Wednesday, 16 June 2004
Seanad Eireann Debate
Minister of State at the Department of Justice, Equality and Law Reform (Mr. B. Lenihan): This Bill is complementary to the Central Bank and Financial Services Authority of Ireland Act 2003 which, as Senators will be aware, was signed into law last year. That Act established the Irish Financial Services Regulatory Authority to oversee the activities of financial institutions, including their treatment of customers.
This Bill provides for the establishment of a financial services ombudsman to deal with consumer complaints about financial institutions; the establishment of consumer and industry consultative panels to advise the financial services regulator; new reporting and auditing obligations for financial institutions; power for the financial services regulator to impose penalties on financial institutions for failure to comply with regulatory requirements; a right of appeal to the appeals tribunal in the matter of certain supervisory decisions of the authority; new regulatory requirements for money transmission and bureau de change businesses; and miscellaneous amendments to financial services legislation.
The greater part of the Bill is based on the recommendations of the report of the implementation advisory group on the establishment of a single regulatory authority for the financial services sector. This report, known as the McDowell report, recommended a new architecture for financial services regulation in this country. The Act passed last year put in place a key component of that architecture, the new financial services regulator. This second piece of legislation provides the remaining pieces of the architecture recommended by the McDowell report.
The new reporting and auditing obligations for financial institutions arise from the report of the review group on auditing. The main recommendations of the group have been implemented in the Companies (Auditing and Accounting) Act, which was enacted at the end of last year. The group’s recommendations that related specifically to financial institutions are being implemented in this Bill. The new regulatory requirements for money transmission and bureau de change businesses implement recommendations of the financial action task force, an OECD-related body, on the prevention of money laundering and the financing of terrorism.
The miscellaneous amendments are mainly technical in nature, correcting flaws and errors in existing financial services legislation that have emerged in the course of practice. They are further pointers to the need for a consolidation of financial services legislation, something that was also recommended by the McDowell group. I am happy to tell Senators that a consolidation Bill is now included in the Government’s legislative programme.
The drafting of the Bill has benefited greatly from the public consultation process on its contents. The consultation process has led to significant changes, especially in the part dealing with the financial services ombudsman. I thank the many organisations and individuals who took the trouble to comment on the original draft heads.
The Bill as presented to the House has also benefited from detailed scrutiny in the Dáil and has been significantly amended in its passage through that House. Many helpful and constructive amendments were put forward by Opposition Deputies, some of which the Minister was happy to accept. I mention in particular significant improvements made to the provisions of the Bill dealing with sanctions, the ombudsman and the Consumer Credit Act. The result of this is a more considered set of legislative proposals.
The financial services ombudsman will deal with complaints from consumers about their individual dealings with financial institutions. Broader issues of consumer protection are the responsibility of the financial services regulator and specifically of its statutory Director of Consumer Affairs. The Bill provides for close co-operation between them and with the pensions ombudsman. This will allow the financial services ombudsman to bring patterns of complaint to the attention of the financial services regulator so that the consumer director can consider whether regulatory action is necessary to deal with the issues highlighted.
Codes of conduct issued by the financial services regulator will form one of the important criteria against which the ombudsman will assess complaints. There is also provision for close co-operation with the Registrar of Credit Unions within the financial services regulator when dealing with complaints involving credit unions. Some amendments to the Credit Union Act are also provided for so that members of a credit union will have the same right of access to the ombudsman as customers of other financial institutions.
In terms of how the ombudsman will deal with complaints, the intention is that a customer should first make her or his complaint to the financial institution concerned. It is in everyone’s interest that financial institutions deal with their customers in a fair way and treat their complaints seriously. If a customer is not satisfied with the response of the financial institution, he or she can refer the complaint to the ombudsman. The ombudsman will try to reach an agreed solution between the customer and the financial institution. If this fails, the ombudsman will make a formal determination on the complaint. The ombudsman’s determination will be binding on both parties, subject to their right to appeal to the High Court. The overall intention is to provide a simple means for aggrieved consumers to have their complaints dealt with fairly and quickly by an independent person.
The Bill provides for the ombudsman’s office to be overseen by a council. The Minister will appoint the members of the council after consultation with his colleague, the Minister for Enterprise, Trade and Employment. The council will consist of up to ten people and people from both consumer and industry backgrounds must be included. The council will be responsible for appointing the ombudsman and any deputy ombudsmen. It will also be responsible for laying down the detailed rules governing the scheme, including the levying of charges on financial institutions to fund its operation.
There are strong accountability arrangements built into the Bill’s provisions. There is a requirement for the ombudsman to produce an annual report as well as an annual strategy statement, both of which will be laid before the Houses of the Oireachtas. Both the chairman of the council and the ombudsman are obliged to appear on request before a joint committee of the Houses of the Oireachtas.
The structure set out in the Bill differs from that originally proposed. This reflects the comments received during the consultation process and subsequent contact with the present ombudsman schemes for the insurance and banking sectors. The existing ombudsman schemes have agreed in principle to amalgamate with the new statutory scheme, with their staffs transferring to the statutory scheme. This should prove a highly advantageous arrangement for all concerned, not least the consumer. The statutory scheme will be able to build on the track record and expertise of the existing schemes and their staffs, avoiding what would otherwise be a loss of continuity and expertise. Specific provisions are included in the Bill to facilitate the amalgamation. The Bill also provides for investigations commenced under the existing schemes to be continued under the new scheme.
I now turn to the provisions for the appointment of consumer and industry panels to advise the financial services regulator. The establishment of such panels was recommended in the McDowell report. It is desirable that the financial services regulator pays close attention to the views of those whose interests it is mandated to promote, namely the consumers of financial services, and the providers of those services, the financial institutions.
The provisions in the Bill have been altered significantly in light of the comments made in the course of the public consultation process. The Minister will appoint the panels only after consulting the Minister for Enterprise, Trade and Employment and, in the case of the industry panel, the Taoiseach. The financial services regulator will be obliged to consult the panels on all general policy matters. The Minister for Finance is also obliged to consult both panels before approving the annual budget of the financial services regulator. Reports and opinions of the panels will be published.
The financial services regulator can be obliged to state its reasons publicly if it does not agree with a recommendation from a panel. The regulator is obliged to provide appropriate support to the activities of both panels. Either or both panels can appoint specialist advisory groups on specific issues. The consultative panels will provide a useful reality check for the financial regulator on how its activities are affecting consumers and financial institutions. Again, the public consultation process has provided the impetus for change in the proposals set out in the Bill, which should further enhance the effectiveness of the panels.
The general recommendations of the review group on auditing have been given legislative expression through the provisions of the Companies (Auditing and Accounting) Act, which passed into law at the end of last year. Apart from establishing the new Irish Auditing and Accounting Supervisory Authority, the Act also contributes a further important chapter to the strengthening of corporate governance standards in Irish companies. Of particular importance are the provisions for an annual statement from directors, covering the company’s compliance with company, tax and other laws that are material to the company’s financial position. The compliance statement must be reviewed by a company’s auditor who is obliged to give a view on its reasonableness or otherwise.
The provisions in this Bill cover the add-ons recommended by the review group regarding financial institutions. It provides that the Financial Services Regulatory Authority can require financial institutions to provide it, or another statutory authority, with reports on compliance with obligations under financial services and other legislation. It provides that auditors must make an annual positive statement that they have not come across anything in their examination of a company’s finances that would trigger a duty to report to the financial services regulator under various existing statutory provisions. It also gives the regulator the power to require an auditor to provide it with information relevant to its statutory duties. The provisions in this part should be viewed in the context of the Government’s determination that we must do all we can to promote the highest standards of corporate compliance in the financial sector.
The McDowell report recommended that the financial services regulator should have the power to impose penalties directly on financial institutions, subject to a right of appeal. At present, the financial services regulator can generally only do so through the courts. The Bill provides for penalties that may be imposed on a financial institution if it breaches a requirement of an Act, regulation or code of conduct. The penalty can take the form of a reprimand, a fine or both. The regulator is also given the power to direct the refund of a charge incorrectly applied. There is also provision for managers to be disqualified from employment in the financial services sector. There is a right of appeal to the appeals tribunal already provided for in the Act passed last year.
The McDowell report also concluded that the appeals tribunal provided a suitable mechanism for review of the financial services regulator’s supervisory decisions. The Minister has therefore provided in the Bill for amendments to existing financial services legislation to provide, in general, for a right of appeal to the tribunal rather than to the High Court.
The system of authorisation that at present applies to bureaux de change is being extended to persons engaged in money transmission business. The main purpose of the authorisation system is to facilitate the effective implementation of the anti-money laundering and anti-terrorist funding provisions of the Criminal Justice Acts. The present authorisation regime that applies to bureaux de change is also being amended to encompass the objective of preventing the financing of terrorism. The new provisions address international concern at the possible use of such businesses as conduits for the financing of terrorism.
The Bill includes a wide range of mainly technical amendments to various pieces of financial services legislation. A small number of these amendments are more substantive in nature, as I will now describe.
Some of the amendments to insurance legislation go beyond the purely technical. I refer in particular to the amendments designed to restore the right of an administrator appointed to an insurance company in difficulty to have access to the insurance compensation fund. While we have not had a failure of an Irish insurance company for almost 20 years, it is important that we have in place a range of options to deal with such a situation. The amendments restore the option that was availed of by the then Government when PMPA and ICI got into difficulties in the early 1980s.
I also draw attention to the proposed amendment to section 77 of the Central Bank Act 1989 on mergers and acquisitions in the banking sector. The heads of the Bill provided for the removal of the role of the Minister for Finance in this area, as recommended in the banking sector strategic issues report published in August 2000. While the Minister respects the arguments put forward by the distinguished members of that working group, he has decided, with Government approval, that it would be going too far to remove totally the element of political judgment and accountability that the current arrangement provides. The proposed revision to the 1989 Act sets out the criteria that the Minister for Finance must use when exercising her or his judgment.
I should also draw attention to five proposed amendments to the Consumer Credit Act 1995. One amendment provides that the Minister may extend the provisions of the Act to cover business consumers. This arises from a McDowell report recommendation that non-consumer money-lending should be treated in the same way as consumer lending. The Minister would only intend to exercise this power after consultation with the financial services regulator and careful consideration of the arguments for and against.
Another amendment arising from the McDowell report provides that all institutions who lend on the security of a borrower’s principal home be made subject to Part IX of the Consumer Credit Act. Part IX provides protection to a borrower by imposing various obligations on housing loan lenders — for example, to warn the borrower explicitly about the danger of losing the family home if repayment conditions are not met.
The third amendment to the Consumer Credit Act extends the definition of mortgage intermediary to cover so-called introducers. This amendment is being made on foot of a recommendation from the Director of Consumer Affairs.
The fourth amendment gives the regulatory authority the discretion to issue multi-annual authorisations to mortgage intermediaries, as is the case with other types of intermediaries. Finally, it is being made an offence for a financial institution to charge a customer in excess of rates notified to the regulator.
With the passage of this Bill, we will have put in place the essential building blocks of a modern, consumer-focused regulatory system for the financial services sector in Ireland. We will also have contributed significantly to the objective of maintaining Ireland’s reputation as a business-friendly, but well regulated, domicile for international financial services activity.
Mr. J. Phelan: I echo what the Minister said in his conclusion. It is appropriate that we should be discussing this Bill today, a number of weeks following further serious revelations in the financial services sector. I agree wholeheartedly with the comment he made in his final remarks there. I broadly welcome the Bill, which is a step in the right direction. I note from the Minister’s comments that we are to have a consolidation Bill as part of the Government’s legislative programme. I welcome that because there is certainly a need for it.
The Bill contains a number of key provisions, outlined by the Minister, which are welcome. The creation of a financial services ombudsman is certainly a move in the right direction. Such a facility will represent consumers in complaints against banks, building societies and other financial institutions. In light of recent events, the establishment of the consumer and industry consultative panels is also a key component of this Bill. The Minister referred to the new reporting and auditing obligations and the new powers which will be given to the Irish Financial Services Regulatory Authority to impose sanctions for breaches of regulations and codes of conduct. These four key elements of the Bill are to be wholeheartedly welcomed.
It is time a financial services ombudsman was appointed. For too long consumers have appeared unimportant in the context of financial services. Fine Gael recognises at first hand the level of frustration that exists among consumers dealing with financial institutions. Last November we launched the website ripoff.ie. Since its launch the website has had many thousands of visitors. They have listed several examples in different parts of the economy but certainly in the financial services sector of how they have been ripped off. One Irish man was charged €4 by one of the major banks here for every ATM transaction he made while in Britain; another bank charged one of its customers €12.70 for the renewal of an existing overdraft facility upon which the bank would make money. We are all familiar with the ridiculously high costs of credit card interest rates which can be anything up to 18% when the current ECB rate is less than 4%. It is important that customers are represented. I am, therefore, glad that a financial ombudsman is to be appointed to look after the interests of customers.
The Irish banking sector has serious questions to answer. The AIB scandals which emerged about a month ago have the capacity to endanger the Irish financial services sector. If I were not here, I would probably be in that sector. There are many people like me who currently earn their living from that sector. Over the past ten years that sector has seen major increases in employment and in the services it provides. It is vital that we act now to ensure the reputation that has been established in this country is reaffirmed. The establishment of a consumer ombudsman will go a long way towards re-establishing and reaffirming the reputation we have built up over the past number of years. For a long time people have felt that there is no one there to fight their corner. The big financial institutions are very large corporate bodies and it can be often difficult for a consumer who has a grievance with an institution to get that grievance heard and to get fair play. The new provision is to be welcomed in that sense.
There are other issues that need to be addressed such as the costs in this country of changing bank accounts. There is a need for proper scrutiny of companies involved in debt consolidation and for banks to pass on interest rates cuts as soon as they receive them from the ECB and not a week later as they currently do, thus pocketing millions of euro of consumers’ money in the process. These issues need to be tackled. The ombudsman should develop a role in that area in the next few years.
In view of what we have seen in the past few months the role of the consumer and consultative panels in the Bill has taken on an even greater significance. In his remarks, the Minister referred to these panels providing a reality check. That is welcome. The Opposition wants to be reassured that they will not be made up of people who are appointed on the basis of party politics. These people should be leaders in their field and should provide impartial practical authority on important areas. In other sectors, we have seen where boards and panels have been set up and packed with party political appointments. It is important that the brightest and best people in the financial services sector would be encouraged to take part in these panels.
This is a good Bill and Fine Gael agrees with it. It contains some flaws but these can be addressed. There is a sense of frustration among consumers with the rip-off Ireland that has developed over the past few years. We need to ensure the consumer becomes central to the financial services system. The Bill is a step in the right direction and I have no problem in supporting it.
Dr. Mansergh: I welcome the Minister and wish him a happy Bloomsday. Ulysses has references to a number of financial scandals, one of which Senator Ross might be aware. Joyce referred to the name Dubedat, and Dubedat was a stockbroker in the 1880s. He used clients’ funds to build a large house in Killiney that was recently put on the market, albeit refurbished, for approximately €8 million. One day it collapsed so he headed for South Africa and acquired an exotic partner having deserted his wife. The House will be reassured to hear that when he came back he spent a few years in prison. The only reason it comes to my mind is that when I am in Dublin I live in the house in Killiney that was built for the deserted wife.
Disappearing with clients’ funds is an extreme example of the dangers that have to be faced. A good regulatory system should stop practices that lead to that. There is still a certain amount of anecdotal evidence that the cash flow generated from clients’ funds is used purely for private purposes. That is an extremely dangerous practice and we have seen far more recent examples of it since the 1880s.
There are two angles to this issue, one of which is domestic while the other centres on international financial services. As clients of banks, credit institutions and so on, we all have an interest in their regulation. Equally, the international financial services sector is very important to this economy. It employs approximately 16,000 people. The continued good regulation and operation of that sector is important, not only for the employment it provides, but also for the irreplaceable revenues that it generates for the Exchequer.
It has not been explicitly stated by the Minister of State in his speech to the House nor in the debate that took place in the other House that this legislation is a product of a consensus following a lengthy consultation process. The financial institutions and the various consumer interests are reasonably happy with it. Its genesis was in the McDowell report which took some time to put together and on which it took even more time to get a Government decision.
On the domestic front, we have unfortunately moved away from an age of innocence which existed 40 or 50 years ago, where people trusted the financial advice given to them and respected the bank as a figure of authority. As the country has become more prosperous, people are looking for places to put their savings. There is a variety of financial instruments including investment funds and pension funds. The ordinary person has some difficulty distinguishing between what is good and what is not. Confidence is not increased when instances occur of overcharging, loaded advice and the recommendation of duff funds, which depreciate a few years later and which will provide a miserable pension, notwithstanding the glowing terms in which they were sold. We have seen recent examples of favouritism with the placing of investments by insider privilege groups in institutions while the ordinary customer just gets the leavings. At worst it reminds me of the song of the master of the house in Les Miserables, who takes a little slice here, a little slice there and a little slice everywhere.
Products are peddled without the integrity one might expect. People feel that they are in a situation of caveat emptor rather than one where they can place trust in the advice given. It is a good thing that people ask questions and have become more critical. In the case of offshore accounts, we have seen instances where people were led up the garden path. I am not denying personal responsibility. However, some people who put their faith in the advice they were given found, when they were the victims, that the people who had advised them were nowhere to be seen.
The appointment of an ombudsman will help establish more trust in the system. If a dispute or complaint about a product is not resolved there will be a recourse to the ombudsman and if patterns of difficulty emerge the regulator can take consequential action. It is a good thing that the regulator will be advised by both consumers and industry and that accountability will be required. The point was made validly in the other House that when a new office is established the officer concerned should be accountable to the Oireachtas. It should not be within such an officer’s discretion to refuse to appear at an Oireachtas committee.
I also welcome the fact that the regulator will have power to direct the refund of a charge incorrectly applied. We have seen instances of that in the very recent past. I also welcome the fact that it will be an offence for a financial institution to levy a charge, often without the knowledge of an account holder, which has not been notified to and authorised by the regulator.
The Minister of State evoked debates, which I well remember, about the collapse of PMPA and ICI. Fortunately, we have not had similar repetitions since but one can never be certain, either in good times or bad, that situations might not arise which would have to be dealt with.
Despite contrary recommendations, I agree with the decision that the Minister should retain the power for mergers and acquisitions of banks. That provision is of potential major public interest and it is important that the Minister retain this responsibility. Ministers need to be careful about divesting themselves of too many powers so that if some major crisis happens they are entirely powerless to affect or influence the situation.
May I correct an underlying assumption in what Senator John Phelan said? He said it was important that the panel contain the brightest and best rather than party political nominees. The implicit assumption of that is that a party political nominee must be the dimmest and worst.
Dr. Mansergh: Of course, that is not the case at all. We ought to recognise that there are people who are very well qualified who may also have a party affiliation. The practice in filling panels of these kinds has been that the vast majority of nominees do not have strong political affiliation. There have been instances in the recent past where people who have been appointed to the chair of bodies have come from Senator Phelan’s party. I am thinking of former Deputy Alan Dukes and the ten year review of agricultural policy.
I welcome the Bill. It is important from a domestic point of view because of the difficulties we have had with banks. It is equally important as underpinning our now very important financial services sector which has come from absolutely nowhere in 1987 to become a major and significant European and international financial services centre.
Mr. Ross: I welcome the Bill in a limited way. The speeches made on the Bill and the reactions of Members of the House are, understandably, a response to recent revelations about AIB. However, if one returns to first principles of regulation of the financial services sector one finds that the Bill is lacking in the kinds of solutions needed for what is a large and fundamental problem.
I say this because the principle benefit flagged in today’s debate is the penalties the Bill gives to the Irish Financial Services Regulatory Authority. I am doubtful about the value of those penalties. I see a virtue in plugging a gap in the original Bill by giving powers to the regulatory authority to punish those who offend the consumer in the ways we have seen. It looked somewhat ridiculous in certain instances where consumers were offended and ripped off by various banks and branches when the regulator, who was then the Director of Consumer Affairs, went into various banks which had offended in serious ways, ticked them off, got them to remedy the situation and then found that she could do absolutely nothing about the situation by way of penalties or prosecution. We are all responsible for allowing the 1999 Act to go through without that sort of penalty.
In Dublin Airport I spotted that a bank was doing something illegal. I complained to the Director of Consumer Affairs about it and it was found that the operation, a company called ICE, had taken either $21,000 or £21,000 from consumers over a very short period. The Director of Consumer Affairs forced ICE to remedy the situation and to close the gap, which was too wide and illegal, between the buying and selling prices.
They paid the money to charity, a suitable remedy. However, no penalty could be imposed on them and no prosecution could be taken against them. That was unsatisfactory. I was surprised to learn, because I thought I was well versed in such matters, that no action could be taken against them and that the money was then voluntarily donated to various charities.
The Bill remedies that type of situation. However, the penalties will not in any way act as a deterrent to banks intent on ripping off the public, as most of them are. I will explain my reasons for saying so. The great advantage of being a bank on which a penalty is imposed for the committing of an offence is that it can be paid off with other people’s money. It is a simple advantage which arose in the case of DIRT taxes and others. The major offender in the DIRT tax case was AIB although the Bank of Ireland was also an offender. What happened to them in that regard was that they willingly and happily paid up vast sums of money — AIB paid €90 million while Bank of Ireland paid €30 million — the most painless penalties ever imposed. If the Minister or I were to commit parking offences in a company car and the company continuously paid the clamping fees and so on, we would not be too worried about committing that offence if we did not get ticked off about it and we retained our jobs. I cannot recall the maximum penalties which can be imposed under this legislation but I do not believe they are punitive to a bank. In the current situation, the bank will be paying with shareholders’ money. Nobody cares all that much about other people’s money.
It does not make sense to include a protection which states that the penalty should not be so high as to cause the bank any financial difficulties. That is simply saying that the amount must be one which is relevant to the bank. That causes a bit of a problem for us because we are continuously reminded in this and the other House that the argument in this regard must be balanced. We must continuously balance consumer interests with the interests of having a sound and secure banking system. Therefore, we cannot impose on the bank a penalty which would shake its foundations or solvency. I understand the maximum penalty that can be imposed under this legislation is €5 million for a body corporate, a pittance to a major bank. It is a laughable amount which will not threaten banks, result in anybody losing a night’s sleep or be a deterrent to banks engaging in any of the malpractices in which they have willingly indulged. A €5 million penalty when one is making profits of several million every day is a small amount.
The argument continuously made by those in Government — it is extraordinary how the knee-jerk reaction between Government and Opposition changes in this regard — is that nothing must be done to threaten the Irish financial system. The Irish financial system is not threatened by anything that has happened in recent times. The offences uncovered have been a gross embarrassment to one bank in particular and, by association, to some others. The idea that the solvency of banks has been affected is nonsense. That has not happened. The only thing that will happen is that they will have to repay the money. There has not been a run on the bank’s shares, something which could provide an indication of what might happen. I and others expected that when the continuous drip of bad information regarding AIB came out there would be a signal from abroad of lost confidence in AIB resulting in the selling of shares by overseas shareholders. However, there is no evidence that has happened even though the overseas shareholders could sell their shares as a protective measure.
Let us lay the myth that the banks are threatened by anything that is happening or that we might do. That is not true. The provision of greater rather than smaller penalties for such offences would result in more confidence among overseas investors in the financial services sector. I do not believe a mega-scale type problem exists regarding the primary or secondary solvency ratios for the banks. They are the markers at which people from overseas look. There is a problem of credibility, for customers and for AIB. Where will young people wishing to open a bank account go now? They will quite rightly think twice before going to AIB because of their fear of being ripped off. That is fair game. That will happen given the events of the past few weeks. However, such issues will not threaten the solvency of AIB or anybody else. That argument should not enter into today’s debate.
The Irish banks solvency ratios are strong, share prices have remained strong throughout the crisis and there is no threat whatsoever. Therefore, they should not be treated with kid gloves, as is happening here today with the introduction in this Bill of small penalties. They should be treated far more severely. A problem arises in terms of the fundamental attitude of IFSRA. Let us not condemn it at this stage but let us issue one or two warnings about it.
The Irish Financial Services Regulatory Authority was set up following a row between the prudential and consumer sides regarding who would assume overall charge of the sector. There are may serious questions which must be asked of IFSRA. IFSRA was welcomed by the public following the split between the prudential and consumer divisions of the Central Bank. It was hailed as the saviour of the consumer. The case can be made that IFSRA let down the consumer in this instance. That is not a helpful thing to say but we are not here to say helpful things. We must not ask what IFSRA is doing now these offences have been discovered but why it did not discover them.
IFSRA was set up to regulate and, if one likes, to interfere with, inspect and examine our financial services on behalf of the consumer. However, not one of the many serious revelations, damaging to the consumer, was discovered by this regulatory body. What we have seen is a reactive body coming in heavy on the bank once offences were identified. What is worse is that this practice was endemic in one particular bank and not one of the 90 people involved in the retail section of IFSRA spotted it. It should have been reasonably easy to work out whether AIB foreign exchange rates coincided with the amount it should have been charging. The offence lay in the fact that they did not coincide. One wonders what IFSRA was doing in its checking. Why did it not spot the activities of the British Virgin Islands company, Faldor, in the case of the people at the top of AIB? One must ask whether IFSRA considers it to be in its remit to look at the top people at all. If a bank is being regulated, it does not just mean regulating its charges but ensuring that people are not on the fiddle as well. It means ensuring employees are not taking advantage to the detriment of the consumer or the shareholders.
This is a very serious problem for the new regulator. If the new regulator is very hot on penalties and reaction and very good on public relations, as it has been, but never finds out anything that is going wrong, it will invite people to continue with the jiggery-pokery that was taking place but to cover their tracks a little more carefully. This is a real danger. The lesson to be learned from the latest scandals is that if somebody wishes to indulge in illegal practices in a bank, there is really nobody to stop him.
It appears there is a culture in at least AIB in which nobody really blows the whistle on anybody else. It is absolutely inconceivable that a large number of people did not know exactly what was taking place. I refer to everyone from top to bottom because there was significant malpractice at the top in the case of Faldor and malpractice at the bottom in the case of the consumer abuses. That people were turning a blind eye to the malpractices means there is a real culture problem extending from top to bottom in AIB, dictated and approved by the top and practised by people throughout. However, the regulator, which was in office for 12 months, spotted neither form of malpractice for some reason. This is a sobering thought and the problem will not be resolved by just whacking those involved on the heads with a penalty of €5 million. This sounds like an awful lot but is actually a pittance. Will the Minister take this thought away with him and respond to it in his reply?
The second area which I find so difficult to tackle and which this Bill does not tackle adequately is financial services, about which I can speak with some experience because I worked in the area for many years. The biggest enemy of the consumer is ignorance. The capacity of people to throw their money at institutions and request that they do what they like with it is quite staggering. I noticed it when I was a stockbroker and saw it in other areas. It is quite stunning and people still do it. One could place advertisements in the newspapers and, regardless of what they state, hundreds of thousands of euro would come into one’s bucket shop the next day. People are almost relieved to find others who say they know what to do with their money. That is a serious human problem which we must resolve. I notice it specifically in areas that have been tackled by various regulatory bodies.
Consider tracker bonds in this regard. The appetite for tracker bonds in Ireland is quite stunning at present. However, if one challenges somebody to state how they work, he will not be able to tell one. They are the most complicated possible instrument one could imagine, involving some very sophisticated transactions with derivatives that nobody understands properly except those who have created them. What happens is that they are sold as absolutely riskless on the basis that people will get their capital back. They understand the message that they will get their money back — they probably will — but they do not understand very much else.
If IFSRA is to mean anything and if it is to have a long-term mission, it should explain to people who have small amounts of money that they are putting their money in great danger wherever they put it. The financial world is full of high-risk counterparties, as they are called, whereby one is not guaranteed any return at all. There is always a very large health warning on all these particular instruments. Some, of course, are less dangerous than others, Government bonds being an example. Even Irish Government bonds have little risk attached at present. People can certainly avail of them but it is important that they understand how they work and that they will only get back 3% and that the possibility of capital growth is virtually zero.
Mr. Ross: The Chair has been very generous. We are in an uncompetitive market. IFSRA and this Bill, which I am not opposing because it represents a small improvement, but not enough, are not tackling the fundamental problems of a cartel that is keeping prices high and consumers in trouble, ignorance on the part of consumers and the terribly flawed history of the banks. They should address the need for protections for consumers and, above all, the need to send in squads to the corrupt financial institutions to prevent malpractices from recurring rather than penalising them afterwards.
Mr. Hanafin: The financial services industry in Ireland employs approximately 50,000 people and if our indigenous industry is the backbone of our economy, the financial services sector is the nervous system. Over the years, certainly throughout my lifetime, we have witnessed very significant changes to the financial services sector, many of which have been very positive. The development of the credit union movement, the development and evolution of the building society movement and the development of the banking movement and the dockside centre have all been positive.
Along with these changes there has been regulation, some of which was very necessary. Some time ago, we needed to regulate the APR because people needed to know the real rate of interest they were paying. Charges were hidden but existed nevertheless, including application fees, processing fees, etc. Institutions levied any fees they liked to obtain some money. We regulated and did a good job because it is now law that institutions must show all their charges. There are other ways in which we ensured the financial services sector was better regulated. We did away with redemption fees, which are criminal. Why should somebody have to pay a six month redemption fee because he is in a position to clear his mortgage early? There is no sound basis for it.
The evolution of the financial services sector has been positive, by and large. We should consider the building society movement in early 1960 and the credit union movement set up in Derry by John Hume, bearing in mind how many it has helped and employed, how many businesses it has started and how many holidays, cars and houses it has helped to provide. These developments have all been very positive.
This Bill represents a further enhancement for the consumer but there are still serious problems in the industry. Senator Ross alluded to malpractice associated with Faldor and AIB. It is very difficult to comprehend how those in privileged positions, who have so much and so many perks and of whom so much is expected, would have offshore accounts of the kind in question.
I wish to refer specifically to offshore accounts. There is considerable talk about and finger wagging at people holding offshore accounts. However, there is a major difference between a person claiming to live in Jersey, whom members of the bank staff knows lives down the road, asking to open an offshore account and a bank recommending that a customer should have an offshore account, which is what happened. People were actively sold offshore accounts by their banks and financial institutions.
We must address the issue of foreign exchange overcharging and repayment protection being sold to those holding mortgages, which were unnecessary charges on people. This is why we introduced the Central Bank and Financial Services Authority of Ireland Act 2003 and this Bill further enhances that Act. The Bill provides for the establishment of a financial services ombudsman, to deal with consumer complaints about financial institutions; the establishment of consumer and industry consultative panels to advise the regulatory authority; new reporting and auditing obligations for financial institutions; power for the regulatory authority to impose penalties on financial institutions for failure to comply with regulatory requirements; a right of appeal to the appeals tribunal over certain supervisory decisions of the authority; new regulatory requirements for money transmission and bureaux de change businesses; and miscellaneous other amendments to financial services legislation.
On 1 May 2003, the financial services regulator was formally established. The structure, which established the regulator, is virtually unique in Europe. As well as bringing the regulation of all financial services into a single organisation, it combines two distinguishing features in one organisation. The mandate puts consumer protection at the heart of regulation by integrating, defending and promoting the interests of consumers ensuring that financial institutions behave correctly in their dealings with consumers and ensuring the safety and soundness of the financial institutions. This enables a free flow of information to the benefit of all and an intelligent integrated approach that balances the different pressures. The alternative of megaphone policy-making between separate institutions has already been shown to be ineffective
On a deeper level, prudential supervision, often dismissed as protecting the rights of investors, is often misunderstood in that it safeguards the funds of depositors, investors and policyholders who are themselves consumers. This is well known to the clients and consumers of failed financial providers. The financial services regulator is independent in its function with its own independent board and management. It is also formally linked to the Central Bank through the now overarching Central Bank and Financial Services Authority of Ireland. This again enables a free flow of information between the prudential supervision arm of the financial services regulator and the financial stability arm of the Central Bank, which in turn links with Ireland’s membership of the European system of central banks.
The approach to consumer protection is to: provide accessible information to the consumer, which encourages the proper functioning of a competitive market; monitor competition between providers and work closely with the Competition Authority; agree and enforce codes of conduct for providers; provide help to consumers with problems and complaints; and approve and monitor a range of bank charges. The approach to prudential supervision is to emphasise the responsibilities of boards of management to uphold the principles which underpin safety and solvency in a fair market, for which probity and integrity of key personnel are prerequisites; and ensure the processes and systems adequately monitor and report risk and carry out regular reporting and on-site inspections.
The mandate also includes the regulation of Ireland’s 438 credit unions, registered under the Credit Union Act 1997. The credit union movement is one of the most important parts of the national financial infrastructure and serves the needs of more than 2 million members. The financial services industry is a vital component of the Irish economy and of Irish society. It is therefore in all our interests for it to be competitive. As well as employing 50,000 people in banks, building societies and insurance companies and contributing significant tax revenue, it represents the central nervous system of the economy and is an important element of our international image and reputation.
The financial services industry must be accountable to the public and us, the elected representatives; be open transparent and accessible; benchmark itself continually against best international practice; and provide ongoing value for money.
Ms Tuffy: While I also broadly welcome the legislation, I was interested in what Senator Ross had to say, especially about the impact of the legislation and whether it has teeth. I agree it is good to have penalties. This compares with the Ombudsman who deals with local authority issues etc., in which penalties are generally not involved. In many ways that Ombudsman does not have teeth and has more to do with shaming of local authorities, hospitals etc. when they fail to treat their customers properly.
In light of what Senator Ross said about the fines representing a pittance, we need to ask whether the penalties are for show and would not really impact on the overall problem of financial institutions and their dealings with the public. We need legislation that makes the banks and other financial institutions afraid of the possible outcome of complaints to the Ombudsman.
These kinds of accountability measures for financial and other institutions are welcome and necessary. However, sometimes they represent a veil giving the appearance that something is being done when the overall problem still remains and is not addressed significantly. I have had considerable experience of the Ombudsman in my dealings with local authorities. While it is good that the Ombudsman exists, that office represents a drop in the ocean. Even though so much of the practice of local authorities in their dealings with customers is wrong, they carry on regardless. Having an Ombudsman to address local authority issues is not enough and I hope that it will not be the same with the ombudsman for financial institutions.
I support calls by Senator John Phelan and others that consumers should have a role on the panels. While amendments were tabled in the Dáil on this matter, as far as I know the Minister did not accept them. I hope he might reconsider these in the Seanad. As this legislation is for the benefit of consumers, it is very important that consumer interest plays a very significant role. Irish consumers do not question matters sufficiently often. However, they are far more likely to question dealings with other commercial interests than those with banks. Senator Ross mentioned cartels. Competition in financial services is not enough and will not stop the problem. Much more needs to be done to help consumers in their dealings with financial institutions.
Many consumers dealing with financial institutions do not question interest charges or analyse their statements and accept outrageous credit card charges etc. When dealing with financial institutions, consumers feel they lack knowledge and work from the premise that all the knowledge is on the side of the financial institutions and they do not go back to financial institutions if they have been overcharged. When we hear of scandals such as AIB overcharging, we recognise how little people question what happens. Having been self-employed for a period, I recognise that small businesses need protection in their dealings with financial institutions.
It is very important in this legislation to ensure people use the ombudsman. We must promote the office as much as possible and do much more to encourage questioning of the dealings of financial institutions with the public. I hope the Minister will give further consideration to the question of accountability to the Houses of the Oireachtas and make provisions whereby we can review the legislation to ensure it is working.
Minister of State at the Department of Communications, Marine and Natural Resources (Mr. J. Browne): I thank Senators for their comments on the ombudsman’s council. The Minister’s intention is to provide for a broad balance between representatives of the financial services industry and consumers. The chairman should have knowledge or experience of consumer issues. Given its central role, it is important that the council should have the confidence of consumers and the industry. The provisions on the appointment of its members are drafted accordingly. In this regard, Senators referred to the consultative panels in respect of which the Bill obliges the Minister to consult the Tánaiste and Minister for Enterprise, Trade and Employment. In the case of the industry panel, the Bill obliges the Minister to consult with the Taoiseach due to the close involvement of the Department of the Taoiseach with the international financial services sector. The Bill also obliges the Minister to consult industry and consumer representative groups.
Senator Ross raised the issues of adequacy and fairness and asked why a limit of €5 million was being set given that a fine of this amount might not constitute sufficient punishment in some cases. Section 33AQ(4) provides that this amount can be increased by ministerial regulation if it is considered necessary. It should be borne in mind that the limit of €5 million applies only to the direct punishment inflicted on an institution which has contravened a provision of financial services legislation. The authority also has the power under section 33AQ(3) to order a refund of a charge for the provision of financial services. Based on recent history, one can easily envisage circumstances in which the cost to an institution in refunding its customers in respect of a charge incorrectly imposed could considerably exceed €5 million.
A number of Senators raised the issue of relevance to the AIB. While Senators will appreciate that I do not wish to refer to the details of matters which are currently the subject of investigations, the following aspects of the Bill and last year’s Act are relevant. First, if it is suspected that a financial institution has not been complying with its obligations under legislation, the regulator may under section 23 of the Bill require its directors to report on whether they have complied with their obligations over a specified period. In such cases, the directors will be obliged to acknowledge any instances of non-compliance and if they fail to do so the auditor will be obliged to contradict them in his or her report. The regulator could also require the directors to indicate what measures they have taken to ensure full compliance in the future.
Second, if the regulator suspects that a financial institution has breached a provision of financial services legislation or an IFSRA code or direction, the provisions of section 10 can be initiated leading to the imposition of an administrative penalty. The penalties are potentially very severe. A fine of up to €5 million may be imposed on an institution and up to €500,000 on a manager who may also be disqualified from employment in the financial services sector. The regulator may also publicly reprimand an institution and order it to refund any charges improperly imposed. Third, the Central Bank and Financial Services Authority of Ireland Act 2003 imposes clear obligations on the regulator to report to the Revenue Commissioners any suspicion that a financial institution is engaged in tax evasion. The Act removed all confidentiality constraints on the regulator other than those laid down in EU law.
The financial regulator is currently carrying out a review of codes of conduct and has recently completed a process of public consultation. The purpose of the review is to ensure a consumer-focused standard of protection for purchasers of financial products and services and put in place the same level of protection for consumers regardless of the type of financial services provider they choose. It is also sought to facilitate competition by ensuring a level playing field. I understand the authority will complete its review this year and subsequently publish revised codes of conduct. In finalising its review, the authority will doubtless consider the implications of the events to which different Senators referred this afternoon to ensure the new codes are sufficiently robust.
According to the consultative document, the Central Bank and Financial Services Authority of Ireland Bill proposes to provide the financial services regulator with the power to impose sanctions on firms which fail to comply with their regulatory obligations. When the regulator has been given that power in law it intends to ensure that regulated entities understand clearly what is expected of them in terms of compliance. The authority is entering new territory with powers to impose heavy administrative penalties on financial institutions for breaches of legislation and codes of conduct. Happily, the authority can easily amend its codes in light of new developments.
We must remember that the aim is to ensure that financial institutions put systems in place to treat their customers fairly. Further developing a consumer-focused compliance culture in financial institutions rather than penalising them for non-compliance represents a major challenge. It is one the authority and the majority of financial institutions have shown a willingness to meet head on.
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