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FINAL REPORT

TITHE AN OIREACHTAIS

An Comhchoiste um Airgeadas agus an tSeirbhís Phoiblí

Tuarascáil ar an Athbhreithniú ar Bheartas Baincéireachta

Forais Airgeadais a Rialú agus a Mhaoirsiú

HOUSES OF THE OIREACHTAS

Joint Committee on Finance and the Public Service

Report on Review of Banking Policy

The Regulation and Supervision of Financial Institutions

Iúil, 1998

July, 1998

Table of Contents

Joint Committee on Finance and the Public Service

ORDERS OF REFERENCE

Dáil Éireann

13th November, 1997: (**28th April, 1998),

Ordered:

(1) (a)That a Select Committee, which shall be called the Select Committee on Finance and the Public Service, consisting of 14 members of Dáil Éireann (of whom 4 shall constitute a quorum), be appointed to consider such—

(i)Bills the statute law in respect of which is dealt with by the Department of the Taoiseach and the Department of Finance, and

(ii)Estimates for Public Services within the aegis of those Departments,

as shall be referred to it by Dáil Éireann from time to time.

(b)For the purpose of its consideration of Bills under paragraph (1)(a)(i), the Select Committee shall have the powers defined in Standing Order 78A(1), (2) and (3).

(c)For the avoidance of doubt, by virtue of their ex officio membership of the Select Committee in accordance with Standing Order 84(1), the Taoiseach and the Minister for Finance (or a Minister or Minister of State nominated in their stead) shall be entitled to vote.

(2) (a)The Select Committee shall be joined with a Select Committee to be appointed by Seanad Éireann to form the Joint Committee on Finance and the Public Service to consider—

(i)such public affairs administered by the Department of the Taoiseach and the Department of Finance as it may select, including bodies under the aegis of those Departments in respect of Government policy,

(ii)such matters of policy for which the Taoiseach and the Minister for Finance are officially responsible as it may select,

(iii)the strategy statement laid before each House of the Oireachtas by the Taoiseach and the Minister for Finance pursuant to section 5(2) of the Public Service Management Act, 1997, and shall be authorised for the purposes of section 10 of that Act, and

** (iv)such Annual Reports or Annual Reports and Accounts, required by law and laid before either or both Houses of the Oireachtas, of bodies under the aegis of the Department(s) specified in paragraph 2(a)(i), and the overall operational results, statements of strategy and corporate plans of these bodies, as it may select.

Provided that the Joint Committee shall not, at any time, consider any matter relating to such a body which is, which has been, or which is, at that time, proposed to be considered by the Committee of Public Accounts pursuant to the Orders of Reference of that Committee and/or the Comptroller and Auditor General (Amendment) Act, 1993.

Provided further that the Joint Committee shall refrain from inquiring into in public session, or publishing confidential information regarding, any such matter if so requested either by the body or by the Minister in charge of that Department; and

(v)such other matters as may be jointly referred to it from time to time by both Houses of the Oireachtas, and shall report thereon to both Houses of the Oireachtas.

(b)The quorum of the Joint Committee shall be 5, of whom at least 1 shall be a member of Dáil Éireann and 1 a member of Seanad Éireann.

(c)The Joint Committee shall have the powers defined in Standing Order 78A(1) to (9) inclusive.

(3)The Chairman of the Joint Committee, who shall be a member of Dáil Éireann, shall also be Chairman of the Select Committee.

SEANAD ÉIREANN

19th November, 1997:

Ordered:

(1)(a)That a Select Committee consisting of 5 members of Seanad Éireann shall be appointed to be joined with a Select Committee of Dáil Éireann to form the Joint Committee on Finance and the Public Service to consider -

(i)such public affairs administered by the Department of the Taoiseach and the Department of Finance as it may select, including bodies under the aegis of those Departments in respect of Government policy,

(ii)such matters of policy for which the Taoiseach and the Minister for Finance are officially responsible as it may select,

(iii)the strategy statement laid before each House of the Oireachtas by the Taoiseach and the Minister for Finance pursuant to section 5(2) of the Public Service Management Act, 1997, and shall be authorised for the purposes of section 10 of that Act, and

(iv)such other matters as may be jointly referred to it from time to time by both Houses of the Oireachtas,

and shall report thereon to both Houses of the Oireachtas.

(b)The quorum of the Joint Committee shall be 5, of whom at least 1 shall be a member of Dáil Éireann and 1 a member of Seanad Éireann.

(c)The Joint Committee shall have the powers defined in Standing Order 62A(1) to (9) inclusive.

(2)The Chairman of the Joint Committee shall be a member of Dáil Éireann.

JOINT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE

List of Members:

Joint Committee on Finance and the Public Service Review of Banking Policy

The Regulation and Supervision of Financial Institutions

1. Background

1.1In March 1998, the Joint Committee on Finance and the Public Service became aware, through media reports, of disturbing allegations relating to certain sectors of the commercial banking sector in Ireland, namely:

(a)in relation to possible tax evasion in the case of overseas or “off-shore” bank accounts; and

(b)in relation to undisclosed over-charging or loading of customers’ accounts.

1.2The Joint Committee wishes at the outset to place on record its appreciation to the media, and particularly to RTE, for uncovering details of the allegations in the first instance and for pursuing the facts unremittingly in the public interest. The Committee also wishes to record that it believes that the vast bulk of financial institutions in Ireland are acting wholly within the law.

1.3The Committee decided to initiate an urgent review to ascertain the precise regulatory/supervisory role of State and other institutions in relation to the commercial banking sector. With that in view it decided to hear evidence from key individuals and organisations and following that, to determine what action should be taken to reinforce or improve existing arrangements. To that end the Committee invited the following to appear:

•The Secretary General of the Department of Finance, Mr. P.H. Mullarkey;

•The Governor of the Central Bank, Mr. Maurice O’Connell;

•The Chairman of the Revenue Commissioners, Mr. Cathal MacDomhnaill;

•The Director of Consumer Affairs, Mr. William Fagan; and

•Representatives of the Irish Bankers’ Federation - Mr James Bardon, Director General, Mr.

Frank Sexton, Deputy Director General and

Mr. Felix O’Regan, Head of Information.

The transcripts of evidence heard by the Committee are published in a separate volume.

1.4Having heard evidence from the above-mentioned, the Committee was perturbed to learn that no structure or body existed that could, with confidence, assure the Committee, or indeed the general public, that the commercial banking sector or other financial institutions were properly supervised and/or accountable. In the circumstances the Committee decided that an urgent comparative study should be made of the current position in a number of other EU Member States. Between 8th and 12th June, 1998, two delegations of three members each led by the Chairman Deputy Michael Ahern and Deputy Michael Noonan, respectively, visited (a) Germany, Sweden and Denmark and (b) Austria, France and the Netherlands. The Committee also obtained detailed background material on the UK Financial Services Authority as well as summary notes on the position in all the remaining EU Member States, the latter courtesy of the Central Bank.

2.Off-shore Bank Accounts

2.1The Committee is conscious of the fact that a formally constituted Tribunal of Inquiry has been examining in detail the position on certain putative overseas bank accounts within the Ansbacher Bank and so is precluded from commenting in detail on the activities involved. However, from published details already in the public domain, it is clear that certain bank customers were allowed, if not encouraged, to deposit funds in accounts which were allegedly in overseas banks, but were in fact, held in Ireland in concealed accounts possibly for the purposes of avoiding payment of taxes due to the Office of the Revenue Commissioners.

2.2Another bank, National Irish Bank, allegedly invited customers to open accounts overseas in the form of bonds or deposits on life assurance policies, but which in fact were effectively deposit accounts accessible in the domestic branches of banks in hidden or numbered accounts - again possibly for the purpose of tax avoidance.

3.Over-charging and Loading of Interest on Accounts

3.1The Committee was also very concerned to learn of allegations that certain banks had adopted a policy of increasing or loading rates of interest on targeted customers holding overdrafts or loans, without actually informing their clients that any change in the terms had taken place. When these allegations of disturbing practices were made public the matter became subject of enquiry under legislation falling within the remit of the Minister for Enterprise, Trade and Employment. Because of that on-going review and referral of the Courts, the Committee will refrain from more specific comment except to record its deep dismay at the potential and alleged breach of trust in the bank-customer relationship, which has been a cornerstone of the Irish economy since the foundation of the State.

3.2The Committee, during its consideration of the specific issues under review, was acutely aware of the potential damage (a) to the long-standing trust placed by the general public in Irish financial institutions and (b) to Ireland’s valued reputation abroad as a deservedly attractive location in which to invest. However, the Committee believes that the correct way to address the allegations of malpractice is to ascertain the truth; identify the weaknesses in the current supervisory practices and recommend an immediate course of action for improvement and change.

4.Conclusions

4.1The Joint Committee, having heard evidence from the institutions listed at paragraph 1.3 above, concluded that current legislation and regulations are inadequate to supervise the commercial banking sector in Ireland effectively.

4.1.2Existing banking practices, whereby confidentiality between financial institutions and between those institutions and their customers/clients is largely sacrosanct, has contributed in no small way to a climate which allowed malpractices and tax evasion to evolve and permeate in certain cases.

4.1.3The Department of Finance has inadequate or insufficient powers and resources to regulate financial institutions on a day to day basis. In any event the Department sees its role as general rather than specific so far as banks are concerned.

4.1.4The Central Bank of Ireland, while empowered to regulate banking institutions, has been largely unable to prevent the type of malpractices under current investigation. This, despite the fact that the Central Bank has access to audited reports of banking institutions, the Committee believes that this is due in part to the fact that the Central Bank sees its role in an overall macro sense - concerned about overall financial stability in Ireland rather than individual consumer protection.

4.1.5The Office of the Director of Consumer Affairs’ position in relation to consumer protection is undermined or weakened by the fact that its present role in the banking sector is limited (a) to oversight of the level of bank charges but not practices and (b) by the fact that the Office is inadequately staffed to respond to the existing overall remit as set out in current legislation.

4.1.6The Office of the Revenue Commissioners, despite the fact that it has very wide-ranging powers in relation to taxation, is constrained to some degree as regards tax evasion in the banking sector by virtue of the fact that, on confidentiality grounds, the Office is not entitled in law to obtain all relevant information about individuals and organisations, which would enable its officers make a comprehensive assessment of tax liabilities.

4.1.7The self-regulatory role of the Irish Bankers’ Federation, made up entirely of members of the banks themselves, means that it is virtually impossible for the IBF to adopt a pro-active or critical role in relation to the pursuit of malpractice or suspected wrongdoing among its members. The question of compulsory reporting by the IBF may need to be addressed in that context.

4.1.8The far-reaching powers available in law to wholly independent financial supervisory authorities in other EU Member States, particularly in Denmark, Sweden and the United Kingdom, highlight the inadequacies and weaknesses in the Irish system. The corollary of that finding is that it is a sine qua non that a similar independent authority should be established forthwith to regulate the Irish commercial financial sector.

4.1.9The Committee is conscious of the fact that its present review, due to time constraints, has been fairly narrowly focused. However, it believes that a single, independent, regulatory authority should be established and given supervisory powers in relation to all commercial, friendly and voluntary bodies, which handle funds or financial transactions (including electronically) on behalf of third parties or other institutions in Ireland.

4.1.10The Committee firmly believes that the establishment of an independent Financial Services Authority, requiring as it would, the provision of additional financial and human resources, would be money well spent. In terms of restoration of public confidence (at home and abroad) and a guarantee that financial institutions in Ireland would be properly and comprehensively supervised in future, the Committee is confident that the regulation and supervision of the financial sector in Ireland would be on par with the best standards, not only in Europe, but perhaps globally. At this sensitive stage in our economic development within the Economic and Monetary Union, the Irish public deserves (and demands) nothing less.

5.Recommendations

5.1An independent Financial Services Authority should be established immediately in Ireland to regulate and supervise:

Building Societies

Friendly Societies

Insurance

Investment Management

Retail Investment Management

Credit Unions

Securities and derivative business

Investment business

Banking

The Stock Exchange or other appropriate institutions in the financial services sector.

5.2Current intermediaries legislation should be reviewed with a view to resolving, in the overall public interest, existing barriers created by customer confidentiality requirements at present.

5.3The powers of the Office of the Revenue Commissioners, having due regard to Constitutional requirements, should be extended as soon as possible to enable its officers gain access to all relevant information held by any party, including internal and external audited accounts etc., in cases of suspected tax evasion.

5.4Legislation should be introduced to require (a) more transparency in the financial institutions sector and (b) the prohibition of accounts designated by number only, or false accounts.

5.5The proposed FSA should be empowered to nominate an auditor to the audit team examining the accounts of all financial institutions (the latter to be responsible for meeting the costs of same).

5.6The FSA should be empowered, in consultation with the Central Bank, to recommend the revoking or suspension of licences and/or the dismissal of individual managers in cases where prima facie evidence of malpractice is found. The FSA should also be empowered to impose fines or other appropriate sanctions.

5.7The Director of Consumer Affairs should be made formally responsible for comprehensive consumer protection in the sector falling within the remit of the FSA. In that context the Minister for Finance should ensure that an adequate level of staffing and other resources should be provided for that enhanced role.

5.8The Joint Committee agrees to the adoption of the Interim Report, as amended, on the understanding that the Committee will review the position in light of any new information emerging as a result of current enquiries.

5.9The Joint Committee on Finance and the Public Service should review progress made in this important area within one year.

5.10Both Houses of the Oireachtas should debate the contents of this report at the earliest opportunity.

5.11The Committee’s report and all ancillary documents should be published immediately.

6.Acknowledgements

6.1The Joint Committee would like to thank all those who provided oral and written information since the present review was initiated (listed in Appendix C). A bibliography of the printed material made available to the Committee is set out at Appendix D.

6.2The Committee would particularly like to thank the members of the two delegations (led by Deputies Michael Ahern, Chairman and Michael Noonan) and staff of the Committee Secretariat who travelled on fact-finding visits to six EU Member States on 8 - 12 June 1998.

6.3Finally, the Committee would like to thank the Department of Foreign Affairs as well as the Irish Ambassadors and their staff in the six European Union Member States^(a) for arranging programmes, briefing material, hospitality and other facilities before and during the Committee’s review. Their professionalism and attention to detail was much appreciated.

_____________________________

Michael Ahern, T.D.,

Chairman

21 July, 1998

APPENDICES

Joint Committee on Finance and the Public Service

Review of Banking Policy

Comparative study of bank supervisory systems in Austria, Denmark, France, Germany, The Netherlands and Sweden.

8 - 12 June 1998.

1.In March 1998 the Joint Committee on Finance and the Public Service initiated a review of banking policy, with particular reference to the supervisory and regulatory role of State institutions in relation to the commercial banking sector. This arose from the Committee’s concerns about:

(a)putative overseas or “off-shore” bank accounts; and

(b)alleged over-charging or unauthorised loading of interest on bank customers’ accounts by certain commercial banks.

2.The Committee heard evidence from the Secretary-General of the Department of Finance, the Governor of the Central Bank, the Chairman of the Revenue Commissioners, the Director of Consumer Affairs and representatives of the Irish Bankers’ Federation.

3.The Joint Committee decided, as part of its review, that a comparative study of the supervisory/regulatory role of State institutions in relation to the commercial banking sector should be made by visiting a number of other European Union Member States. One delegation, led by the Committee Chairman, Deputy Michael Ahern, visited Germany, Sweden and Denmark, while a second delegation led by Deputy Michael Noonan visited Austria, France and The Netherlands. Source material about the supervisory/regulatory role in other EU Member States was also obtained and examined. A summary report of the meetings held are at Appendices A and B respectively.

4.On the basis of evidence heard to date and the contact made with the counterpart institutions in the six EU Member States, the Committee decided to draw up a report on its overall findings with a view to bringing its conclusions and recommendations to the attention of both Houses of the Oireachtas.

____________________________

Michael Ahern, T.D.,

Chairman

June, 1998

Appendix A

Joint Committee on Finance and the Public Service Visit to Germany, Sweden and Denmark

8 - 12 June 1998

1.A delegation from the Joint Committee on Finance and the Public Service - Deputies Michael Ahern (Chairman), John Dennehy and Derek McDowell attended a series of meetings in Germany, Sweden and Denmark to discuss the regulation/supervision of the commercial banking sector. The delegation was accompanied by the Clerk to the Joint Committee, Mr. P. Judge.

2.Explaining the purpose of the visits, the Chairman outlined the background and context of the Joint Committee’s review at the commencement of each meeting.

Frankfurt (8 June 1998)

3.The delegation had an exchange of views with Mr. Görtz, Interlocuter, Deutch Bundesbank (German Central Bank). Mr. Görtz described the role of the Bundesbank in relation to banking in Germany, with particular reference to stability of the banking system. He explained that the Bundesbank did not have a role in relation to consumer protection and regulation of the banking system as such. That function rested with the Federal Banking Supervisory Office, located in Berlin. Essentially the Bundesbank is the policy maker and the FBSO administers the supervisory process. There is very close co-operation between the two institutions. As a result of EU directives, there had been recent major changes in German banking laws.

4.In the case of confirmation of wrong-doing at a particular bank, Mr. Görtz indicated that an individual bank manager could lose his licence to act - this was regarded as an effective deterrent.

5.In relation to bank accounts held overseas, the German authorities have no influence. New regulations forbid German citizens trading in foreign deposits. In that context the German Ministry of Finance would be unhappy with the Irish Financial Services Centre in Dublin or similar facilities in Luxembourg which attracted German money. Within Germany, however, branches and subsidiaries of foreign banks are subject to German laws and regulations. Tax laws require identification of all customers and proper controls by auditors. On the other hand, the Bundesbank treats all its transactions with utmost confidentiality and does not reveal details to third parties. Its formal role was limited to overall financial security and stability within the German banking system.

Bonn (9 June 1998)

6.The delegation met Dr. Werner Kerkloh, Director in the German Ministry of Finance.

Dr. Kerkloh explained to the delegation that bank licensing, supervision and regulation is centralised in Berlin through the FBSO. That Office is concerned about prudential matters, but not bank/client day-to-day relations. Consumer protection falls under the Department of Justice and the Highest Court in Karlsruhe. Recent changes in German legislation (under six headings) had set out the regulatory position in relation to the supervision of banks, including intermediaries. The recently established European Central Bank would have no role in relation to regulation/supervision of commercial banks at National level.

7.While there were no direct comparisons in Germany with the Irish credit union system, co-operative banks (in which investors held the shares) were carefully controlled. Special guarantees, as well as special funds and insurance were available to ensure investors were protected.

8.In relation to controls and supervision, the FBSO requires all banks to supply that Office with all bank audit reports. In cases where there are doubts or problems, the Office may insist on special reports or audit queries. In cases of discovery of wrong doing, there is a procedure for imposing administrative fines and/or referral to the relevant authorities for criminal prosecution. Banks are also legally required to provide early warning on problems on a confidential basis to the FBSO. In general the Office maintains a moratorium on publicity but reserves the right to go public if the need arises.

9.There followed a meeting with two officials in the Ministry of Finance with particular reference to the tax aspect of banking (Mr. Bernd Metzner and Mr. R.D. Scheurle).

10.As regards off-shore accounts held by German citizens, the delegation confirmed that the German authorities do not have access to, or control over, banks or accounts held overseas. However, since 1993 citizens are subject to a 30 per cent withholding tax on interest on accounts abroad - recent cases revealed in Luxembourg were cited as examples. There were on-going and difficult negotiations with Luxembourg on the subject. In reality, it was difficult to oblige account holders in Germany to reveal details on such accounts. Banks are obliged to prove the legitimacy of account holders within Germany by means of passports or other I.D. Withholding tax of 30/35 per cent is paid over to the Revenue authorities mostly on an aggregated basis, i.e. individual details are not revealed. Systematic checks are carried out regularly to ensure that the regulations and tax laws are being complied with. The banks, rather than their individual customers, are liable for such tax payments. A sizable number of prosecutions has been successfully taken in the case of defaulters. Individual Federal States pursue such enquiries through their investigation agencies. Banks, including staff, can be co-defenders in cases where aiding and abetting in tax evasion is suspected. In many cases the tax authorities learn of such cases through anonymous correspondence. Underlying the system of investigation, however, is a legal requirement to treat information as confidential, i.e., investigation officers may not pass on information to tax authorities or other third parties, except in important and exceptional circumstances.

11.In relation to tax laws and requirements, all companies setting up in Germany must register details with the appropriate agencies and notify the tax authorities.

Stockholm (10 June 1998)

12.The delegation met Mr. Mats Walberg, Deputy Director, Swedish Ministry of Finance and two other officials, Mr. Gustaf Sjoberg and Ms Margareta Palmstienna. Mr. Walberg briefed the delegation on the role of his Department in relation to control of banks and credit institutions through specific legislation. A banking crisis in Sweden in the early 1990s had led to a considerable tightening up of the regulation and control of banks. Apart from the independent Financial Supervisory Authority (Finansinpektionen) there was also an ad-hoc Committee on Laws for the Banking System (appointed by the Ministry of Finance) which included parliamentarians and other non-elected experts and officials. The Ministry of Finance did not interfere with the FSA on a day-to-day basis. The Central Bank (Riksbank) had a central role in relation to Sweden’s monetary policy, including the promotion of the financial stability and efficiency of the payment system.

13.In relation to off-shore accounts, Mr. Sjoberg explained that strict identification procedures in Sweden ensured that there was tight control in relation to tax matters - the FSA was obliged in law to notify the tax authorities or financial police (within the regular police force) in cases where tax evasion was detected or suspected. In relation to breaches of the law, the individual bank was held responsible - after a warning a bank’s licence could be revoked.

14.The FSA was empowered to appoint auditors to banks, either on the regular team of auditors or in special cases where malpractices were suspected. Annual reports by the FSA are provided to the Ministry of Finance.

15.Consumers in Sweden are protected by a Consumer Ombudsman, who deals with complaints against institutions - there is also a competition authority which ensures fair competition in relation to financial and other institutions.

Financial Supervisory Authority (FSA)

16.The delegation met Mr. Hans Schedin, Chief Legal Counsel, Director-General’s Office. Mr. Schedin outlined the role and functions of the FSA, explaining that, in 1991 there was a merger of banking and insurance inspection under the FSA (see summary document). Under EU Directives there is a deposit guarantee scheme which protects customers up to 200,000 Kroner (IR£20,000 approx). Banks are obliged to pay fees towards the services provided by the FSA. The Board of the Authority is totally independent, the Director-General being Chairman of the Board. Through the Director-General’s Office the FSA supervises the insurance market, the credit market and the securities market.

17.Mr. Schedin explained that a banking crisis in Sweden in 1990 had led to an urgent overhaul of the regulation and supervision of the banking and insurance markets, resulting in the establishment of the FSA. One of the most effective powers available to the FSA allowed the Authority appoint an independent auditor to the team of external auditors examining the accounts of financial institutions (paid for by the bank in question). Under Swedish law, auditors are formally obliged to report any suspected criminal activity to the appropriate authorities. While the FSA does not deal with individual consumer complaints, each bank is obliged to appoint a person to deal with consumer-related issues. Special courts also deal with complaints and hand down non-binding recommendations.

18.The FSA also has power to revoke bank licences but no action had been taken in that area to date since the introduction of the new Authority. However, another formidable deterrent is that the FSA can order a meeting of shareholders of a bank to be called and can present its critical views to the board of directors, thereby forcing action through moral suasion and/or ensuing publicity.

19.Finally, Mr. Schedin confirmed that the establishment of the Swedish Investor Guarantee Scheme of Compensation for investors arose from a specific EU directive.

Copenhagen (11 June 1998)

20.The delegation had a joint meeting in the Danish Economy Ministry with Mr. Torban Garne and Ms. Pernille Gram, Economy Ministry; Mr. Carsten Biltoft, National Bank (Central Bank) and Ms. Susanne Gotil, Danish Financial Supervisory Authority (FSA).

21.Ms Gotil outlined the role and powers of the FSA, which is independent of the Ministry and the National Bank. Its main objective was to check whether banks complied with the law. Accounts of all banks were examined in a structured manner by means of quarterly checks on balance sheets and via audits. In addition, a series of inspections may also be carried out. The FSA had been rationalised 10 years previously, so that the regulation and supervision of all financial and insurance institutions fall under the FSA. There was, however, an underlying requirement to balance stability of the overall financial sector with the need for public accountability and compliance with the law.

22.Mr. Garne informed the delegation that a person representing the public interest must be appointed to the board of Danish banks, though that requirement was not perhaps as effective in practice as compared with expectation. The Danish Economy Ministry was also entitled to put a member on the board of all credit institutions. In reality, due to legal constraints in relation to confidentiality, it did not necessarily follow that the Ministry or the FSA would learn of all cases of malpractice.

23.As regards money laundering, however, banks were obliged in law to notify the authorities. It is in fact illegal to have an overseas account unless full details are disclosed to the State. The tax authorities have very wide ranging powers and have unlimited access to details of all account holders. As in the case of Sweden, foreign banks having branches in Denmark, are subject to their own domestic law, while all banks operating as subsidiaries or ‘stand alone’ banks, are subject to Danish laws and controls. Off-shore bank accounts are also subject of supervision by the Danish authorities. However, it was not clear from samples cited, whether proven structures existed for the detection of tax fraud within the banking system overall.

24.As regards consumer protection in the banking sector, the FSA has no formal role. All complaints are handled by the Consumer Complaints Body which is an independent agency. It was also pointed out that there were clear divisions of responsibility relating to tax, financial stability, consumer and policing matters, i.e., as in other countries a system of on-going sharing of information between agencies had not evolved, mainly due to the need to protect confidentiality. However, in relation to banking malpractice, the FSA controlled the ultimate sanction of withdrawing a licence to operate under a ‘fit and proper’ (to practice) procedure. The FSA also had powers to appoint its own auditor to the board of any financial institution.

25.The delegation was supplied with further background papers and information on the system operating in Denmark, including a copy of “The Commercial Banks and Savings Banks etc. Consolidated Act, 1996” which contains provisions implementing Council Directive No. 73/183/EEC etc.

26.Due to pressure of other business, the Danish Business and Industry Committee cancelled a meeting also scheduled for 11 June.

Financial Services Authority UK

27.The delegation, while unable to visit the UK in the time available, also sought detailed information on the operation of the Financial Services Authority which, following a radical restructuring of an existing regulatory regime, is operational from 1 June 1998. The following summarises the FSA’s legislative background and regulatory scope. Source material/references are appended.

“The legislative background

4.The FSA, which is in corporate and legal terms the Securities and Investments Board (SIB) renamed, is a company limited by guarantee. It will acquire its full range of responsibilities in two states, following the enactment of the necessary two pieces of legislation.

5.First, the Bank of England Bill will transfer from the Bank to the FSA responsibility for supervising banks, listed money market institutions³ and related clearing houses.⁴ That Bill will make some consequential changes to the Banking Act, for example to provisions for funding banking supervision (on which a consultation paper is being published on 28 October). The Bill will, it is hoped, receive Royal Assent early in 1998. The date on which the FSA acquires its new powers to supervise banks is referred to in this document as ‘N1’ - likely to be April 1998.

6.Second, the proposed financial regulatory reform bill will create a new statutoryu regime under which the FSA will, in broad terms, acquire the regulatory and registration functions currentlyu exercised by the Self-Regulating Organisations (SROs),⁵ the DTI Insurance Directorate,⁶ the Building Societies Commission, the Friendly Societies Commission, and the Registry of Friendly Societies. The FSA will also be given responsibility for the authorisation of firms currently authorised to do investment business by virtue of their membership of a Recognised Professional Body (RPB). The Government has indicated its intention to publish this Bill in draft, for consultation, in the summer of 1998. Early introduction of the Bill in Parliament might lead to enactment in 1999. Full implementation will, we assume, follow as soon as practicable after that. The date on which the FSA acquires the full range of powers under the financial regulatory reform bill to regulate this wider constituency is referred to as ‘N2’ - perhaps late 1999.

Financial Services Authority”

Note:

In Bonn, Stockholm and Copenhagen, the delegation had working lunches with Ambassadors Pádraig Murphy, Martin Burke and James Sharkey, respectively. In Bonn the delegation also met the overseas representatives of Aer Lingus, Bord Fáilte, Bord Bia, Forbairt, Bord Iascaigh Mhara, Irish Dairy Board, An Bord Tráchtála and IDA and would like to record its appreciation for the individual briefings and exchanges of views.

Appendix B

Joint Committee on Finance and the Public Service Visit to Austria, France and The Netherlands

8 - 12 June 1998

Vienna (9 June, 1998)

This meeting was with a joint delegation from the Austrian Finance Ministry and the Austrian Central Bank. As with many other central banks, the role of the Austrian Central Bank is a prudential one with an emphasis on maintaining stability. Overall responsibility for the banking system lies with the Ministry of Finance but the demarcation line between institutions is sometimes blurred. When the Committee delegation explained their raison d’ètre i.e., interest loading and off-shore accounts being used to avoid payment of tax, the Austrians were quick to point out that these were not significant issues with them. It was also pointed out that there was no regulation of loan and deposit rates and that there are no banking cartels.

In terms of the consumer interest, there was no position such as that of Director of Consumer Affairs and it was evident that while written contracts exist for all loan and current accounts, consumer interests in general are not considered a priority.

Returning to taxation, the delegation were informed that there was no reporting system in place between the banks and the taxation authorities. Reporting does occur, however, where criminal proceedings have been initiated.

There is a strong code of banking secrecy and this is provided for specifically in the Austrian Banking Act. When questioned further on off-shore accounts, the Austrians responded that they were not a problem and they emphasised the importance they attached to the free movement of capital.

In summary, the Austrians gave the impression that their system and regulation thereof was above reproach. consumer issues were marginal and as stated above, off-shore accounts were not considered a problem. Privately, the Committee delegation wondered if indeed everything was as portrayed, particularly with a major economy immediately next door.

Paris (10 June, 1998)

Meeting with Mr. Gabriel Benoin and colleagues from the French Bankers Association.

Deputy Noonan explained the rationale for the Irish delegation’s visit specifying the problems experienced with interest loading on accounts and the utilisation of off-shore accounts for tax evasion purposes. He explained that the Irish Central Bank had no great consumer protection mandate and that the enhanced role of the Consumer Affairs Director was not in place when the difficulties arose at NIB.

It was explained that the French banking system was highly regulated and the following points are worth noting:

(a)There is a system for the reimbursement of people who lose money through bank failure.

(b)In matters of dispute there is a Credit Company Ombudsman and also a National Council of Consumers and Banks which makes recommendations. There is a mediation service which, if it fails the matter, goes to Court.

(c)Most difficulties are resolved at counter level.

(d)Banks must report all interest payments and dividends to the tax authorities and they deal with off-shore accounts and related issues.

(e)There are no exchange controls.

(f)There exists as part of the banking framework, a Household Debt Commission, with the aim of preventing and resolving personal debt problems. This Commission attempts to work out agreements between debtors and creditors and the back-up services for the Commission are provided by the Banque de France.

The view emanating from this meeting, and it should be noted that it was with a group of bankers, was that the consumer was well looked after in the French scheme of things and that, in fact the French banking system was over-regulated at the expense of profitability.

Meeting with Mr. Pierre Henri Cassou, Official at both the Banque de France and the Ministry of Finance.

Mr. Cassou was of the opinion that over-regulation was the main problem with the French system resulting in low levels of profitability and business going elsewhere. He stated that the French consumer was very much protected - too much so in his opinion and he cautioned the delegation against bringing in similar regulations in Ireland.

He pointed out for example that banks could not charge for checking accounts and the existence of a general regime which precluded banks from exploiting many commercial opportunities to the full. He suggested that as a consequence the French banking system was weak. This was an interesting comment from a person who is involved at a senior level in the French Central Bank but it should be said that he felt strongly that over-regulation and lack of political will to redirect the balance in favour of the banks was an inhibiting factor in the French economy.

Amsterdam (12 June, 1998)

This was a meeting with officials from the Dutch Central Bank. Like the other countries visited, the Dutch Central Bank is primarily a supervisory body. Like the others, off-shore accounts were not a matter of concern but full disclosure is made of all interest payments to the taxation authorites.

In terms of consumer protection, the Dutch representatives felt that this was achieved move by supervision, which leads to financial stability thus protecting the interest of the consumer in an indirect manner. In terms of the consumer, however, there has been a recent adjustment to the Act on the supervision of the Credit System 192 which are in effect enabling regulations governing the provision of information to the public. If the self-regulatory systems employed by the banks are not satisfactory, the enabling regulations will be invoked by the Minister for Finance.

The point was also made that there are no specific controls for the monitoring and regulation of off-shore accounts - regulation applies to bank accounts in totality. Banks are bound by the obligation of professional secrecy, without prejudice, however, to cases covered by criminal law and where a bank becomes aware of fraud/forgery they may inform the Public Prosecutor.

There is an Act on Consumer Credit in force providing for licensing of consumer credit providers (other than a banking licence) and there are specific rules laid down governing loans below the IR equivalent of £18,500, regarding advertising, terms and conditions etc.

The Hague (11 June, 1998)

This meeting took the form of a discussion with officials from the Dutch Ministry of Finance and in fact duplicated some of the subsequent ground covered with the Central Bank. In summary, consumer interests are not a core value of the financial and banking system but are regarded as accruing indirectly from overall prudence in the supervising of the system.

A notable point made by the Dutch was the importance of the integrity and competence of bank managers in terms of expertise and trustworthiness, countering conflicts of business and personal interests and the capacity to deal with fraud and money laundering. These qualities and functions contribute to the protection of creditor interests and the consequent stability of the financial system.

With regard to taxation, the fiscal authorities have access to all the information they require from the banks.

Apppendix C

List of Witnesses

Ireland

Mr. William Fagan, Director of Consumer Affairs.

Mr. Cathal MacDomhnaill, Chairman, Office of the Revenue Commissioners.

Mr. P.H. Mullarkey, Secretary General, Department of Finance.

Mr. Maurice O’Connell, Governor, Central Bank of Ireland.

Mr. James Bardon, Director General, Mr. Frank Sexton, Deputy Director General and Mr. Felix O’Regan, Head of Information, Irish Bankers’ Federation.

Overseas

Mr. Karsten Biltoft, Head of Section Economist, Financial Markets Department, Denmark.

Ms. Susanne Gotil, Deputy Financial Inspector, Danish Financial Supervisory Authority

Mr. Torben Weiss Garne, Director, Ministry of Economic Affairs, Denmark.

Mr. Günter Görtz, Bundesbankdirektor, Deutsche bundesbank, Germany.

Dr. Werner Kerkloh, Regierungsdirektor, Bundesministerium der Finanzen, Germany.

Mr. Hans Schedin, Director-General’s Office, Swedish Financial Supervisory Authority, Stockholm.

Mr. Mats Walberg, Deputy Director, Ministry of Finance, Stockholm.

(See Appendix B in relation to Austria/France/The Netherlands.)

Appendix D

Bibliography/Sources

Ireland

1.Statement of the Governor of the Central Bank of Ireland (1 April, 1998)

(See Appendix E)

2.Note on the conduct of inspections of banks by the Central Bank

(7 April, 1998) (See Appendix E)

3.Briefing material supplied by the Governor of the Central Bank (2 June, 1998) on Central Bank supervision of banking institutions in EU countries.

(See Appendix F)

4.Letter from Mr. Michael Clarke, Consumer Protection Branch, Department of Enterprise, Trade and Employment (5 June, 1998).

(See Appendix G)

5.Letter of 5 June, 1998 received from Mr. Robert Carey, Department of Finance.

(See Appendix H)

6.Excerpt from Danish newspaper 26 May, 1998 re bank over-charging.

(See Appendix J)

Overseas Material

^(a) Austria, Denmark, France, Germany, The Netherlands and Sweden. The Irish Embassy in London also supplied source material on the United Kingdom’s’s Financial Services Authority.

³ As defined in s43 of the Financial Services Act 1986, Pt 1.

⁴ As defined in s171 of the Companies Act 1989, Pt VII.

⁵ Investment Management Regulatory Organisation, Personal Investment Authority and Securities and Futures Authority.

⁶ Ministerial responsibility for this area is expected to transfer to the Treasury later this year.