from and is regulated for investment business by one of the two supervisory authorities under the Bill, the Central Bank or the Department of Enterprise and Employment. If the intermediary is not in any of these categories, then the institution giving it a written appointment must itself ensure that the intermediary is of good character and complies with the terms of the Bill.

The investment industry very recently raised a concern about the unlimited liability in section 28(4) on institutions to honour payments made by clients to an intermediary they have appointed. As I have already indicated in the Dáil, the Bill will not be implemented all at once. It was always the intention that a number of sections of the Bill, including the written appointments regime in Part IV, would not come into effect for some time. This delay is unavoidable because it will take some time, for example, for intermediaries to arrange written appointments for the institutions on whose behalf they are acting.

While this is taking place, the Department of Finance will be exploring the difficulty raised by the industry with the relevant industry groups in the context of discussion on an overall system of compensation for clients of investment firms. Such discussion would have taken place at an early stage in any event, because the EU Investor Compensation Directive is nearing completion in Brussels and will have to be transposed into Irish law by means of a separate Bill.

If it is decided that an amendment of section 28(4) is appropriate, it will be included in that Bill and section 28(4) will not be brought into effect until a decision on that issue has been made. That Bill will take cognisance of the compensations provisions in the EU directive and will be brought before the Oireachtas as soon as possible. The Government's objective will naturally be to provide appropriate protection for [250] investors in the context of a competitive financial sector.

The basic rule of the Bill is that all firms covered by the Bill must have an authorisation from the Central Bank or the Department of Enterprise and Employment to do investment business. However, where a firm does not provide any investment services other than the services of an investment product intermediary, and where it does not handle client funds other than when acting as a deposit agent or exercise any discretionary powers over clients' investment portfolios, it is called a restricted activity investment product intermediary. In view of the restricted nature of its business, such an intermediary will be allowed to operate without an authorisation from a supervisory authority provided it has a written appointment. It will, naturally, be subject to rules and codes of practice. The Department of Enterprise and Employment will, of course, have various powers to make rules for, and carry out inspections of, restricted activity product investment intermediaries.

There is a small category of firms not far removed from the restricted intermediary type, which has a small amount of discretion in respect of switching clients' portfolios from one investment product to another with the same institution. While these firms would not handle clients, cash, they will nonetheless have to get an authorisation from the Department of Enterprise and Employment to carry on their business, and will be subject to ongoing regulation by that Department.

All other investment business firms will come within the remit of the Central Bank, either directly or indirectly. The indirect sort includes accountants who are members of professional bodies and who do investment business only in an incidental way. These may be exempted from the requirement to be authorised and regulated directly by the Central Bank, provided their professional body has been approved by the Central Bank. In this case the professional body regulates the accountant, [251] and the Central Bank overseas the regulatory system of the professional body. I emphasise, however, that this system will only apply where the investment business being done by the accountant is incidental to his or her normal professional practice as an accountant. It will not apply where an accountant is heavily involved in investment business.

Otherwise, all investment business firms must be regulated directly by the Central Bank. This means that they must get an authorisation from the bank to enable them to operate and that the bank will monitor and supervise them on an ongoing basis. This category will include the fund management firms operating in the Irish market and the IFSC, for example, those providing fund management services to large corporate clients. However, the directly regulated category will also include small businesses or individuals who, on a professional basis, provide investment services to clients where they have control or discretion over client funds.

I have set out the categories of firms which are included in the Bill. I now wish to mention certain types of firm which are exempt from the definition of investment business firm and, therefore, from most aspects of the Bill, though not necessarily from the requirement to hold a written appointment if acting as an investment product intermediary. These exemptions are mostly for technical reasons. They include the bodies charged with the management of public debt, the Minister for Finance, the National Treasury Management Agency and An Post, but only when the latter is acting on behalf of the State. Banks, insurance undertakings and certain collective investments, and member firms of stock exchanges, are also excluded from the definition of investment business firm; these are already catered for under existing legislation.

Solicitors are covered by the Bill in the same way as any other investment firm if they do investment business in a manner other than incidental to their legal activities. However, they are [252] excluded from the definition of investment business firm if they carry on investment activities only on an incidental basis in the course of their profession. The reason for this is that the Law Society is already operating a substantial regulatory system under the Solicitors Acts, including the recent Solicitors (Amendment) Act, 1994. That system is also backed up by a compensation scheme and by appropriate professional indemnity protection. In these circumstances it was not considered necessary to include solicitors doing incidental business under the definition of investment business firm.

The Law Society can be expected to continue to maintain an appropriate standard of protection of solicitors' clients, but if the Minister for Finance were to come to the view that the Law Society was not performing its functions adequately, the Bill provides that the Minister may, by regulation and after appropriate consultation, bring solicitors doing incidental business within the definition of investment business firm.

One final thing the Bill will do is to extend the definition of investment company within the meaning of the Companies Act, 1990, to include closed ended investment companies. These are a type of collective investment fund. The effect of the change will be to bring such companies within the regulatory scope of the Central Bank, which already regulates other collective investments.

I now move on to a more detailed description of some key provisions of the Bill. Part I contains standard provisions about commencement, definitions and expenses. Section 2 sets out the definitions used in the Bill and is especially important because in so doing it effectively defines the scope of the Bill. “Investment business firm” is defined as a person providing investment advice or certain investment business services to a third party on a professional basis. “Investment business services” include a number of services provided with regard to investment instruments. The term “investment [253] instruments” is defined to cover the range of securities and derivative instruments traded on domestic and international financial markets.

Part II deals with authorisation of investment business firms and related matters. Under section 9, it will be an offence for a firm to act as an investment business firm, or to claim to be one, unless it is authorised to do so by a supervisory authority in Ireland or by a competent authority in another member state, or unless its activities are such that the Bill allows them to be carried on without such an authorisation. A foreign firm which has neither a branch nor a subsidiary in Ireland may carry on investment business with Irish companies and institutions without an authorisation from the Irish authorities. However, such a firm providing investment business services or investment advice to Irish individuals, that is, other than investment professionals, will be regarded as operating in Ireland and will have to have an authorisation from the Irish authorities or from a competent authority elsewhere in the EU.

Section 10 sets out the conditions which must be met by firms seeking an authorisation. An authorisation under this Bill can be subject to conditions laid down by the supervisory authority, and the supervisory authorities will have various powers to issue conditions or requirements or make directions in respect of investment business firms.

Section 12 makes provision for Irish based investment business firms to operate in other EU countries on the basis of their Irish authorisations while section 13 makes transitional arrangements for firms already operating as investment business firms, giving them time to arrange the necessary authorisations, etc.

Section 16 allows a supervisory authority itself to revoke the authorisation of an investment business firm in limited, technical circumstances. More importantly, a supervisory authority may apply to the High Court for an order revoking the authorisation of a firm if the firm has acted in a manner [254] which it is felt should disqualify it from doing investment business. This will allow the court to disqualify firms which can no longer be regarded as being fit and proper to be involved in investment activities.

Part III of the Bill deals with various aspects of the regulation and supervision of investment business firms. Section 20 sets out the general principles for such regulation. It provides that the supervisory authorities will administer the system of regulation and supervision of investment business firms in the interests of investor protection, the proper and orderly regulation and supervision of investment business firms and that of financial markets and subject to any guidelines which may be issued by the Minister.

Section 21 equips the supervisory authorities with a general authority to issue directions to investment business firms and their directors and management in the interests of proper and orderly regulation of investment business firms or the protection of investors. In certain circumstances these directions can extend as far as a direction that an investment business firm should cease trading. There is, of course, provision for appeal to the High Court. Section 22 enables a supervisory authority to apply to the court for an order to wind up an investment business firm if it believes, for example, that the firm is or is likely to become unable to meet its obligations to its clients or creditors.

Sections 23 and 24 make various provisions for restrictions in advertising. It will be an offence to advertise investment business services where the provision of such services would be an offence. Senators will realise, of course, that powers on advertising are an important aspect of the regulation of the activities of investment business firms.

Part IV deals with the written appointment regime applicable to investment product intermediaries. As mentioned earlier, this type of firm is engaged either in part or solely in a more limited form of investment, consisting mainly of passing customers' [255] orders to larger financial institutions; the definition is set out in section 25.

A restricted activity investment product intermediary, defined in section 26, may do business without a specific authorisation from a supervisory authority because it is not generally allowed to take clients' cash or to have discretionary power over clients funds. I have already dealt with the position of clients of firms operating under the written appointments regime and these are detailed in Part IV.

Part V makes various provisions in relation to auditors of investment business firms in line with the corresponding provisions in the Stock Exchange Act. Among other things, this Part obliges the auditor of an authorised investment business firm to report to the supervisory authority if he or she has reason to believe that there are circumstances which affect the investment business firm's ability to meet its financial obligations or that there are defects in its accounting systems or records or in its safeguards for client money or investment instruments. The auditor must also report to the supervisory authority if he or she has reason to believe that the investment business firm has breached the rules of any approved professional body of which it is a member.

Part VI of the Bill deals with probity and the competence of persons involved in investment business firms, with codes of conduct and provisions for regulating acquisition of significant shareholdings in investment firms, as well as with bonding for investment business firms and the protection of clients' money.

Section 36 contains provisions relating to disqualification from employment. Where, on application by a supervisory authority, the High Court finds that a person is not suitable on grounds of probity to be an officer or employee of an investment business firm, it may direct the employer to dismiss that person. Where the court finds that a person is incompetent, it may direct that the person concerned be removed from a particular position, suspended or dismissed. [256] These substantial powers mirror provisions in the Stock Exchange Act.

Section 37 sets out the broad parameters for codes of conduct which will govern how investment business firms do business with their clients. Codes of conduct will be drawn up by the supervisory authorities. The supervisory authorities may then require that investment business firms follow these codes of conduct. Codes of conduct will cover such issues as ensuring that firms deal honestly and fairly with clients, act with due skill and care, have adequate resources, seek enough information from clients to ensure that they provide appropriate advice or services and make adequate disclosure of relevant information to clients.

Sections 38 to 48 enable a supervisory authority to prevent undue or excessive influence being gained over an investment business firm by a person acquiring a significant shareholding. These provisions meet the requirements of the investment services directive in this regard.

Sections 50 and 51 deal with information about compensation and with bonding. While the Bill does contain a significant compensation provision, it does not provide for a comprehensive compensation scheme across all investment business firms. A draft investor compensation directive is nearing finalisation at EU level. The Department of Finance will be consulting industry interests about legislation for it as soon as possible.

I have already explained the protection available for clients under the written appointment regime. In addition, section 50 provides that an investment business firm must inform a client of the details of any investor compensation scheme. Section 51 then provides for a bonding arrangement for investment business firms on the model of the bonding arrangements which apply for insurance intermediaries. However, the minimum bond will be higher than that which applies at present in the insurance area — £50,000 rather than £25,000. The Minister may prescribe exemptions [257] from the bonding requirement where an appropriate compensation scheme exists or is set up or where a firm has a high level of capitalisation.

Section 52 deals with an important matter, the protection of client money and investment instruments. The section empowers the supervisory authorities to impose requirements on investment business firms in respect of their rights, duties and responsibilities regarding the treatment of clients' money and instruments. This section also creates offences for failing to keep proper books and records on clients' money or failing to have them audited regularly. A failure to keep client money in a properly designated account will also be an offence. It will, of course, be an offence for a firm to misappropriate client funds.

An important protection for clients is that in the event of insolvency of a firm, no liquidator, receiver, examiner or creditor of an investment firm will have any right of access to clients' money or investment instruments until the proper claims of clients have been satisfied in full.

Section 53 provides for an exemption from liability for the supervisory authorities unless they act in bad faith and for a disclaimer of warranty in respect of their approval of professional bodies or authorisation of investment business firms. Under section 54, where an investment business firm is unable to pay its debts and its failure to keep proper books and records or to comply with client money obligations has contributed to its insolvency, an officer of the firm may be held personally liable for the firm's debts on a direction of the court. In addition, a director who fails to take reasonable steps to ensure his firm's compliance with obligations regarding client money or books and records will be guilty of a criminal offence. Such a director, however, may not be jailed unless the court believes that he or she acted wilfully.

As I mentioned earlier, accountants doing investment business will be covered by the Bill in the same way as [258] other investment business firms, unless any investment business they do is incidental to their professional practice. Part VII of the Bill, which deals with approved professional bodies, is relevant only to this incidental business. It provides that the supervisory authority may grant approval, subject to conditions or otherwise, to a professional body of accountants to operate as an approved professional body. Such a body may then regulate its members in respect of investment business which is incidental to their professional activities. The members may then do such incidental investment business without a specific authorisation from a supervisory authority. Solicitors doing incidental investment business will not be affected by this provision. As I have already explained, such solicitors will not be treated as investment business firms for the purposes of the Bill unless the Minister for Finance prescribes otherwise.

Under section 56, professional bodies must apply to the Central Bank for approval to operate as an approved professional body and the section sets out the conditions they must meet to get such approval. Section 58 gives the bank powers to impose conditions and requirements on approved professional bodies in the interests of their orderly regulation. Provision is also made in section 61 for the revocation of approval. Except in certain purely technical circumstances, such revocation will be a matter for the High Court.

Part VIII of the Bill deals with inspections, offences and penalties. This Part of the Bill is closely based on the Stock Exchange Bill. Section 64 and section 65 deal with the powers of authorised officers appointed by supervisory authorities to inspect investment business firms. These officers will be empowered, for example, to enter premises, inspect documents and to require explanations of documents. This section also provides that a supervisory authority may require an investment business firm to supply specified information to it.

Section 66 to section 72 provide for the High Court, on the application of a [259] supervisory authority, to appoint an inspector to investigate the affairs of an investment business firm. An inspector appointed by the court will have wide-ranging powers of investigation, including, for example, powers to examine people on oath. The High Court may publish, with or without omissions, the report of an inspector appointed by it. A court inspector's report will be sent in full to the Minister for Finance and the Minister for Enterprise and Employment, who may decide to lay it before the Houses of the Oireachtas. On receipt of an inspector's report, the court may make an order for winding up of the firm concerned or remedying damage done to any person by its conduct of its affairs.

Section 73 provides for the appointment of an inspector by a supervisory authority to investigate particular matters relating to an investment business firm, including their compliance with any requirements of this or any other Act. The bank may publish, in whole or in part, the report of an inspector appointed by it, and must forward any such report in full to the Minister for Finance and the Minister for Enterprise and Employment, who again may decide to lay it before the Oireachtas. The supervisory authority may, on foot of a report, present a petition for a firm to be wound up.

Section 74 enables a supervisory authority to set up a committee to determine whether there has been a breach by an investment business firm or professional body of conditions or requirements imposed by the supervisory authority. Such a committee will have three members, drawn from a panel of seven to be nominated by the Minister of Finance with the consent of the Minister for Enterprise and Employment. If it finds there has been a breach, the committee may issue a reprimand or require payment of up to £500,000 by the relevant firm or professional body to the supervisory authority. It should be noted that this mechanism will only apply where the firm agrees. A firm may [260] appeal the determination of a committee to the High Court. Where an investment business firm or professional body does not want the matter settled by a committee, the supervisory authority may apply to the court to make a determination instead. Detailed provisions relating to committees appointed under section 74 are contained in the Second Schedule. Such committees offer a mechanism whereby breaches of conditions and requirements imposed by a supervisory authority can be speedily determined without the expense of a High Court hearing.

Section 75 and section 76 provide for an application for a search and seizure warrant by an authorised officer and for the admissibility of an inspector's report as evidence in civil proceedings. Section 77 and section 78 provide for legal professional privilege and for confidentiality of documents. Section 79 sets out the penalties for offences committed under the Act. The maximum penalty will be £1 million or ten years' imprisonment, or both.

Part IX of the Bill consists of section 80 only and deals with the amendment of the Companies Act, 1990, which I have described earlier. The effect will be to make the Central Bank the regulator of collective investment schemes structured as closed-ended companies.

The aim of this Bill is to ensure that the activities of investment intermediaries are made subject to appropriate regulation by the Central Bank and the Department of Enterprise and Employment and that these supervisory authorities will be equipped with the necessary powers to enable them to make regulation of intermediaries effective. Of course, no one can guarantee that there will never again be a rogue intermediary and the buyer must always beware. However, the introduction of a proper system of regulation is obviously good for investors; equally, it is also good for honest and law abiding investment intermediaries.

I commend the Bill to the Seanad and I look forward to hearing Senators' contributions. I would like to point out that [261] a correction to the Bill is required. On page 15, line 34 to line 35, a reference is made to “the Solicitors Acts, 1954 to 1995”. The correct reference should read “the Solicitors Act, 1954 to 1994”. I ask the Leas-Chathaoirleach to direct the Clerk of the Seanad to make the correction under Standing Order No. 100.

An Leas-Chathaoirleach:  In accordance with Standing Order No. 100, I will direct the Clerk to make the correction.

Mr. Mulcahy: Information on Michael Mulcahy  Zoom on Michael Mulcahy  I thank the Minister for introducing the Bill. I understand that it passed all Stages in the Dáil without amendment. No amendments have been tabled in this House.

This is a very important Bill because it deals with people's money. The issue of investment intermediaries has been a problem for ordinary people who have lost money. It has been a subject of scandal in almost every country in the world where people have lost money through fraudulent or negligent business intermediaries. I am disappointed by the poor attendance of Members from certain parties. It is not good enough that some parties do not have a representative present for this debate. Perhaps that shows that they are not interested in what is a very important——

An Leas-Chathaoirleach:  That is not relevant to the Bill. I ask the Senator to confine his remarks to the Second Stage debate.

Mr. Mulcahy: Information on Michael Mulcahy  Zoom on Michael Mulcahy  I will. This is a very important Bill which deals with a very complex area.

I would like to ask the Minister if we are in danger of becoming overregulated? It is a complex area, some of the instruments are complex. This will obviously be an enormous burden, not only on the Department of Enterprise and Employment and the Central Bank, but on those firms involved. Is the Minister satisfied that the burden of compliance with these regulations is not too [262] heavy? I believe that one of the problems with commerce in the developed world is that it is becoming overburdened with paperwork, regulations, etc. The Minister did not address the issue of who will pay for these regulations. Will it be the business intermediary firms, the consumer who buys products or the taxpayer? The question of cost is one that the Minister did not address. He might do so in his closing remarks.

I also wish to raise the question of the division of responsibility between the Department of Enterprise and Employment and the Central Bank. Under the Stock Exchange Act, the Central Bank is the regulatory authority for the Stock Exchange. In this Bill, however, regulatory responsibility is being divided between the Department of Enterprise and Employment and the Central Bank. What is the rationale for dividing the responsibility? Would it not be more appropriate that the Central Bank, given its responsibility under the Stock Exchange Act, should also be responsible for all aspects of business investment intermediaries? I suggest that it would be more appropriate. It would also create a little more distance between the Department and the Central Bank, which would be responsible for monitoring and supervision. If that system broke down, the Department and the Minister for Finance could oversee the Central Bank.

This Bill is to be welcomed in general terms. To quote a very famous Irishman “Property has its duties as well as its rights”. Anyone dealing with other people's funds, be they private individuals or companies, has a responsibility to be honest, competent and accountable. In so far as this Bill seeks to put into legislative form those types of responsibilities and standards, then it is to be applauded.

I do not necessarily agree with the exclusion from the scope of this regulation of members of the Stock Exchange. The Minister will recall that the provisions of the Stock Exchange Act do not appear to place as heavy an onus in terms of codes of conduct on [263] members of the Stock Exchange as is being placed by this Bill on business intermediaries.

It is pointed out at great length in the Bill that codes of conduct will apply and that people who are supervised and who have been granted the power of authorisation will have to comply with those codes of conduct. Yet, we exclude members of the Stock Exchange. I think the Minister would agree that there have been many occasions when members of the Stock Exchange have not lived up to the expectations that would be required of them by a code of conduct. Only a few weeks ago we debated the Stock Exchange Bill, which does not force the same type of code of conduct upon members of the Stock Exchange. That is an anomaly which the Minister should examine.

A business intermediary authorised in another member state of the European Union can now set up here, but it does not appear from this Bill that they will be subject to the same type of inspection and monitoring by the Irish supervisory authority. In other words, it seems that we are going to take on face value the authority or licence they receive from another member state. Again I have to ask——

Mr. Coveney: Information on Hugh Coveney  Zoom on Hugh Coveney  And it goes both ways.

Mr. Mulcahy: Information on Michael Mulcahy  Zoom on Michael Mulcahy  It goes both ways, but is the Minister satisfied that the supervisory bodies of each member state will apply the same ethical standards of compliance that we would expect? For example, the Minister will be aware as a matter of common knowledge that supervisory bodies in several European Union states have had question marks thrown over them by scandals. So, what steps will the Minister take to satisfy himself in this regard? What measures will the Central Bank and the Stock Exchange take to satisfy themselves that when a firm comes here from another member state of the European Union it will comply with the same standards that are expected of Irish firms?

[264] Ireland has an excellent reputation as a member of the European Union and is, by and large, overzealous and extraordinarily honest when it comes to European Union dealings. Is it fair to overburden Irish firms like this? If the Minister looks closely at the Bill he will see that monitoring of such firms by the Irish supervisory authority will be considerably less than for firms which get their licences from the Irish supervisory authority in the first place.

A smaller question is the exclusion of solicitors from the rigours of this Bill. Is the Minister satisfied that some solicitors will not use this exclusion to their benefit? He introduced the concept of incidental trading or business activity, but who is going to monitor that? Who is going to say whether or not a firm of solicitors is carrying on investment activity in an incidental way? Is it going to be the Department of Enterprise and Employment, the Central Bank or the Law Society and how is that monitoring going to be done? Will every or any firm be examined? Will it be done by self-assessment? These are questions that are not answered in this Bill and have not been alluded to in the Minister's speech, so perhaps in his reply he might assist in that regard.

This legislation is long overdue. In the past the bad news about such firms has only been revealed when, all of a sudden, a notice appeared on a door, a scandal emerged and people's life savings were wiped out. Insofar as this Bill seeks to do away with that, it is to be welcomed.

The power to grant or revoke authorisation is the key to this Bill. I am glad to see that there is a similar feature in the Stock Exchange Act whereby firms will have a period of time within which to get their licences. It can be difficult for firms that have been living in an unregulated environment to suddenly enter a regulated one. The Minister should ensure that his Department's officials are sympathetic and helpful to such firms. Many people earn their livelihood from this activity in an honest and competent way and it may be diffiassessment [265] cult for some such firms to come in from the cold and enter this type of overly-bureaucratic and difficult area of regulation.

There are many aspects of the Bill with which we would all agree — the protection of investors, the register of investment firms, the winding up power of the court and restrictions on advertising. A code of conduct should be drawn up for advertising because many aspects of advertising in the financial services sector can be misleading. The Minister should address that issue.

The control of auditors is important, as is the code of conduct for employed persons and, in addition, the bonding requirement is absolutely essential. The personal liability of officers, which is in line with the Companies Act, is to be welcomed as is the appointment of inspectors.

Getting back to the point of being over bureaucratic and over regulatory, I am slightly critical of one aspect of the Bill. There is a requirement that when a business investment firm is seeking a licence it must satisfy the supervisory authority as to the organisational structure and management skills of the proposed investment business firm and that adequate levels of staff and expertise will be employed to carry out its proposed activities. Is that type of thing really necessary? Has a firm really got to prove that it is up to the job and can do it? That could have the effect of stopping many people from entering the market place as investment intermediaries. Perhaps some people cannot prove themselves in advance, but they can prove themselves through their track record. Is there a case to be made in relation to this particular requirement? It might be waived for people who are entering the business for the first time so that they could show, after a year's activity and having said they would be able to do it, how they achieved this. It really is over-regulatory to say they must prove they can do the job in the first place, not only from the bonding or the capital ratio point of view — all of [266] those are absolutely important for protection——

Mr. Coveney: Information on Hugh Coveney  Zoom on Hugh Coveney  To what section is the Senator referring?

Mr. Mulcahy: Information on Michael Mulcahy  Zoom on Michael Mulcahy  Section 10(5)(f). It is overly bureaucratic and the Minister might look again at it.

In general, the Fianna Fáil Party is happy to welcome the Bill because it brings consumer protection to an area where it has not been available, that is, business investment, the purchase of shares, units derivatives and so on. It is another example of Ireland being spurred into action by our membership of the European Union. The question arises — as in so many other areas of legislation — why we or the EU did not act before now because these provisions will be far too late to help many people — but, it is better late than never. The legislation is generally to be welcomed and we can address the Bill section by section later.

I commend the Bill to the House. I thank the Minister and his officials for what is a long and technical Bill. It must have taken a long time to prepare.

Mr. Burke: Information on Paddy Burke  Zoom on Paddy Burke  I welcome the Bill. It has been long promised and is long overdue. It is a long time since the warning lights began flashing. Investment firms have collapsed leaving many people bereft of their life savings, without any remedy or anybody to act as their intermediaries or on their behalf. Of course, some acted with disastrous consequences. The reality is that we must have a proper regulatory framework.

I compliment the officials in the various Departments who contributed to the drafting of this technical Bill. It is a long, drawn out tedious Bill and it must have taken many hours of technical advice to put it together.

I realise it is very difficult to draft legislation which will protect the public and the investor from all types of misappropriations. The complaints bodies and the professional firms will have no problem [267] with the Bill. It is only the fly-by-night operators who set up with the intention of misappropriating clients' funds who will get into difficulty with the Bill.

The Bill is welcome in that it gives the State more direct control over the operations of investment intermediaries. No supervisory body, at whatever level, will be able to supervise every investment body because an investigator would be needed every day of the week. I welcome the fact that the Bill gives some of the professional bodies the job of regulating the activities of their own profession, such as accountants. I also welcome the hands off approach at that level; it is about the best one can do.

The Bill imposes a considerable onus on auditors whose function it is to police the accounts of solicitors. The reality is that if a rogue operator wants to mislead his auditor or hide from him clients funds, no auditor in the world would be able to discover them. The Department of Finance has consulted a wide range of interested bodies on the Bill, which was a long time in gestation. It will take us some considerable distance in regulating an activity which is growing every day of the week.

It is essential that the Government does not make itself the guarantor of investment intermediaries in the long run — and Senator Mulcahy referred to this. The Minister should say who is going to carry the can. I hope the taxpayer will not have to bail out those who defraud people of their life savings.

The legal profession has also had its fair share of disasters but it has its own system for compensating solicitors' clients. The Bill will regulate a wide range of firms from the smallest investment intermediary to the fund management arms of large financial institutions. There has been no similar regulatory system in the past, so the Bill is very welcome.

The Minister pointed out that there are likely to be substantial numbers of bodies regulated by the Bill. There are over 500 building society agents who [268] would be deposit agents for the purposes of the Bill. Most of these would fall within the restricted activity investment intermediary category. There are also about 2,700 insurance brokers and insurance agents, apart from tied insurance agents, so we can see this is an important Bill. It is not, therefore, before its time coming into the House.

We all have an interest in seeing that the fly-by-nights and the rogues are put out of business and that a system is put in place. The Bill addresses most of these issues. I hope it puts an end to the disasters and misery that have been endured by people who have lost their life savings or every single penny they had saved over a long time, to rogues. I hope the Bill will address most of those issues.

The Minister said in his speech that the basic rule of the Bill is that all firms covered by the Bill must have an authorisation from the Central Bank or the Department of Enterprise and Employment to undertake investment business. Can he give examples of companies that are classified as “restricted activity investment product intermediaries”? I do not think any examples are given. These people and companies can operate without an authorisation from supervisory authorities and I would like the Minister to give a few examples in that area.

In section 73 and 74, the Bill lays down the rules, the fines and the mechanism for setting up the board and this is welcome. It also makes provision for the Central Bank to publish a report of an inspector it appoints. It forwards it to the Minister for Finance or the Minister for Enterprise and Employment who, in turn, can decide to lay the report before the Houses of the Oireachtas. That too is welcome. When it is brought before the Houses of the Oireachtas the public can find out what has happened, and if there have been shenanigans, as happened in the past.

I welcome the Bill. It will go a long way towards sorting out the many serious problems that have arisen in [269] relation to rogue operators and it will deal with them in the long run.

Mr. Mooney: Information on Paschal Canice Mooney  Zoom on Paschal Canice Mooney  I endorse the comments made and welcome the Minister of State to the House. This is the first opportunity I have had to meet him in his official capacity and I wish him well in his recently appointed brief.

Like my colleagues, I welcome this legislation. It is a measure of our growing sophistication in financial matters that this highly technical and complex Bill is before us today. The growth of the International Financial Services Centre places Dublin, and Ireland, as one of the key players in the international investment market. Dublin now competes with other offshore investment areas within Europe, such as the Channel Islands, the Isle of Man and Luxembourg, for investment funds totalling billions of pounds annually.

It is inevitable that the movement of such large funds internationally — sometimes within seconds, due to advanced technology — should attract criminal elements, people who have little compulsion exploiting the attraction of increasing one's wealth by investing in the stock market. The effect of the Bill will be to outlaw the more unscrupulous independent investment advisers who abscond with a client's money instead of placing it in investment funds as requested.

The Bill brings us into line with our EU partners and will meet obligations arising from the EU Investment Services and Capital Adequacy Directives. It is also complementary to the Stock Exchange Act which provides for the regulation of Stock Exchange member firms. However, due to the virtual explosion of activity in financial investment services over the last ten years in this country, the vast bulk of investment firms are not stockbrokers. This Bill provides for the regulation of investment firms covered by the Investment Services Directive.

I welcome the provision whereby all investment product intermediaries will be covered by what the Minister refers [270] to as the written appointments regime. In future any investment broker passing an investment order to an institution will now require a written appointment from that institution which will result in the institution rather than the intermediaries being held responsible for honouring the payment in all circumstances. The Minister indicated here that this involves cases where the intermediary absconds with a client's money.

The scale of potential investment in this country cannot be underestimated. For example, within the last 24 hours a major stockbroking firm in this city announced plans to raise £3.2 million under the section 35 tax incentive scheme for a new film, Divine Rapture, which features Mr. Marlon Brando and Mr. Johnny Depp and is due to be shot in Ireland next month. The attractiveness of section 35 is such that for people availing of the loan facility the projected tax free return is 41 per cent over the remainder of the current tax year.

On the basis of a minimum investment of £5,000, this investment is targeted at the small to medium investor, which is the growing area of investment funding in Ireland. This is one example where unscrupulous middle men and women, operating under the existing law, could attract people who with the best will in the world can see the benefits of such an investment but might ignore the credibility or status of the individual to whom they entrust their money.

This is the kernel of the Investment Intermediaries Bill. It is an important protection for the consumer, not only in Ireland but for any financial dealings with an intermediary throughout the EU. It should be noted that the consumer may still lose considerable funds, as dabbling in the Stock Market can be a risky business — I do not necessarily speak from personal experience. At least the public is now protected from any misappropriation of their investment funds by fly-by-night or cowboy operators who are active in what is a potentially a lucrative field of financial investment.

[271] The legislation does not guarantee that once the funds have been deposited with an investment house they will make money — would that it were so — but it sends a signal through the international community that Ireland is developing a growing reputation as a financial services centre and consequently will provide a high quality service in which anyone can have complete confidence. As the Minister correctly points out, reputations are hard won and easily damaged, particularly in financial services. It is essential we put in place a regulatory system which meets European standards. This Bill goes much further and fills gaps in our domestic system of regulation of financial investment services. The Minister dealt with this in great detail throughout this 80 section Bill, and that is to be welcomed.

Although it is not within the scope of the legislation, we should reflect on the enormous damage done to the City of London by the failure of investments owned by the Lloyd's Names and the more recent Baring's Bank debacle. In the latter case the evidence suggests a small group of people, operating within the bank's Far Eastern operation, diced with hundreds of millions of pounds in clients' funds in order to make a financial killing. While they operated under the umbrella of a major banking company, the evidence points to the reality of human frailty, and possibly greed and ambition, traits which tend to emerge where large sums of money are being invested.

The Minister said that while smaller firms may be more likely to fail in the financial services sector, it is of particular importance that the larger firms be regulated as well, as a failure in such cases could have consequences for the financial system as a whole. The Minister would share my view that if a failure on the scale of Baring's or Lloyd's were to occur in the fledgling Dublin financial services centre, its impressive progress would be set back by at least a decade. It would also have horrendous [272] financial implications for the Irish economy.

I am satisfied that despite the complex nature of this Bill, which encompasses 80 sections, the Minister and his Department have done a good day's work in seeking the widest possible consultation to present us with legislation which, once enacted, will provide us with valuable consumer protection in an area where the Government needs to be ever vigilant due to the rapid changes in financial services and the technology surrounding them. I concur with the Minister's view that this Bill will provide an extra layer of confidence, not only among the public but among the financial institutions within the EU and beyond, in an activity which makes a significant contribution to the Irish economy. I wholeheartedly welcome the Bill.

Mr. Calnan: Information on Michael Calnan  Zoom on Michael Calnan  I welcome the Minister to the House to introduce the Investment Intermediaries Bill. When I saw the Bill I thought it was a formidable document; when I read it I realised it was even more formidable than I thought, so I turned to the explanatory memorandum.

Mr. Coveney: Information on Hugh Coveney  Zoom on Hugh Coveney  It is easier.

Mr. Calnan: Information on Michael Calnan  Zoom on Michael Calnan  I found that fairly baffling too. However, I welcome the clear language of the Minister's contribution, although parts of if were confusing. When dealing with high finance a person like me is bound to be baffled.

Acting Chairman (Mr. Maloney): Information on Sean Maloney  Zoom on Sean Maloney  Cork people are well used to it.

Mr. Calnan: Information on Michael Calnan  Zoom on Michael Calnan  A few weeks ago we discussed what is now the Stock Exchange Act, which dealt with a stock exchange set up in the last century and legislation from the early part of this century. This Bill deals with an area where no laws or only flimsy laws existed in the past. It seeks to tighten up the laws relating to financial services. It is not before time. We are being prompted somewhat by [273] the EU, in that the Investment Services Directive and the Capital Adequacy Directive lay down European standards.

We must welcome the decision that the Department of Enterprise and Employment and the Central Bank will be the supervisory authorities for investment firms. It is necessary to have the power of those bodies when regulating investments because many people have seen their life savings go down the drain. People who had hoped to make money from their investment for their future found the bank they dealt with was gone. They may have worked hard, saving from a small wage. We should provide proper protection for our investors.

We must also develop an element of trust. Throughout this country people have hidden their life savings in their homes, where it is in danger from thieves who may attack them for money. If a person goes regularly to a bank with his savings, it will be known that he does not keep money in the House. It is important to develop that trust and to have regulations to protect investors.

We need an orderly regulation of investments and of firms in that sector and we have to satisfy both Irish and European law. If we want European standards for this country we must adjust our laws accordingly. We must have a good name in Europe and we must get clearance from Irish supervisory bodies such as the Department of Enterprise and Employment and the Central Bank so that Irish firms can go to Europe. If a European firm which does not have a branch here wants to invest in Ireland, the same rigorous rules and regulations should apply to them as apply to our companies. It should not happen any other way. We must get our house in order and we hope that all other countries will do the same.

The Minister referred to accountants and solicitors, who are represented by professional bodies. In the past they have been careful to regulate their affairs properly in order to keep the high standard of their profession. That [274] is recognised in this Bill. However, how far can we stretch “incidental to his or her normal professional practice”? Most people will accept this in the spirit of the law, but the law must be tightened in this regard because we do not want loopholes which allow rogues to get away with things they did in the past. Most people do their work properly, but there will always be a few who will destroy the barrel of apples.

The Minister mentioned codes of conduct. It is extremely important that firms deal honestly and fairly with their clients, that they show skill and care, that they seek enough information from their clients to ensure that they provide appropriate advice or services and that they make adequate disclosure of relevant information to clients. We are talking about people who want to invest their life savings, therefore they should be given the best advice.

Receipts for payments were also mentioned. In the past money was given to people who did not issue receipts and it was never recovered. We have a responsibility to look after clients' money and anyone who breaches that should be severely penalised. This aspect is covered in the Bill.

The Bill deals with probity and competence of persons involved in investment business firms. It is important that responsible people invest clients' money. This happens in firms which have good names and which employ people to advise their clients properly. Matters should be referred to the courts in the case of a dispute. I am glad that certain issues can be brought before the Houses of the Oireachtas. It is important that items which may cost public moneys can be openly discussed in the Dáil or Seanad.

This is a complicated and technical Bill, but I hope it will prevent rogues from taking people's investments.

Minister of State at the Department of Finance (Mr. Coveney): Information on Avril Doyle  Zoom on Avril Doyle  I thank Senators for their contributions and I will answer the questions raised. I am pleased that there is broad support for [275] this Bill, which has a number of aims. It will protect consumers of investment services; it will ensure that the Irish regulatory system meets European standards and, in so doing, it will ensure that Irish investment firms are entitled to do business throughout the European Union; and it will also increase the level of protection available to the financial system as a whole. By ensuring proper regulation of the investment industry, the Bill will protect the reputation of Ireland as a centre for financial services and, therefore, protect jobs in the industry as well.

Rather than reading my briefing notes, I will now deal with the questions asked, particularly by Senator Mulcahy. The first question he asked related to the danger of over-regulation. This is a matter of balance between giving the necessary protection and imposing regulations to do so. One of the reasons there were so few amendments in the other House and none here was that — the Senator alluded to this when he complimented my officials — there was an extremely long period of consultation between representatives of the industry and consumer associations. It was not an imposition of regulations invented in the Department of Finance, but the reverse. Some unduly bureaucratic elements were imposed on us by EU directives, which tend to be bureaucratic because they are written in broad terms for 12 nations. Officials engaged in a high level of consultation over a long period of time and the balance is as good as we will get. We cannot have the type of protection we need without a degree of bureaucratic control as well.

The Senator asked who pays for the cost of regulation. The Bill includes a provision for charges for supervision, but no decision has yet been made about imposing charges or what those charges might be. We do not believe that the cost will be a relevant factor relative to the size of the market and the amount of protection being provided. It does not mean the consumer will pay more; the amount will be small relative [276] to the overall amount of business involved.

Mr. Mulcahy: Information on Michael Mulcahy  Zoom on Michael Mulcahy  Will it stop small firms from entering the market?

Mr. Coveney: Information on Hugh Coveney  Zoom on Hugh Coveney  I do not think so because most small firms — the restricted product intermediaries — tend to be regulated from outside the heavy side of the regulatory system. Small firms will not be unduly imposed upon; we are concerned that this does not happen.

As regards the division of responsibility between the Central Bank and the Department of Enterprise and Employment and why we are using the two, the reason we are doing so is that both of these are already significantly involved — the Department on the insurance side and the Central Bank on the general financial side. We are keeping that division and we are adding to the Department those matters which are more closely associated through insurance. In other words, we will not impose two regulators on a company which is doing insurance business and additional business; it will continue to be regulated by the Department of Enterprise and Employment. Likewise the Central Bank is the existing regulator for firms that come in under this Bill; we are trying to achieve a single regulator for each firm rather than two.

With regard to the exclusion of members of the Stock Exchange from the Bill's tougher requirements, section 38 of the Stock Exchange Act, 1995, will ensure the Stock Exchange member firms will be subject to practically identical codes of conduct as is approved in section 37 of this Bill; this section was taken from that Bill. There would be no intention of having a different level of regulation for the Stock Exchange members as opposed to the members under this Bill. I am glad the question was asked as it is important that message would go out.

The Senator asked about the fact that EU member countries' investment firms could operate here under the EU authorisations in their own countries. That is [277] true but it is a double edged sword; in other countries they might say the same about us. I do not know if we could claim to be the best and that everybody else coming here is less regulated. As well having the right to operate within the EU from the regulation in their own country, these investment firms would be required to fit in with the local codes of practice in each country in which they operate.

The Senator may take it they would not be operating under a less regulated system than their competitors here. However, the same question could be asked of us in England or France, for example. Part of being a member of the EU involves trying to free-up members to operate in all the states and then impose individual local regulations on them. That is the basis of the system.

Mr. Mulcahy: Information on Michael Mulcahy  Zoom on Michael Mulcahy  Irish firms might use that as a loophole.

Mr. Coveney: Information on Hugh Coveney  Zoom on Hugh Coveney  We are operating within a European framework and it would not really be for us to consider that our investment could operate throughout Europe but others could not operate here. The local codes of practice should overcome the problem to which the Senator alluded.

Several Senators asked what “incidental” means and how it is to be determined. “Incidental” by its nature means a much lower level of activity than the normal run-of-the-mill business a firm is engaged in. The only way to measure it is in relation to turnover. There is a rule of thumb in England, but it is not included in the Bill and I do not think it could be put in legislation — it is not in the UK legislation either. In the UK they conclude that if the activity approaches 20 per cent of turnover it would no longer be regarded as incidental.

In the case of solicitors, the Law Society would require solicitors to advise them if their turnover in this so-called “incidental” business is climbing and it would be regulated in that way. I agree it is slightly imprecise but it is [278] hard to make it precise. However, if it were to exceed 20 per cent of one's turnover one could no longer refer to it as “incidental”.

Senator Mulcahy also asked if officials will be sympathetic to firms who are now entering a new regulatory environment; the answer is “yes”. I say that with some confidence. This Bill was a long time in gestation because there was a lot of consultation and notice was taken of what was said by the industry.

Advertising is an important element of this subject. We have all read in newspapers outlandish claims of returns of 30 per cent per annum. Those who are most vulnerable are those who get a substantial sum of money on redundancy, for example. It may the largest, or the only, sum they have ever had. They see the banks offering 4 per cent or 5 per cent and somebody else offering perhaps 20 per cent. That poses a great danger. In this legislation we are taking a strong approach on advertising which is exaggerated and patently untrue and which, while it may be technically possible, does not in any sense describe the level of risk involved with such returns. The Bill deals strongly with that.

In the Dáil last week Deputy McCreevy laid great emphasis, with which we agreed, on an educational aspect. In addition to disallowing the advertisement of things which are untrue or dangerously misleading, the State should take the lead in doing some promotion of its own to warn people against the dangers, for example, of paying cash to an intermediary when one would be safeguarded by paying a cheque to the product producer through the intermediary, or warning people about falling for exaggerated claims on returns.

Education for the more vulnerable is needed and while that is not in the Bill I wanted to mention that we considered those two matters together and we will do something in that area. There will be a code of conduct in relation to advertising.

[279] Senator Mulcahy also mentioned the difficulty for a new firm proving its suitability for authorisation by reason of its not having a track record but having competence. In such a case they would not be precluded from authorisation but they might be required to restrict their expansion initially until the authoriser has more confidence that they can do what they say they can. Other than that we would not see it as a bar to getting into business.

Senator Burke asked about the restricted activity investment product intermediary. “Restricted” refers to the fact that it does not take cash but that it only takes cheques made payable to the product producer. It will generally be the smaller high street financial adviser who may often be acting for a building society as well and doing a little investment advice business in towns all over the country. They will be regulated but it is not felt necessary to regulate them in a heavy fashion because generally they are not handling cash.

Question put and agreed to.

Agreed to take remaining Stages today.


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