Investor Compensation Bill, 1998 [ Seanad Bill Amended by Dáil ]: Report and Final Stages.

Thursday, 2 July 1998

Seanad Éireann Debate
Vol. 156 No. 9

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An Leas-Chathaoirleach: This is a Seanad Bill which has been amended by the Dáil. In accordance with Standing Order 85, it is deemed to have passed its First, Second and Third stages in the Seanad and is placed on the Order Paper for Report Stage. On the question, “That the Bill be received for final consideration”, the Minister may explain the purpose of the amendments made by the Dáil. This is looked upon as the report of the Dáil amendments to the Seanad. Therefore, the only matters which may be discussed are the amendments made by the Dáil. For the convenience of Senators, I have arranged for the amendments to be printed and circulated. Members may speak only once.

Question proposed: “That the Bill be received for final consideration.”

Minister of State at the Department of Finance (Mr. Cullen): Information on Martin Cullen Zoom on Martin Cullen I will explain briefly the amendments made to the Bill following its passage through the House. There are 23 amendments in all and, if Senators want me to explain any of them in greater detail, I will be happy to do so. No disrespect was meant by not tabling the amendments in the House on Committee Stage. One amendment was accepted here on Committee Stage and we agreed to consider another, which gave rise to a further three amendments to the Bill.

I will take amendments Nos. 1 to 3 to section 18 together. This section originally provided that the Minister for Finance would be responsible for the appointment of the members of the Investor Compensation Company and of the board of the company, with the agreement of the Minister for Enterprise, Trade and Employment. The three amendments were tabled on the basis that the

[643] Minister for Enterprise, Trade and Employment should have responsibility for the appointment of the members of the board, who will represent the interests of consumers, because the Minister has specific responsibilities in the area of consumer affairs. I was happy to accept the amendments on those grounds.

Amendments Nos. 4 and 5 deal with the situation where a compensation scheme or fund has difficulty paying compensation — for example, in the event of a major default. It is necessary to make provision for such a situation because the Office of the Attorney General has advised that it would not be possible under Irish law to require a compensation scheme to pay out unlimited compensation.

Section 25(8) of the Bill as initiated provided that a compensation scheme operated by a professional body on behalf of accountants could set an annual limit on payments to investors, subject to the approval of the Central Bank. However, the section did not specify what would happen when a compensation scheme reached that limit. On the other hand, section 35 of the Bill as initiated applied to both compensation schemes for accountants and to the Investor Compensation Company. Section 35(1) provides that compensation must be paid within three months of the establishment of an investor's claim. Section 35(2) then goes on to say that the Central Bank might, at the request of the Investor Compensation Company or of a compensation scheme for accountants, provide for an extension of the time for paying compensation of up to a further three months, which is a total of six months. This is in accordance with the provisions of the investor compensation directive and was intended to deal with a situation where a compensation scheme comes under extreme funding pressure. However, it must not be forgotten that the directive applies only to a minority of investment firms.

As the Bill was drafted, the Investor Compensation Company or an accountants' compensation scheme would be breaking the law if it was unable to pay out within six months. Where payments under the compensation directive are concerned, we have no option but to provide for this. However, in all other cases our legal advice is that there are limits on the obligations which can legally be imposed on investment firms in terms of funding compensation if they are not covered by the directive. To cover this situation I have amended the Bill so that there is a single provision dealing with inability to pay compensation.

Section 25(8) has been deleted. The replacement section 35(2) provides that payment of compensation may be deferred for an unspecified period, but with important safeguards for investors. It will be possible to defer payment of compensation only in exceptional circumstances. The Central Bank will have to approve any delay and it will be able to impose conditions and requirements relating to the delay. Investors will continue [644] to have a right to payment within three months in all but the most exceptional circumstances. We are dealing here with a situation where the roof falls in on the investment community. We have to cover every eventuality, however unlikely.

The purpose of amendment No. 6 is to ensure that product producers cannot evade their responsibilities under the Bill by including restrictive clauses in a contract given to an investment firm.

Regarding amendment No. 7, section 42 originally provided for an exemption from liability for damages for the Central Bank, its officers and employees and for the compensation company and its officers and employees. Section 20 provides that the bank can establish a subsidiary to provide administrative services to the Investor Compensation Company. This amendment extends the exemption from liability which will be available to the company and to the bank to include a subsidiary set up by the bank. This is essentially a technical amendment. If the bank is to have this protection in providing administrative services to the company, as agreed by both Houses, and if it sets up a subsidiary to do the job, the subsidiary should logically have the same protection.

Amendments Nos. 8, 21 and 22 are best considered as a group. An amendment to section 43(7) was tabled on Committee Stage in this House and it was agreed to examine it. I tabled this amendment and amendments Nos. 21 and 22, which amend similar provisions in the Investment Intermediaries and Stock Exchange Acts, as a result of that examination. They are drafting amendments clarifying an offence provision relating to the provision of documents or information. I thank the Senators who tabled the original amendment for drawing the matter to my attention.

Amendments Nos. 9 to 16 can also be grouped. They amend sections 44 to 47 of the Bill which deal with solicitors who do investment and insurance business. These eight amendments deal with difficulties which emerged following the passage of the Bill through this House. The background to these sections is as follows. The Bill plugs a potential compensation gap where solicitors are doing investment business. Currently, if a solicitor is doing incidental investment or insurance business, the Law Society compensation fund provides compensation. If the solicitor is doing non-incidental investment or insurance business, he should be a member of a compensation scheme under the Bill. However, if he does not own up, he would be covered by neither the Law Society compensation fund nor by a compensation scheme under the Bill. The Bill deals with this potential gap by assigning responsibility in such cases to the Law Society compensation fund.

Amendment No. 17 inserts a new section, section 48, in the Bill. It ensures that the Central Bank will be able to pass information to the [645] Investor Compensation Company or to a subsidiary set up by the bank in accordance with section 20 to provide administrative services to the compensation company. Otherwise the arrangement could not work. The EU Investment Services Directive allows the disclosure of information by competent authorities — in this case, the Central Bank — to bodies which administer investment compensation schemes. Hence the strict confidentiality regime of the Central Bank can be amended.

Amendment No. 23 is a technical amendment to the Long Title of the Bill arising from amendment No. 17.

Section 51 provided that a liquidator or receiver of an investment business firm or of a Stock Exchange member firm would not be an investment business firm for the purposes of the Investment Intermediaries Act. Amendment No. 18 extends that provision to liquidators and receivers generally because it would not be appropriate to require a liquidator or receiver to obtain authorisation from the Central Bank where their activities as a liquidator or receiver include, for example, selling shares owned by a company which was being liquidated or was in receivership.

Amendment No. 19 is a drafting amendment to section 59. The purpose of the amendment is to ensure that product producers are not prevented from doing business with a certified person, in other words, an accountant who provides only investment services which are incidental to the provision of accountancy services.

Finally, we come to amendment No. 20. Section 60 as introduced amended section 31 of the Investment Intermediaries Act to impose a requirement on a product producer to publish a newspaper notice where a written appointment with an investment product intermediary had been discontinued. This section was recommended by the Select Committee on Enterprise and Economic Strategy which examined the collapse of the Taylor group of investment companies. The purpose of the section is to try to ensure that the public is aware that an intermediary may no longer do business on behalf of a product producer. The section has been amended to allow the written notice to be published by the intermediary, because of concerns that publication by the product producer might damage the intermediary. Where the intermediary does not publish a notice within 14 days, the product producer will be obliged to do so. This achieves the end of informing the public but in a modified way which reduces the possibility that there might be a misunderstanding as to why the intermediary is no longer dealing with the product producer because in the majority of cases the written appointment will be discontinued for commercial reasons.

The remaining amendments on the list have been dealt with already.

Mrs. A. Doyle: Information on Avril Doyle Zoom on Avril Doyle I am not sure we are dealing with the return of the Bill to the House as we [646] should. It only came to our notice yesterday that we would have to bring the Bill back to the House and it was only this morning that I got the list of amendments. I did not bring the Bill originally through this House and I feel this is an unsatisfactory way to do business. I am not even sure which of the 22 amendments were thoroughly debated previously either in the Dáil or by the Select Committee. Of course, no Members of the Seanad were party to the debate at the Select Committee. I feel I am under a considerable handicap in doing justice to this very important legislation. The need to have the Bill passed before the end of the session is not a justification for not parsing and analysing it. Some of the amendments may be new and may not have been discussed by my parliamentary party or by my party spokesman. I do not know. This is a dangerous way to proceed.

The Opposition may be criticised when the Bill is in operation for having failed to ensure that the Bill was adequately examined.

Mr. Cullen: Information on Martin Cullen Zoom on Martin Cullen May I, to be helpful, make two points? The Committee Stage of the Bill was long and extensive. I accept that Senators were not party to it but it lasted more than seven hours which was quite exceptional. I have brought no new amendments today which were not discussed by the Senator's colleagues either in the Select Committee or on Report and Final Stages. Indeed, some amendments came from the Opposition. There is nothing new which has not been discussed in great detail.

Mrs. A. Doyle: Information on Avril Doyle Zoom on Avril Doyle I thank the Minister for that helpful interjection. We have not even had time to read the Official Report of the debate in the Dáil. This is not a satisfactory way to do business. I was thrust the list of amendments as I walked to the House this morning. We must examine how we do our business in the interests of ensuring the relevance of this House and the important job with which we are charged.

I have no difficulty accepting the amendments before us. I thank the Minister for accepting amendments from my colleague, Deputy Noonan, in the other House. This is an example of a Minister listening to reasoned cases made by the Opposition.

On reading the Official Report of the debate in the Dáil on 30 June, I see that when my colleague, Deputy Noonan, proposed amendments to section 18 the Minister initially gave a stock reply which had been prepared for him. I will not embarrass him or his officials by going through it in detail but the reply given was not even relevant to the amendment tabled by Deputy Noonan. He had moved his position, having listened to a previous reasoned response from the Minister and had tabled a new amendment which took account of the Minster's advice. The Minister's reply referred to the detail in the original amendment.

However, having listened to the point made by Deputy Noonan, the Minister accepted his [647] amendment and I thank him for that. That is how the Houses of the Oireachtas should function. That is the point of examining legislation line by line and illustrates why, simply because a Government has a majority, we should not rubber stamp legislation or push it through without regard to opinion on all sides. It is a reflection on the Minster's intellectual integrity that he responded so positively to Opposition amendments.

I am concerned about outstanding difficulties in relation to the industry working party on the Investor Compensation Bill. The working party has proposed changes to section 60 and I would like the Minister to address their concerns, to say how far he has been able to meet them and why the specific points they make have not been met. It has been difficult, in the hour available to me, to catch up on the proceedings of the last two days. I understand from media reports that the Minister rejected proposed changes to the Bill from the investment industry working party who wanted section 60, which deals with the treatment of intermediaries, dropped. The Minister rejected this amendment and said that the Bill had to strike a balance between the interests of the investment industry and consumers. No one could disagree with that. However, under the terms of the original section, investment institutions which are required to give a letter of appointment to intermediaries with whom they do business must publish notice of discontinuation of appointments in a national newspaper.

When the Minister of State appeared before the Select Committee on Finance and the Public Service he agreed that there was a need to change the section and he put down an amendment to that effect. However, he refused to delete the section. Under the Government amendment the intermediary rather than the investing institution must publish in a national newspaper the withdrawal of the letter of appointment within 14 days. If this does not happen, responsibility reverts to the product provider to publish the information.

Anne Fitzgerald, the chairperson of the working party, is still not satisfied and believes that investors will not be fully protected under the amendment. She said that consumers' problems are exacerbated by the fact that a fraudulent intermediary has 14 days to publish a notice before the product producer is forced to act. “This is 14 days in which to defraud,” she said. The working party suggested that if the section is retained, it should force companies to inform the Central Bank within three days of discontinuance. It also suggested that the bank be forced to accept responsibility for accurate updating of its register of intermediaries.

In response, the Minister of State said that if somebody wanted to defraud an investor, they could do so within 24 hours as easily as within 14 days. My colleague, Deputy Noonan, asked why the Central Bank should not be responsible for placing the notice. The Minister of State said he [648] did not think it would be a good idea. At that stage he also put on record details about the likely size of the fund to be established to compensate defrauded investors.

I am concerned about this area, although that might relate to the fact that I am not thoroughly fluent on the line by line provisions of the Bill. However, to ensure I am doing the job with which I am charged, I ask the Minister of State to develop his reasons for not accepting the deletion of section 60 as suggested by the working group and to respond to media reports of the group's ongoing concern subsequent to the Select Committee's deliberations on the section.

The £15,500 limit was discussed in detail in the Dáil and I am aware that it is linked to the EU directive. There is a similar limit on cross border transfers of moneys within the EU. This and other directives have been discussed in detail in both Houses. Nevertheless, the £15,500 maximum compensation limit is a small amount vis-à-vis the type of investment that occurs in many cases. On the one hand one can say that the investor is aware that it is a maximum limit and is, therefore, aware of the risks he or she is taking if they expose themselves beyond that amount. On the other hand, however, in the overall context of investment and attracting money, it is an extremely small amount.

Is there provision for indexing this limit or is it unalterable until it is amended on foot of another regulation or EU directive to change it? How does the £15,500 or 20,000 ECUs maximum compensation limit keep pace with inflation? Why is it pitched at such a modest level? The answers to these questions should be on record to ensure complete understanding of the logistics of the compensation scheme.

I wish the Bill well. It provides for the payment of compensation to clients of investment business firms, Stock Exchange member firms, credit institutions and insurance intermediaries — so called investment firms — when an investment firm is unable to return money or investment instruments belonging to clients. It also transposes the EU investor compensation directive into Irish law. The Central Bank will be the supervisory authority for investor compensation and the competent authority in the State for the purposes of the investor compensation directive.

The Bill provides for the establishment of a limited company to administer investor compensation arrangements, some details of which we are dealing with this morning. I thank the Minister of State and his staff for the time they have invested in promoting this important legislation. It is part of the body of legislation required to instil security in the general financial services and investment sector. Only last night the Oireachtas Joint Committee on Finance and Public Affairs recommended the establishment of an independent financial services authority in its response to the investigations of the National Irish Bank and Ansbacher scandals. Could the Minister of State comment on the role such a financial services [649] authority might have with regard to regulating and supervising these sectors and on how that function might or might not dovetail with the business before the House today?

I thank the Minister of State for his attention and for accepting amendments from all sides of the House.

Ms O'Meara: Information on Kathleen O'Meara Zoom on Kathleen O'Meara Like Senator Doyle, I am concerned at the short notice Members were given for dealing with this Bill. Given that it is important legislation, it is understandable that the Government is anxious to have it passed before the end of the session. However, we take our responsibilities as legislators seriously and we would appreciate time to peruse the amendments. I am aware that the Minister of State and his officials put a great deal of work into this legislation. Therefore, since a proper examination of the provisions would require a considerable amount of time and research, I am prepared to take the work of the Minister of State and his officials on trust in that regard.

Yesterday, Senator Dardis spoke about the need for legislation such as this. He was referring to the Food Safety Authority, but it is indicative of our times that complex regulatory and protective structures must be put in place for consumers and customers, particularly in the financial services sector where there are major issues of public concern not only in relation to the Ansbacher accounts and the tribunals of inquiry but also with regard to how banks conduct their business. Senator Doyle referred to the recommendation of the Oireachtas Joint Committee on Finance and the Public Service for the establishment of an independent financial services authority. That appears to be a sensible suggestion which would probably receive all-party support.

The Bill before the House is designed to provide a level of protection for investors. However, one will be unable to judge its effectiveness in according such protection until after its implementation. I wish to put on record my appreciation of the work done by the Minister of State and his officials on this legislation. I hope it will be effective and that the Oireachtas will not be required to revisit this issue as more concerns arise about the operation of financial services.

Minister of State at the Department of Finance (Mr. Cullen): Information on Martin Cullen Zoom on Martin Cullen I thank Senators for their contributions. As a former Member of the Seanad, I have great respect for its work. I do not order the business of the Seanad but I and my officials did everything we could to accommodate all views on this legislation. A number of good points were put forward and my acceptance of relevant amendments has improved the Bill.

Senator Doyle raised a number of important points. I presume she is not suggesting that we remove the important provision in section 60 which is the central consumer interest provision. Viewed in that context, one can understand the view of the industry.

[650] It is my role to strike a balance between the industry and the consumer. When I introduced this Bill here I emphasised this was a consumer oriented Bill. My concern and that of the Oireachtas Select Committee involved, as expressed over some of the debacles that happened, was that we must put in place legislation oriented in a way that would offer as much protection as possible to consumers.

With regard to section 60, the industry was initially concerned that the intermediary would have difficulties if product producers published a notice that an intermediary was no longer taking business from them. When an intermediary ceases to do business with a product producer it does not signal there is something wrong. An intermediary can take this step for all sorts of commercial reasons and it is their choice to do so. If a product producer published a notice in the newspaper it could convey the wrong impression, that it had to do with some fraudulent activity on behalf of the intermediary, which may not have been the case at all. We agreed that there was merit in this point and changed the situation to allow an intermediary to publish a notice. We also left it up to them to decide what to put in their notice with regard to the reason for their termination of an arrangement. That would have overcome the industry's difficulty. Unfortunately, when we moved to do this other issues were raised.

In reality, it is my business, as it is all Members, to ensure that the consumer gets information, which is what section 60 is all about. This section tries to ensure the consumer understands the reasons a product producer is no longer dealing with an intermediary; but this should not be done in a manner that would automatically convey there was some fraudulent activity, because that is not always the case. There are many reasons for an intermediary to terminate business. I am sure the Senator was not suggesting we should not look after the consumer but ensure that the consumer gets the information.

First, we decided to make changes to allow for an intermediary to publish the notice. Second, I inserted a timeframe of 14 days. When this issue was debated on Report and Final Stages, in response to Deputy Noonan, I stated that there was not much point in my inserting a timeframe of three or four days in the Bill knowing that this deadline could not be met. Obviously an intermediary would seek legal advice and then it could take up to seven days to publish the notice in the newspaper. A timeframe of fourteen days seemed reasonable and when I explained it in those terms all Members agreed that it was reasonable.

I want to ensure that there is a reasonable timeframe that allows time to publish the notice in the newspapers. I did not want to put in a timeframe that obviously would be impossible to meet and would negate the whole prospect for all sorts of extraneous reasons as to why the information was not there in the first place. I wanted to be reasonably precise but fair and give a workable, practicable [651] approach rather than some aspirational approach.

Members will agree that this is how we should legislate. There are many things we would like to include in legislation that would only be suitable in a perfect world and that we know in practice cannot be done for various reasons. I was not going to start the Investor Compensation Company and this very important fund by putting it in place and then doing things that could negate its ability to function in the widest sense. That is why I inserted a 14 day timeframe.

Section 60 is a very important provision from the consumer's perspective — the industry might have all sorts of views on it. We have struck a very good balance between the rights of the industry and the consumer.

Mrs. A. Doyle: Information on Avril Doyle Zoom on Avril Doyle Why are the working parties still unhappy?

Mr. Cullen: Information on Martin Cullen Zoom on Martin Cullen I have every confidence in the intellectual capacity of the person the Senator mentioned and they are a very valuable contributor to this area, but there is a particular perspective being put forward that I have to make a judgment on. My judgment is that I must balance the consumer interest with the industry.

The latest question is: why would we not do the same for the Central Bank? It is going to publish reservations about a client and it is the regulator. It would be a bad reflection on an intermediary if the Central Bank published a notice in the newspaper with regard to that person because it might not convey precisely why the intermediary was leaving or give a different impression altogether. That person may be only moving or discontinuing business with one product producer and yet have many different agency arrangements with other product producers. It is not right for the Central Bank, as a regulator, to publish such notices.

I have got to be fair in the interest of the consumer and the intermediary because we must not presume that in the termination of many of these arrangements there is a fraudulent activity. We have to realise that this is a commercial world and there are many reasons an intermediary would terminate business arrangements with a product producer. I am sure it happens regularly. Exclusive arrangements come along, new products come on the market, intermediaries move because they were no longer interested in their clients, etc. Therefore, I had to allow some latitude on this issue. If there is fraudulent activity or suspicion of same, the notice must be published. It is then up to the investor to question the reason behind it. Our business is to ensure the information is published in the proper fashion and we have achieved this.

Senator A. Doyle raised the issue of compensation but this has already been discussed at length. I do not accept that it is a paltry sum. First, we must remember there was no compensation [652] in the past and now £15,500 or 90 per cent of the total loss is available to compensate a person who has been defrauded by an intermediary. It would have been nice to be able to allow for a very large sum which could cover all claims, but then caveat emptor is forgotten about along with people's ability to discern between intermediaries and products.

Second, if I insisted on a very high compensation figure it would have been more difficult to launch the fund. The costs involved might have been so substantial as to make it impossible to get it off the ground and there might have been an attempt to make the consumer pay for some of the costs. This is like an insurance policy in some respects and the costs could be so prohibitive as to make it not worthwhile. I am open to the prospect, depending on how the fund is working, of increasing the compensation figure.

Mrs. A. Doyle: Information on Avril Doyle Zoom on Avril Doyle What is the mechanism involved?

Mr. Cullen: Information on Martin Cullen Zoom on Martin Cullen This point already came up, that the Minister could possibly arbitrarily increase the fund. But this is primary legislation, a point accepted by the Senator's colleague, and I am not keen on Ministers having arbitration functions in that regard. This should be resolved by the Houses of the Oireachtas. It does not mean we have to bring in a new Investor Compensation Bill just to deal with this situation. There is an ongoing range of financial legislation being passed through both Houses, which will continue because the market is evolving so fast. Therefore, there will be ample opportunity to amend this provision on an ongoing basis if the House sees fit. There is no question of having to wait for years to do this.

I think we have struck a very good balance. I appreciate all the contributions made by Senators and that the Bill was introduced here.

I must refer to the single regulatory authority. The recommendation of the Oireachtas committee regarding a single regulatory authority is interesting. Senator Doyle mentioned this matter on Second Stage. However, it does not relate directly to the Bill. The Senator is correct; this type of legislation begs a specific question and merits discussion. However, it would not be appropriate to do so in the context of this Bill. A working party established by the Minister for Finance, Deputy McCreevy, is due to report soon and it will probably deal with this issue.

I thank Senators for their contributions. The suggestions and amendments made were most helpful. I also thank my officials.

Question put and agreed to.

Question, “That the Bill do now pass,” put and agreed to. [653]


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