Committee Reports > List of Committees > Joint > 2000 > Committee on Finance and the Public Service > Report of the Implementation Advisory Group on the Establishment of a single regulatory authority for the financial services sector

MIONTUAIRISC NA FINNEACHTA

(Minutes of Evidence)

AN COMHCHOISTE UM AIRGEADAS AGUS AN TSEIRBHÍS PHOIBLÍ

JOINT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE

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Dé Céadaoin, 13 Deireadh Fómhair 1999.

Wednesday, 13 October 1999.

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The Joint Committee met at 6.00 p.m.

MEMBERS PRESENT:

The Joint Committee commenced in Private Session and went into Public Session at 6.06 p.m.

DEPUTY M. AHERN IN THE CHAIR.

Chairman: On behalf of the committee I welcome the Governor of the Central Bank, Mr. Maurice O’Connell, the Director of Consumer Affairs, Ms Carmel Foley, Mr. Tom Considine, Assistant Secretary, Department of Finance, Mr. John Corcoran, Assistant Secretary, and their colleagues to this meeting to discuss the report of the implementation advisory group on the establishment of a single regulatory authority for the financial services sector. Before starting I would point out that whereas Members have privilege in respect of utterances made before the committee, other persons appearing before the committee do not. I invite Mr. O’Connell, Ms Foley, Mr. Considine and Mr. Corcoran, in turn, to address the committee for approximately ten minutes each, after which there will be a general question and answer session.

Deputy McDowell: This is a very interesting exercise in that we have got the various players in the game to come along but we do not have the referee or the person who has, apparently, decided the result of the match. Did we invite the Attorney General or is it possible to invite the Attorney General to present the report?

Chairman: As I understand it there is no decision yet.

Deputy McDowell: I appreciate that but he did draw up the report or, at least, he was chairman of the implementation group.

Chairman: We did not invite the Attorney General.

Deputy McDowell: Does he take the view that he should not publicly speak of it or what is the position?

Chairman: At the last meeting it was agreed that these people would be invited. The question of inviting the Attorney General was—

Deputy McDowell: It did not arise?

Chairman: No.

Deputy McDowell: All right.

Chairman: Mr. O’Connell.

Mr. Maurice O’Connell: Thank you, Chairman. In July 1998 the committee completed a report on the regulation and supervision of financial institutions. This was laid before the Houses of the Oireachtas and subsequently the Government decided, in principle, to establish a single regulatory authority for all financial services.

In the context of the preparation of the report last year, the committee visited a number of countries in Europe to study arrangements at first hand. Across the European Union there is a great diversity of arrangements and it is the exception rather than the rule to combine within one organisation the functions of prudential supervision and consumer affairs. The United Kingdom has set up a single regulatory authority outside the Bank of England. It is much too early to pass judgment on this but there had been serious transition problems and the UK, in any event, may not be a good precedent for our situation because of the huge difference of scale.

In eight out of the 11 European member states, the Central Bank is the prudential regulator of credit institutions. There is a broad expectation that the European Central Bank may have a coordinating role in this area in due course. I would only be engaging in speculation if I went any further than that.

World-wide there are likely to be considerable changes ahead. There is a general realisation now that the current rules may be inadequate because of the rapid expansion of the financial markets and the need for greater attention to risk factors. The big issues being addressed now include capital adequacy, cross-border measures, Internet banking, electronic money and money laundering. Up to now the debate on the single regulatory authority has been driven essentially by concern for the consumer. This is entirely understandable but it must not blind us to the fact that prudential supervision is also most important. It may be forgotten that prudential supervision is the first line of defence for the consumer. Its first duty is to the depositor who is also a consumer. The Central Bank has been berated, from time to time, for failing to pursue other consumer issues but the reality is that up to now we do not have the authority to do this. We have been criticised in the past because of bank charges, retail interest rates and disputes with customers. It is a fact of life that this is not our area and I am not trying to be defensive; I am simply stating the facts. We all recognise that there is a gap in the system and in the submission to the McDowell group the Central Bank outlined how consumer protection activity might be structured and operated. To my knowledge, the bank is the only organisation that has addressed this subject in detail up to now.

Consumer regulation is high profile. That high profile sometimes leads to unreasonable expectations. The essence of consumer regulation centres around access to information, standards of transparency and the right of appeal. It does not extend to taxation. The key factor is the right of the consumer to be properly informed at all times. Thereafter the consumer should be responsible for his or her own commercial decisions. The old principle of caveat emptor , which has been evoked elsewhere, should apply here also. This is not just a responsibility, it is a right, and it would be an insult to the intelligence of the consumer to seek to change this. The consumer has the right of choice and the right to make mistakes. There is a balance here and we need to get it right.

It is difficult to explain in layman’s terms what prudential regulation is all about. In short, it aims to protect depositors and secure the stability of the financial system. It focuses on risk in particular. It has to achieve a balance between intervention and interference. When it succeeds there is no visible or measurable results and no system can guarantee 100 per cent success because it is so difficult to detect an individual or indeed an institution determined to break the law. Ultimately, all supervision requires co-operation from the institution being supervised.

The Central Bank has no role in relation to the tax affairs of clients of financial institutions. We have no means whatsoever of establishing the tax status of a client and we have no communication with the Office of the Revenue Commissioners. This is the law as it now stands. I hope I am right in believing that this is no longer an issue in dispute. Our track record in prudential supervision is very good. The last bank failures in this country were some 20 years ago and they were relatively small. This contrasts with the picture in so many European countries and in the United States and Japan where rescue operations have had to be undertaken at great cost to the taxpayer. The AIB-ICI crisis in 1985 was an insurance failure and not a bank failure.

Over the years our banking system has gone from strength to strength and has extended overseas more and more. This development is to the benefit of all of us. Our banking industry and indeed our financial industry in general is facing a period of unprecedented change and challenge, and the latest manifestation of this has been the arrival of the Bank of Scotland into the Irish mortgage market. Of more significance perhaps in the longer term is the reality that if our industry is to expand further, it must do so for the most part overseas.

The committee and myself have an interest in asking what will be the position of this industry in five to ten years from now. For my part, I would like to see a strong, vibrant and indigenous banking industry in the longer term. I want to see Irish banks survive and retain an Irish identity. I would be most disappointed if the Irish names disappeared. Part of the strategy for survival and expansion must be a good regulatory system which carries credibility both at home and abroad.

In recent years the Central Bank has been assigned additional supervisory responsibilities including stock exchange and also investment intermediaries, and we have never hesitated to take on extra work. We set up controls and inspections where none existed before and this embraces most activities, with the exception of insurance, in the International Financial Services Centre. There is total agreement that good regulation is vital to the continuing success of the centre. The committee should ask the leading practitioners who are there if there is any doubt about this, why they have such confidence in the Central Bank, and why it means so much to them that the bank should continue as regulator. It is common knowledge that they are quite disturbed at the prospect that the bank might not be the regulator in future. I admit this kind of regulation may be very far removed from the standard problems of consumer protection. It is essentially about the measurement of risk. Many of the activities in the centre are at the forefront of financial technology and the regulator has to be an expert and he or she must be on top of the job. If we want new structures to deal with the regulation of the IFSC we better be very sure of our ground before we throw away a system that by common consent is working well.

The Central Bank is bound by strict rules of confidentiality that are not of our making. We may not reveal information about individual companies or individuals in the normal way. These rules are international. They are enshrined in European and Irish law and if we breach them we are liable to severe penalties. The reasoning behind this confidentiality is that regulators world-wide share information and suspicions. This sharing would simply break down if information were available to third parties. It is vital to good regulation because the financial industry is so mobile internationally. I assure the committee that more than once I wished there could be a public profile on the work we do so as to demonstrate the importance of prudential regulation.

The Central Bank has a duty to be satisfied that management of financial institutions are people of integrity and observe proper ethical standards at all times. I am disappointed at the failing of standards unearthed by the revelations in relation to DIRT abuses. There are lessons here for the Central Bank as well as others and I readily acknowledge that. In fairness, it should be acknowledged that in recent years the culture has changed. I believe that across the financial sector generally there is now a genuine intention to be compliant.

The debate on regulation has continued for more than a year. I trust that it can be concluded reasonably soon so that we begin to put in place whatever changes are decreed. Uncertainty is in nobody’s interest. Because of the extended delay there is now a problem of uncertainty in the Central Bank. As a consequence we find it increasingly difficult to recruit experienced personnel because we can give no assurance about the future. This situation should not be allowed to continue. If it does, damage will be done to the fabric of regulation.

A decision in principle has been made to establish a single regulatory authority that embraces all financial institutions. If this decision is to be implemented, I contend that the authority is best located within the Central Bank framework. We have already set out in submissions to the McDowell group how this might be organised, giving due rating to the prudential and to the consumer responsibilities. We are open to other variations provided they fit into a workable organisation. We have already demonstrated our readiness to assume extra responsibilities and we are ready now to go further. Thank you, Chairman and members.

Chairman: Thank you, Mr. O’Connell. Ms Foley.

Ms Carmel Foley: Thank you, Chairman, for the invitation to be here. The governor has traced the genesis of why we are here, mentioning the committee’s report and so on. That is in my first paragraph so I will not go over it again.

I have a role in this area in relation to licensing credit intermediaries, mortgage intermediaries, money lenders and pawn brokers. I also have a role in bank charges, not rates of interest but other fees and charges. I also have responsibility generally, as part of consumer legislation, for unfair terms and conditions in consumer contracts and that also applies in the financial area.

There has been much talk and a good deal of public discussion and agreement on the need for a single regulator. It would be artificial if I did not admit that the issue that is causing a great amount of debate is that of where the regulatory authority should be located rather than what it should do. The committee considered this in great detail and, as members are aware, the majority recommended an independent new greenfield organisation. One of the main reasons for this is that from the point of view of consumers it seems that to start from scratch and build in the consumer protection function rather than bolting it on to an existing organisation means that consumer protection will be on a par with the prudential regulation.

Consumers’ confidence has been shattered by the number of scandals in this area. They include the National Irish Bank’s overcharging on consumer accounts, which High Court appointed inspectors are continuing to investigate; the DIRT issue, as has been mentioned; the mis-selling and churning in the insurance sector, including in Irish Life; misappropriation of funds in the investment sector, as in the case of the appointment by the High Court of a liquidator in the Tony Taylor group; and, in recent times, the Ansbacher issue. These scandals have caused the ordinary person to question our current framework.

Howard Davies, Chairman of the Financial Services Authority in the UK talked recently about the change in culture that is needed. He said:

Regulation while it must be sensitive to the needs of financial institutions and markets is not for those institutions, it is there, ultimately, to protect consumers. We also believe that a single regulator is better for consumers who were confused about the previous system. In future, there will be a one-stop-shop for them too in the form of one place to come for complaints, one ombudsman scheme, one compensation scheme, all underpinned by two new statutory objectives, to promote consumer understanding of the financial system and to protect consumers.

Institutions, if given an inch, will take a mile. Statutory regulators need to be proactive in enforcing legislation and bringing about the conditions for a competitive market. In relation to the area for which I have responsibility, we have had some success in bringing about greater transparency and making available more information regarding bank charges. Institutions have discovered that mine is not a rubber-stamping exercise and some have been surprised when I have refused to approve charges on the basis that they are not commercially justified. Much more could, however, be achieved within a properly resourced authority with the concentration of financial expertise, which a single authority would have.

On the question of complaints by consumers, it is appropriate that there would be a one-stop-shop. In the report we recommended that a statutory ombudsman scheme would operate rather than the current situation of the voluntary schemes operated by the insurance sector and the banking sector, which do not provide a one-stop-shop. They are voluntary in nature and do not cover all sectors. It is extraordinary that if one buys an insurance policy through a broker, one has no redress to the ombudsman, but if one buys the same policy from one of the main providers, one has a means of redress. That is unfair to customers. Voluntary ombudsman schemes do not provide the necessary feedback for enforcement and legislative reform because, apart from a summary annual report being published, the important information does not get back to the legislators. Self-regulation and voluntary codes of conduct have not worked. A statutory scheme would deal with consumer complaints, centralise compensation and redress funds. Such a scheme would be above reproach and beyond industry and sectoral interests.

In terms of competition, vigorous and broadly based competition is still one of the best forms of self-regulation in any industry. This does not exist in the provision of financial services in Ireland and the entry of the Bank of Scotland is a good example of that. Before the entry of the Bank of Scotland into this market we were told by the banks that they had to maintain their margins, but since the entry into the market of the bank of Scotland that no longer seems to be the case. Irish consumers are paying above the odds for a whole range of financial products compared to their UK and European counterparts. That is something the Competition Authority might wish to examine. The UK Chancellor’s Review of Banking concluded in an interim report that competition is lacking in the UK banking sector.

On the question of sharing information, as Member are aware, this is also dealt with in the report. There is no conflict in making the single regulator responsible for prudential regulation and consumer protection. It ensures the flow of information and builds up a critical mass of financial expertise in the one organisation, which is particularly relevant in a small country. It is only through locating both these functions in the one organisation that it will be possible to overcome one of the biggest flaws in the current framework, the inability of regulators to share information. As the governor said, under European Law there is a restriction on disclosing information even to other regulators. This restriction is untenable in a situation where the producers and sellers of the services are able to diversify and, in doing so, become answerable to a number of different regulators. In whose interest is it that such fragmentation exists at present? We, in Consumer Affairs, encountered difficulty in the past because we were not able to obtain information, which was known to the Central Bank, in matters that concerned consumer protection within our area of regulation. The public will not accept that a State body cannot pass on information to other appropriate authorities.

We talked about streamlining approval, and in terms of the financial institutions, it would also help them to have a one-stop-shop compared to the current approach, which is fragmented and inefficient. As Members will have read in the newspapers, a new financial service will be launched shortly, known as “Tusa” - the TSB and Superquinn are coming together to launch in-store banking facilities for customers. When they came to us they told us they had to obtain separate authorisations and approvals for this venture from the Central Bank, the Department of Finance and ourselves. This is because each of these organisations has its own individual focus and legislation rather than a streamlined approach. Similarly in the international field, unified regulation would facilitate Ireland. No one would be in any doubt as to who regulates our financial institutions and similarly overseas bodies wishing to establish in Ireland would have one single point of contact.

The report of the implementation group also highlighted unregulated activities. This is a matter of great concern to us and we hope it will be taken up by the new authority. As members are aware, there are some unregulated mortgage lenders - people who do not need to be regulated either by the Central Bank or by the Office of Consumer Affairs. This is something that possibly should be addressed in advance of the establishment of the single regulatory authority and it may require an amendment to existing legislation in a shorter timeframe.

To add the role of single regulator to the other functions of the Central Bank would be out of line with practice elsewhere. My authority on this is Professor David Llewellyn, who is Professor of Money and Banking at Loughborough University in England. When addressing the Irish Centre for Commercial Law this year, he stated that besides the UK there are “seven other countries with a single mega regulator, but in none of them was it located in the Central Bank. If the Central Bank were chosen to be the single regulator, Ireland would be the only country in the world apart from Singapore, with such a structure, and the Singapore Monetary Authority is not really a Central Bank.”

Within Europe, Sweden, Denmark, Norway and the UK have single regulators. This trend recognises the growing move towards financial conglomeration. Traditional boundaries between banks, insurance companies and investment funds are becoming blurred with these large conglomerates. Ireland has an independent Central Bank. In a book edited by Charles Goodhart, which surveyed 85 countries, it was found that “the more you create an independent Central Bank, the less appropriate it is for the Central Bank to regulate banks, and even less appropriate to regulate other institutions”. The vast majority of institutions to be regulated by a new single regulator will not be banks.

Professor Llewellyn also poses the question: “could we achieve sufficient accountability of the Central Bank Governor, for the regulatory role of a mega regulator, given the EU requirement for his independence?” This is also dealt with in the report. It is a Maastricht requirement and, obviously, the question of accountability is extremely important.

I believe that a new, independent SRA would be the first State agency to have financial regulation as its primary objective. It would place consumer protection on a par with prudential supervision, would provide an integrated approach to regulation, enjoy the confidence of Government and consumers, have a separate corporate identity and a culture that would attract and retain staff from a range of existing regulators, staff who would concentrate on that single role rather than as is the case at present. It would also result in the free flow of information for prudential supervision and consumer protection, both of which should have equal importance. It would, of course, result in greater accountability to the Oireachtas.

Indeed, it is reported in today’s Financial Times that the FSA in the UK has put out what they call 11 commandments that financial companies and bodies must follow. It is tremendous to see included, right under prudential regulation, customers’ interest and communication with customers. It is right up there as one of the commandments. It is not a subsidiary or smaller body. It is not a case of “if consumers have a problem, let them be dealt with elsewhere”.

Chairman, in your report of July last year you said you were perturbed to learn that no structure or body existed which could, with confidence, assure the committee or the general public that the commercial banking sector or other financial institutions were properly supervised and/or accountable. Sadly, this is still the case.

Chairman: Thank you, Ms Foley. Mr. Considine?

Mr. Considine: I wish to take this opportunity to outline the approach adopted by the Department of Finance in relation to the work of the implementation group on the establishment of a single regulatory authority for the financial services sector.

On 20 October 1998, the Government agreed in principle to the establishment of a single regulatory authority for the financial services sector at the earliest possible date and agreed to the immediate establishment of an implementation advisory group to progress the necessary work. The group was chaired by Mr. Michael McDowell, senior counsel and now the Attorney General. I was a member of the group. Its terms of reference are set out in pages one and two of the group’s report.

The group held 22 meetings and received submissions for 64 interested parties. It met with representatives of the staff currently employed in the area of financial services supervision, a representative of the UK Treasury, a representative of the UK Financial Services Authority and other interested parties. The group took account of the July 1998 report of this committee on the regulation and supervision of financial institutions. It also took account of the regulatory arrangements in other countries and the views of the parties who made submissions to it and who came to see it. Account was also taken of the analysis undertaken by the working group on banking and consumer issues established by the Minister for Finance in April 1998, the remit of which was overtaken by the establishment of the implementation advisory group.

The group also noted that the terms of reference of the Moriarty tribunal includes a remit to make whatever broad recommendations the tribunal considers necessary or expedient for enhancing the role and performance of the Central Bank as regulator of the banks and of the financial services sector generally. However, as the tribunal has not reported, the group was not in a position to take account of any work which the tribunal might have undertaken in relation to this matter.

In regard to the existing position, the group noted that Ireland’s financial services sector is supervised and regulated under a legal framework that is, primarily, the responsibility of the Departments of Finance and Enterprise, Trade and Employment. The Minister for the Environment and Local Government is responsible for legislation in relation to building societies. This legal framework is made up of both Acts of the Oireachtas and regulations made under statute on foot of EU regulations/legislation. The Department of Finance is responsible for the development of the legal framework for most of the regulation of the financial services sector carried out by the Central Bank. The Department also represents Ireland in the development of EU legislation in the same area.

Apart from his role in providing the legal framework, the Minister for Finance has no general statutory function in relation to supervision. The legislation provided by the Minister for Finance requires the Central Bank to undertake the actual supervision. The bank is required to undertake the supervision in accordance with the legal framework provided by the Minister for Finance. The Minister for Finance appoints the members of the Central Bank board with the exception of the governor, who is appointed by the President on the advice of the Government.

A key objective of the Department of Finance is to ensure that the Irish financial sector remains competitive and successful. Consistent with this, the Department believes that the sector must be regulated to best international standards, including the regulation of issues of particular concern to the consumer, with the maximum possible transparency.

Allegations concerning financial institutions have raised questions about the nature and scope of supervision of the financial sector. In particular, they have raised questions relating to the adequacy of the protection of consumers in their dealings with financial institutions and about the adequacy of the accountability obligations of the State regulatory authorities. Consequently, the Department is clear that the single regulatory authority must allow for the maximum degree of co-operation permitted by EU law between those responsible for prudential regulation, consumer protection and law enforcement generally. The single regulatory authority must also be seen to be subject to the maximum possible degree of accountability.

The group worked well and reached agreement on all but one point, the structure and location of the SRA. The main point of difference is whether the single regulatory authority should be an entirely new, independent organisation - the majority view - or whether this role should be given to a restructured Central Bank, where the board of the Central Bank retains responsibility for policy on regulation.

There was general agreement in the group on the following points: Ireland needs a first class regulatory authority operating to high standards and dedicated to its regulatory role; the SRA should be fully accountable in the discharge of its functions in a transparent way to the Minister for Finance, the Oireachtas and, in part, to a statutory financial services ombudsman; the SRA should have clear statutory responsibility for the implementation of regulation and supervision of financial services coming within its remit; it should be responsible for the implementation of both prudential regulation and consumer protection in the provision of financial services and should provide a “one stop shop” both for the regulated bodies and their customers; the SRA should be self financing in the sense that, taking one year with the next, the full costs of the SRA should be defrayed by the entities regulated by it; it should be in a position to provide itself with the skilled staff and resources necessary to carry out its functions and the Minister for Finance should be the Minister responsible for the SRA.

In an early submission, the Department of Finance informed the group that it had an open mind on where the SRA should be located and that it would not reach a conclusion on this point before considering all the submissions made to the group and discussing them with the other members of the group. The Department, however, went on to inform the group that it took the view that regulation of the financial sector will contribute to the further development of the sector if it is consistent with the following principles: (a) it has the structure, skilled staff and resources required to provide the sector with a regulatory system which in all respects equals best international practice; (b) that there are clear lines of responsibility and accountability; (c) that there are acceptable and clear avenues for dealing with incidents of wrongdoing which come to the attention of SRA and (d) that it is consistent with pursuing a policy of maximum possible transparency in the regulatory area.

Having considered the issues in full, the views of all interested parties and after detailed discussion within the group, the Department reached the decision that the best option would be to locate the SRA within a restructured Central Bank. The model proposed by the Department to achieve this objective is set out at appendix II of the group’s report.

This model provides for the establishment of an SRA with consumer protection functions within the Central Bank. It provides for a high level of accountability for regulation to the Minister for Finance and the Oireachtas.

In parallel with the central banking function carried out as part of its ESCB activities in the euro zone, a separate division would be established within the Central Bank, headed up by a person with the same rank as the current Director General of the Central Bank. This person would be responsible for the implementation of the functions of the bank concerning all the prudential and consumer regulation assigned to the SRA and could be known as the Commissioner for Regulation. The functions of the Commissioner would be provided for by statute.

However, a person reporting directly to him or her, to be known as the Director for Consumer Issues, would also have specific statutory responsibility for consumer issues. The board would retain responsibility for policy in relation to regulation as provided in statute. The Commissioner for Regulation would have autonomy in so far as the operation of the regulatory system would be concerned and would only report directly to the board in respect of policy aspects of his or her regulatory and consumer affairs functions. The Commissioner would only report to the Governor in respect of organisational matters, such as staffing and finance. There would be a free flow of information between the regulatory and consumer divisions. Therefore, the problem to which the Director of Consumer Affairs referred would not exist.

With regard to accountability, the Commissioner for Regulation would be appointed by the board of the bank with the consent of the Minister for Finance for a fixed term which could be renewable. The post would be filled by open competition to be conducted by an independent body on a basis to be agreed by the Minister for Finance and the Minister for Enterprise, Trade and Employment. Both the Governor and the Commissioner for Regulation could each be required to appear before the relevant Oireachtas Joint Committee whenever requested and, in any event, at least once a year to answer questions in relation to regulatory and consumer affairs matters in the context of the bank’s annual report and a specific report by the Commissioner.

In addition, under the law at present, the Minister for Finance can oblige the board of the Central Bank or the Governor on behalf of the board to consult with him in regard to the execution and performance by the bank of any function or duty imposed on it other than those related to monetary policy. This power would continue under the model proposed by the Department of Finance and it would continue to apply to regulatory and consumer issues, thus emphasising the accountability to the Minister of these functions.

This model also envisages the establishment of a panel representative of consumer and industry interests which would be chaired by the new Commissioner for Regulation and which would provide a forum for reviewing the performance of the Central Bank in carrying out its financial regulatory duties as well as providing an opportunity for the industry and consumer interests to suggest initiatives which they wish to see pursued. This model also envisages the establishment of a single statutory Ombudsman scheme for financial services fully independent of the Central Bank. Complaints raised by customers of regulated entities would be referred to the relevant financial institution in the first instance. In the event that a customer is unhappy with the institution’s response he/she would be able to refer the matter to the Director of Consumer Issues in the Central Bank who, depending on the nature of the complaint, could deal with it himself or refer it to the Ombudsman. In any event, any decisions of the Central Bank in relation to customer complaints could be appealed to the Ombudsman.

The advantages associated with this model are that it addresses the need for change by providing operational autonomy for the regulatory function while preserving what is already working well. This is an important element. It would extend the statutory remit of the existing regulatory role of the Central Bank to include consumers who are at present provided for separately. It provides a high level of accountability. The relationship between the monetary authority and the regulator would not be disturbed if the SRA was located within the Central Bank. It is important that co-ordination between these two functions is maximised. The track record of the Central Bank in regard to its regulatory functions is extremely good and the confidence of the financial markets, both foreign and domestic, it has earned and retained is high. There is considerable support among the entities currently regulated by the Central Bank for it to become the new regulator. Criticism of the bank in relation to the exercise of its statutory functions, as prudential regulator, has been non-existent in the context of the submissions received by the group. It would provide for continuity of expertise and it would help to minimise industrial relations difficulties.

While a new stand alone organisation could give consumer interests a high priority and identity, there is no reason the Central Bank, if restructured in the way I have outlined, could not give the same focus and attention to consumer interests. The primary role assigned to the bank up to now has been prudential supervision. The model proposed by the Department for regulating consumer issues, combining as it does a statutorily based officer at senior level within the SRA and a role for an independent Ombudsman, would significantly strengthen the position of consumers and would overcome the main shortcoming perceived in regard to the existing regulatory role of the Central Bank.

The Department of Finance made it clear to the group that it had no objection to a solution which involved the establishment of a three board structure within the Central Bank. Subject to the provisions of the Maastricht Treaty, the main board would have responsibility for policy matters, including policy on regulation, and for corporate governance. One of the other two boards would have autonomy in the day to day implementation of regulation, both prudential and consumer. The other board would have operational responsibility for the non-regulatory business of the Central Bank, consistent with the provisions of the Maastricht Treaty. However, this approach to the restructuring of the Central Bank was also not acceptable to a majority of the group. I thank the Chairman and members of the committee.

Chairman: Thank you, Mr. Considine. I call Mr. Corcoran, who has a large tome with him.

Mr. Corcoran: It is not too large and much of its contents has been outlined already. By way of introduction and as this is my first appearance before the committee, I should say that I am in charge of both insurance and company law in the Department of Enterprise, Trade and Employment. I was also a member of the McDowell group on the implementation of the single regulatory authority and Ronnie Sheehan, who helped me with the work, is also present.

The document before the committee breaks down into four parts, not all of which are equally important. The first part deals with the current role of the Department in financial regulation. The second deals with the attitude of the Department towards a single financial regulatory authority. The third part deals with the location and structure of the regulator while the final part deals with legislative proposals which are with us at present and which we hope to bring before the members soon on improvements in the areas of financial regulation in which we are involved.

Part one relates to what we do with regard to regulation. We supervise insurance companies, of which there are approximately 120, and we add 15 insurance companies to our register each year. We monitor and regulate the market for insurance. This involves the cost and availability of insurance, which relates to the area of consumer protection. We oversee the self-regulation of insurance intermediaries. The Department also has the Registrar of Friendly Societies who oversees credit unions, of which there are almost 500 now, friendly societies and industrial and provident societies. We are the parent Department for the Director of Consumer Affairs, who already made a presentation to the committee, and within the Department we have a consumer protection section which deals with policy and new legislation in the area of consumer protection. This is normally generated by Brussels. This is what we do at present. There are approximately 60 staff engaged in the activities. We are involved in regulation from a prudential end and in the area of consumer protection.

In addition to what we do, there is self-regulation for insurance intermediaries. That is carried out by the Irish Brokers Association which has a membership of approximately 600 and by the Insurance Industry Compliance Bureau, which is an integral part of the Insurance Industry Federation, and there are approximately 3,000 intermediaries in that area. Our relationships with the insurance industry are good and workman like. There are, to be frank, difficulties between us, which must be resolved. I think it is normal to have such difficulties between those being regulated and the regulator.

I will move now from what we are doing to our attitude to a single regulatory authority for the financial services sector. We have been considering in the Department the question of a single regulator for some time - for at least two years and perhaps even longer, although not in such an intense way. The factors that influenced us to engage in that examination are listed in my document.

First, it is undeniable that there is a multiplicity of regulatory bodies at the moment. They have grown up over time. We have taken British legislation and implemented it here. The regulation and the legislation are not up to date. We are still dealing with some pre-Independence legislation on insurance. That will have to be improved.

Second, the cross-overs between the products provided by the discrete subsectors of the financial sector must also be taken care of. In this regard, an earlier speaker referred to the lack of difference that now exists between savings, investment and insurance products.

Third, a difficulty and danger could arise from the multiplicity of bodies. The technical term is “regulatory arbitrage”, where financial institutions seek to be regulated by the least rigorous regulator.

Fourth, I firmly believe that financial scandals have reduced public confidence in the regulation system of the financial services sector, generally. People may say that is a perception, but I think it is a fact. There is a need for a bold move by the Government and the Oireachtas to restore that confidence. One way of doing that would be the establishment of a single, focused financial regulator, with the powers, resources and expertise to do the job and look after both prudential and consumer considerations.

Fifth, a small country such as Ireland will have to build up critical mass in the area of financial regulation. A certain number of people in the Central Bank are engaged in this. As I said, we have 60 people involved in financial regulation. The brokers have five or six. There is a need to get that expertise together under one roof. There is no difference between the expertise required for prudential regulation and that required for consumer regulation.

The final point is the difficulties that arose in the group, to which Tom Considine has already referred, that was looking at the legal and consumer issues in banking. It failed to reach any conclusions, partly because it was not possible for the various regulators to exchange information between themselves.

Following that thinking in the Department, the Government decided on 20 October 1998 to establish the single financial regulator and establish the McDowell group, of which I was a member. We made a submission to the McDowell group in December 1998 outlining our position. That is covered, in brief, on page 4 of the document.

We believed there should be one financial regulator, and that that regulator should deal with prudential supervision and consumer protection in financial matters. We believed it should be a new, stand alone undertaking, to which I will return later. We suggested a representative board of approximately ten persons. We believed the body should be accountable to the Minister for Finance and the Oireachtas Joint Committee on Finance and the Public Service - at least we got that one right. We said that the organisational structure should be along the lines of figure one in our document, with a director-general at the top, with three assistant directors-general reporting to him - one dealing with prudential matters, one dealing with consumer matters and one dealing with corporate services, IT and so on. We also believed that the posts of director-general and assistant director-general should be filled by open competitions.

We saw our role in financial regulation declining significantly after the establishment of a single regulator, as we believed it did not fit in with the core tasks of the Department and that it would be better done under someone with a more direct focus. I make that point to show we had no interest in empire building and that we were interested in what was best for the nation, generally, rather than taking a narrow departmental perspective.

On the question of the location and structure of the regulator, we believed it should be a stand alone entity. The reasons for that are set out on pages 4 and 5 of the document, and also in a submission we made to the McDowell group in March 1999. Both those submissions to the McDowell group - those of December 1998 and March 1999 - are in the public arena. They were discovered under the Freedom of Information Act.

The first reason we opted for a stand alone entity was that it would be the first time that Ireland had a body with financial regulation as its primary objective. The Central Bank is involved in a number of areas. It prints money, publishes economic commentaries, carries out very important work in monetary policy, linked to Frankfurt and also has the regulatory function. Similarly, my Department is also involved in a number of areas such as employment, protection of workers, company law and financial regulation. It seemed to us that financial regulation was becoming of such importance that it needed a purpose built body that had financial regulation as its primary or only objective.

Second, we also believed that public and institutional confidence would be increased if there was a coherent, robust, transparent approach to financial regulation.

Third, we also believed the new body would have a different mindset from regulators in the Central Bank and the Department of Enterprise, Trade and Employment. It would have a regulation mindset. For example, I have people in my Department dealing with regulation this week who might be dealing with something completely different next week. It is difficult, in that situation, to get people to think solely in regulatory terms and not have regard to where their future prospects lie. This returns to my initial point, that regulation is so important that it needs that regulation mindset. The people who go to this new single regulator from the Central Bank and my Department would have to think differently about where their future prospects lie.

The fourth point is consistent with the third point. The change of mindset would help to develop staff loyalty to the regulator. The fifth and sixth points could be taken together, in the sense that the single regulator would allow the transfer of information between the various regulatory jobs done within that regulator.

In regard to point eight, we believe the regulator should be self-financing. In our own case, insurance regulation is financed by contributions from the insurance industry. Our experience is that the industry is willing to pay for good regulation. We believe that providing money on that basis by the industry and putting it through the Estimates of the Department in the A&As also brings in a desirable element of transparency.

On accountability, as I have said, we would see the regulator being accountable to the Minister for Finance and the Joint Oireachtas Committee. Finally, we would see the regulator providing continuity of service for financial institutions through the transfer of regulators from existing institutions and also being a one-stop-shop for financial regulation. Those were the arguments that influenced us to go for a brand new standalone regulator. Since the McDowell report was published, and since we made that submission, I have seen the case put forward for other options, mainly based on the Central Bank. I could certainly understand why the banks, who have been regulated by the Central Bank for a number of years, would make the case that they are making - that the Central Bank is a good regulator. I certainly accept the point that on prudential matters there have been no failures over the past 20 years, as the Governor has mentioned. I would, however, disagree with the argument that Ireland’s regulatory reputation would suffer should the single regulator reside elsewhere than with the Central Bank. I regard this as highly exaggerated, given the proposed continuity of experienced personnel in the new body, and the Government’s stated objective of strengthening the regulatory system as part of the current process. There is a tendency on the part of the financial sector to over react and hype up any proposals for change. I say that in a constructive sense, but since we are dealing with such an important issue I think I should put it on the record.

With regard to the Central Bank generally, I see three major downsides to giving it the job of regulating or being the major body in the single-regulator system. The first relates to independence and accountability. If the Central Bank takes on this job in a big way and the present situation continues, the Governor would have a dual function, reporting to the Minister for Finance and the Oireachtas in relation to regulation, and reporting to the European Central Bank in relation to Ireland’s membership of the European monetary system. I have had dual reporting systems myself in the Civil Service and I am sure members of the committee would also have had them in the past. They are not the best and if we can avoid them I think we should do so. We have the opportunity of avoiding them.

The second difficulty relates to public confidence, and I have referred to this already. The public rightly feels that if it comes to deciding between the interests of banks and the interests of an individual consumer, the Central Bank will favour the banks. I say that again in a constructive sense, but I think it is true. Still on the question of public confidence, there is a difficulty with a body having the word “bank” in its title, as the Central Bank has, being the regulator for other banks. I would much prefer to see the name of the body reflecting what it does. If we are in the business of regulation the name of the body doing that should be a regulatory body of some sort.

To be frank, the problem I would see with the Central Bank is the singularity of purpose. If the Central Bank is in the business of being a monetary authority, dealing with Frankfurt and also regulation, this takes away from the singularity of purpose and the focus that would be put on regulation. That would be inconsistent with what has been said over the past year or 18 months about the need for better regulation. There is a full-time job there for 250 people plus, in relation to the regulation of financial entities. I also believe there is a full-time job, and more than enough work, to be done in dealing with Frankfurt on monetary policy.

At the end of my document there is a reference to legislative proposals in the Department concerning the insurance sector. I will not go into them at this stage because I have spoken a little too long, but if anyone wants to ask me any questions about them I am available to do the best I can to answer them.

Chairman: Thank you very much Mr. Corcoran. It is quite clear that everybody accepts the necessity for setting up an SRA, but the two divergent views are quite clear to us. Would Mr. O’Connell comment on what Ms Foley said, quoting the experts, on page 6, including Professor Llwellwyn?

Mr. M. O’Connell: She quoted a few experts, actually

Chairman: She did. Can you comment on the three points that Mr. Corcoran made with regard to independence, accountability, public confidence and singularity of purpose?

Mr. O’Connell: Can I first of all put to rest this canard about accountability? What is in this document is completely spurious. You can say what you like about the Central Bank, but you cannot accuse us of lack of accountability. I believe that you will agree with me on that. The fact that I am here is evidence of accountability. I say that advisedly. Other central bank governors who are in exactly the same position as myself, have no problem with this. I have talked to them about it and they find it difficult to understand what the argument is all about. This argument has no merit. Say what you will about the Central Bank, but we are accountable. I am here and I will be here any time you ask me to attend before the committee. If that is not accountability I would like to know what is. I wanted to lay that matter to rest.

We are dealing here with a few Anglo-Saxon professors. I pay little attention to what they are talking about and I do not know why they should be dragged out of the closet. There is much discussion about the UK example, the consumer and all the principles and documents they have enunciated since they were set up. The fact of the matter, however, is that they have up to 2,500 people working on regulation. How many do you think are working on consumer regulation? Less than 50. Does that say it all about the UK set up? I do not think I need to say any more about the Anglo-Saxon commentators.

I leave it to you, Chairman, to judge whether the Central Bank is not enjoying the confidence of the general public. I think we have an extremely good record. I find it rather offensive to have to read this, to be honest with you. I do not think there was any need to write it. We have an extremely good record. We are obliged to do prudential regulation and we are extremely successful at it. We have a good reputation abroad. We are asked again and again to provide technical assistance abroad. It happens all the time so we must be doing something right.

Deputy Noonan: When I was living in west Limerick we used to go to school in the morning. There were two neighbours, Rick and Martin Conway, who did not talk to each other for about 20 years. They had a cat called Thady. When work had to be done they used to talk through the cat. Rick would say, “We’re going to the bog today, Martin”, and Martin would say, “By Christ we’re not. We’re taking the horns off young calves today”. Then he would say, “We’re going to cut the back field”, but other would say, “We’re not. We’re in the garden today”. It was all said through the cat. I feel much like Conway’s black cat because here is a group of people who should be talking to each other, but who are putting us in the position of the black cat - talking through us. Many fairly hard things have been said, even though they are couched in very good phraseology. On this side of the House we have to take up the constituents’ point of view. All the groups here are different. The Department of Finance is different from the Central Bank, the Director of Consumer Affairs, and the regulatory role of the Tánaiste’s Department.

They would all be held in reasonably high repute by the consumers but there would be criticisms of all of their functions also. For example, in respect of the Central Bank, the people I represent would say that its prudential considerations are so strong that it would allow a bank to make extravagant profits at the expense of a consumer so that the bank’s deposit base would be strengthened, that its primary interest would be ensuring that the deposit base of the bank was very strong and that sometimes this was contrary to the interests of the consumer. Many people would find it difficult to understand why it took the intervention of the Bank of Scotland in the mortgage market to lower mortgage rates to European levels even though many of us in political life would argue that the downward movement should have occurred sooner. I know that is primarily not the function of the Central Bank either and I think the Central Bank’s difficulty is its role is frequently misunderstood by the consumer. There is a view, for example, that there is a direct relationship between the Central Bank and the Revenue Commissioners on things which are properly the responsibility of the bank and we know that is not so. There is a wider impression that if the Central Bank does not have such a role, it should have such a role and it is getting blamed for many such things.

On the other hand with regard to insurance industry regulation, again, no more than banks, there has not been collapses of insurance companies to any large degree or not for a long time anyway and the people opposite would receive high marks in that regard also. To set Mr. Corcoran’s own test to him, that his role in insurance would be to guard the costs and to ensure availability, if he asked any young driver how he has faired in those terms he would be given a fairly dusty answer. On all the occasions when we have had debates on the cost of insurance, and motor insurance in particular, there would be a view that what is available freely in other markets is not available in Ireland and that the regulator has done little about it.

I welcome Ms Carmel Foley to Office because she has not been there long. Her Office is growing in stature but it is under resourced and underfunded. Again, in respect of the Office of Consumer Affairs, the consumer would have a fairly dusty view of many activities. For example, the operation of the responsibility of the Office of Consumer Affairs in respect of the price of drink is a joke because there are cartels operating among vintners in every town in Ireland and when one puts up the price, they all put up the price. The committee has discussed this with Ms Foley’s predecessor previously and the Office as been ineffective in that regard.

In respect of the price of petrol, which is an area in which her predecessor took an interest also and in which her placed inspectors in many parts of the country, while there is price competition operating now in some parts there are cartels in operation in many parts of the country. The farther one gets from Dublin, the worse it gets. The thing which is confusing now is to which pump the stated price applies and this is widespread on the forecourts of garages. In circumstances where there is no service anymore and one must identify the pump oneself and pump one’s own petrol, when one green hose delivers at a price 6p per litre dearer than the next green hose and they are intermixed with no identification across the forecourt, one wonders whether the Office has been successful in those two areas.

In the director’s first joust with the greatest cartel in the country, the Irish Bankers’ Federation, there was a touch of Arsenal versus Manchester United about it. It was bankers’, six, Director of Consumer Affairs, nil, in my view, in respect of the cost of changing foreign currency in the euro zone.

It would be easy for somebody like me to speak at length on these issues but I want to acknowledge that the Central Bank by and large has done a good job; the Department of Enterprise, Trade and Employment, which is the regulator of the insurance industry, has done a good job; and Ms Foley is increasingly doing a good job with limited resources - she obviously needs funding and resourcing so that her mandate can be carried out.

That leads me to the point where I think she should try to reach a compromise on this. It is difficult when people with such strong reputations are making strong cases which are so contradictory for a committee like this to come to a conclusion. We were the people who initially brought forward a reasoned report that there should be a regulatory authority, and we are strongly of that view. We want to see regulator systems introduced and delegations of the committee visited regulatory systems in different parts of Europe. We certainly came back with the view reinforced that there should be a single regulatory authority in Ireland. I do not have any difficulty with the summary which Mr. Considine put before the committee, where there is agreement. Actually, there is a great deal of agreement among the people who participated in the McDowell committee, but it is down to a question of the location of the single regulatory authority now and its functions rather than anybody objecting in principle to a single regulatory authority.

I do not think there is too widespread a disagreement on the functions. I think the functions are negotiable. Effectively it comes down to whether it would be a refurbished Central Bank or some arm of it which carries out the function, or whether we would have a stand alone new creation. If it is in the Central Bank, there will be a single regulatory authority which will be dealing with everything. If there is a stand alone single regulatory authority, one will still have the Central Bank which will deal with many other things. It is not really a question of one or the other. It is a question of the Central Bank plus an SRA or an SRA taking over the functions of the Central Bank, if that is the way to put it, and incorporating consumer protection.

The political demand is that the people I represent want a single regulatory authority and, while they are not in any way arguing that the bodies which the people present have represented singly have not carried out their functions in the past and overall they would mark these bodies highly, they do want changes now and those changes have to do with consumer and customer protection. That involves greater transparency and accountability. On the bottom line, we will not get that, irrespective of the structure involved, unless there is greater competition. Competition is probably the answer. I do not see great competition in the banking system. I think there is a cartel in operation. I think it is an informal cartel but there is a cartel operating.

I also think there is probably a cartel operating in the insurance industry. As regards where it is located, there is no sign over the door but the decisions are being made and policies are being aligned. Whether it is being done in the golf club or over dinner, decisions are being aligned and the customer is being short-changed and usually is paying too much for the product in absolute or comparative terms. That would apply right across the insurance sector, in my view.

On the banking side, there is a feeling that people are paying far too much for the products. I cannot understand why somebody who must negotiate the kind of jumps which a credit cardholder must negotiate in Ireland is charged a rate of 20 or 21 per cent when the equivalent rate in the US, where the FED is the regulator, is about 6.5 or 7 per cent. Where is risk which justifies 20 per cent if your credit rating is gone through with a fine tooth comb anyway before they will give you the card? Such a risk does not exist yet there is a situation where a small group is controlling it and there is a pretence of competition, which does not exist.

To return to the mortgage issue, a month ago I heard eminent economists saying that there was competition. They looked at the profile of rates, which varied from 5.4 per cent down to 4.9 per cent, and stated that there was a range of rates here when all one had to do was access any of the French banks on a web-page to find that their rates were lower by about 1.25 per cent. Everyone was buying money in the same wholesale money market but people here were charging 1.25 per cent more for it. Out of 5 per cent, 1.25 per cent represents a mark up of 27 per cent or 28 per cent.

We are absolutely committed to a single regulatory authority but I am not impressed by turf wars. There should be fewer turf wars and more attempts should be made to reach a solution. I do not know where the Government stands on this issue but we have come down to net points. I believe more work could be done on agreeing the functions. At the end of the day the Government will be responsible for deciding on the location.

Mr. O’Connell: The Deputy’s comments were interesting, fair and reasonable and I have no quibble with what he said. He said a great deal that I find extremely interesting. We have to reach a compromise, to use his words, and we are anxious to move forward in that regard. We feel we can make a big contribution to this. Beyond that, I am very interested in what the Deputy said.

Deputy McDowell: It is interesting and useful to have people’s various points of view exposed in public. That is something which, perhaps, does not happen as often as it should. There is a temptation for Opposition politicians to emphasise the difference in the views expressed by representatives of the parts of the establishment they see before them. We should resist that temptation for once and state that there is a large measure of agreement among everyone present about the need for an SRA which would carry out both functions.

I share most of the sentiments expressed by Deputy Noonan so I will not repeat them. However, I wish to ask a number of brief preliminary questions and I hope the Chairman will not cut me off if I receive monosyllabic responses. Will the governor indicate whether the Central Bank supports the minority report?

Mr. O’Connell: Is the Deputy referring to the Finance report?

Deputy McDowell: Yes.

Mr. O’Connell: Yes.

Deputy McDowell: Yes, in full. This issue comes down to whether we believe the Central Bank wants to be given responsibility for the consumer protection function or whether the past ethos of bank is compatible with carrying out that function in an enthusiastic, transparent and credible manner. The Department of Enterprise, Trade and Employment, in particular, and, to some extent, the director seem to be saying that they find it less than credible. I put it to the governor that he is not all that enthusiastic about his line of work. He speaks with great feeling, enthusiasm and pride about prudential supervision and the way the bank has operated in that area in the past. I understand his motivation in that regard.

A number of Members visited the Bundesbank last year and I asked the gentleman with whom we were talking, I cannot recall his name, how the bank related to consumers. He looked bewildered and said “Consumers? Nein.” Consumers are just not part of the ethos, understanding, practice or history of the Central Bank. Genuine doubts have been expressed because the bank was not involved in consumer affairs in the past and we are not sure whether it wants to be involved in that area or whether the ethos is compatible with that sort demanded by consumer protection policy. Will the governor give us his views on that?

Mr. O’Connell: I would say to you “Give us a chance.” Look at what we have done already, look at what we have taken on in recent years. We took on the investment intermediaries and you could say there is a very strong consumer element in that. We also took on the Stock Exchange. We have taken on a huge amount of extra work and we are ready to take on the consumers. Give us the powers and give us the chance to do it. Our record has related solely to prudential regulation because we have been confined to prudential regulation.

Deputy McDowell: I accept that but—

Mr. O’Connell: I mean—

Deputy McDowell: —are they basically two different jobs?

Mr. O’Connell: —I can assure the Deputy that the Bundesbank is very different to the Central Bank of Ireland. Perhaps there is a different ethos in other things like that. Where central banks have taken on a consumer role, to my knowledge they are doing it extremely well and we will learn from them.

Deputy McDowell: Could I put the same question to either Ms Foley or Mr. Corcoran? They clearly do not believe that the bank is capable or interested in doing this.

Mr. Corcoran: No, and maybe it comes back to the point raised earlier by Deputy Noonan in respect of insurance. At least we have tried to approach the price of insurance from a consumer perspective. I know the questions the Deputy is talking about because every Dáil session questions arise about the price of insurance for young drivers. We have approached the insurance companies and said “Justify that” and the records and the data they keep is so good that they are able to extract data for males and females under the age of 20 and show the propensity of those people to have accidents as against that of someone like myself who is 55 years old. A young male under 17 is five times as likely to have an accident while females under that age are 2.5 times as likely to do so. The accidents young people have would be four times more expensive as one I might have. That justifies a certain increase or mark up on insurance for young against what it is for old people and there are underwriting losses.

We have also looked at the returns, namely, the profits that insurance companies are making on motor insurance. We have asked the accountant and the actuary working in the Department whether the rates of return over a 20 year period were reasonable and the answer was “yes”. The Motor Insurance Advisory Board will be reporting next month on the cost of motor insurance and Deloitte & Touche carried out a report on the question of whether Ireland was at a competitive disadvantage vis-à-vis other countries in respect of the price of liability insurance. I provide that as an example of the way we think in terms of the interests of consumers as well as those of a prudential nature. I do not want to see insurance companies go bust. The last thing I want to do is appear before a committee such as this or our own committee—

Deputy McDowell: Why do believe the Central Bank is not capable of seeing both sides?

Mr. Corcoran: I do not believe the Central Bank thinks that way.

Deputy McDowell: The governor will presumably say that the Central Bank has not been charged with doing both sides in the past and that if it was given the opportunity it would be able to do so.

Mr. Corcoran: Yes, but we have no price control legislation. We are specifically excluded by EU directives from putting price controls on insurance. However, when questions are asked in the Dáil with regard to why the price of insurance for a young male under 20 years of age is £3,000, at least we go out and make those inquiries. In the Dáil, Members are capable of putting questions to us and we are obliged to go out and satisfy ourselves. Again, if you asked me if I would be prepared to see the cost go down and insurance companies go bust I would clearly say “no”.

There is a mindset in the Department of Enterprise, Trade and Employment that has a consumer orientation to it. We have a consumer section in the Department and the office of Carmel Foley, the director, is linked to ourselves. I do not believe the Central Bank has consumer-constraining or consumer-encouraging incentives to get its officials to think from the point of view of consumers. That is a straight answer to a straight question.

Chairman: Does Mr. Corcoran not believe that if the new structure was established the people to whom he refers would be responsible for operating the consumer protection area?

Mr. Corcoran: Chairman, again I want to give a straight answer to your question. I have a great regard for mindsets and the way you think is the way you act. When you are dealing with attitudes and mindsets, it takes a great deal of effort to change a particular mindset. I intend no humour when I say that the older you get the more difficult it is to change the mindset.

Chairman: Does Mr. O’Connell wish to comment?

Mr. O’Connell: I wish to make one point because a great deal of discussion has taken place about the consumer, and rightly so. To my knowledge, however, nobody but the Central Bank has actually produced a thorough paper on how this would be done. It is interesting that the Central Bank, despite all the criticism, etc., to which I referred earlier, has actually produced a paper on how it will tackle the consumer protection role. I am not aware that any other organisation or individual has produced such a paper, so, in fairness to us, maybe we are a little bit ahead.

Deputy McDowell: I wish to approach this matter from a slightly different angle. I have spoken to the governor about it privately and I am not saying anything that he has already stated in public. Is it fair to state that he told me that he did not believe the bank should be used as a convenience address, that if it was going to be an independent organisation it should be allowed to proceed in that manner and that it should not merely use Dame Street and the Central Bank building as an address if there was no true accountability and if it was not genuinely part of the bank?

Mr. O’Connell: I think that is fair, yes.

Deputy McDowell: Is that a fair summary?

Mr. O’Connell: Yes. We are independent and accountable.

Deputy McDowell: The minority report seemed to suggest that the Governor would only retain responsibility in relation to matters of staff—

Mr. O’Connell: No.

Deputy McDowell:—and that basically the policy-making function would still be independent within the Central Bank. Is the minority report basically an independent organisation with a convenience address at the Central Bank?

Mr. O’Connell: No, on the contrary. If the Deputy looks at it, the board of the Central Bank is the authority in charge.

Mr. McDowell: But the Governor has no control.

Mr. O’Connell: Any control the Governor has is delegated from the board. That is the way it is at the moment in relation to non-ECB activities. Any powers I have in the Central Bank are delegated from the board. The board of the Central Bank remains the ultimate authority.

Deputy McDowell: I am confused about the section on the sharing of information, which is an important part—

Mr. O’Connell: It is an awkward one, yes.

Deputy McDowell: Yes. The report appears to suggest that if, for example, there is a subsidiary relationship between the bank or the regulatory authority and the consumer protection section, that it is not possible to trade information. It suggests various ways in which information cannot effectively be shared. It appears to suggest that only if they are under the one house, basically part of the same authority, can the information safely be shared. Is that a common cause between you all? The report—

Mr. O’Connell: That would be the position under existing legislation.

Deputy McDowell:—acknowledges the law is not absolutely sure on this. It says legal certainty is elusive.

Mr. O’Connell: I am not sure that this is as big a barrier as we think it is. I think there may be room for, may I use the word, “modification” of the law that would allow for some scope in this area. I do not think this is a barrier or fundamental problem, I think we can get around it to some extent, if the Deputy is talking about sharing information between regulators.

Deputy McDowell: This originates in a recent scandal where information came to the attention of the bank, which it was prohibited from sharing because of existing directives and the law.

Mr. O’Connell: Under EU law, as interpreted by Irish law.

Deputy McDowell: Absolutely. The suggestion in the report, if I understand it correctly, seems to be that we would get around that prohibition if the various functions had been part of the same authority. Is that generally accepted?

Mr. O’Connell: This is a grey area, to be honest. The legal opinions we get on this are not always—

Mr. Considine: Chairman, I wish to make some points on this. First, when are the consumer and prudential roles compatible? Both the minority and majority reports will, if implemented, result in both being under the same organisation. There is no dispute there. Second, on the minority report, we are not just relying on a change of attitude, if such a change is required. The structures here give the Commissioner for Regulation very significant autonomy within the Central Bank. If one looks at table B which is the diagram of the report, it shows him reporting directly to the board on prudential and consumer functions. There will be a separate Director of Consumer Affairs within the area of the Commissioner for Regulation. The thinking behind this - and I do not think there is any fundamental dispute of it - in so far as one can be certain, and one cannot be totally certain on the legal issue unless it is tested, is that this structure and any structure which would have both of them in the one organisation, should allow for the freeflow of information between them. The difficulty arises where, as now, the consumer affairs function is in a different organisation. It is also common ground that the Central Bank cannot pass information to Ms Foley. We spent a great deal of time on this before the working group was established by the Minister for Finance. In so far as one can be sure about anything like this, that is the position.

Deputy Noonan: Is Mr. Considine saying that confidential information of the type we are discussing can pass internally within an organisation but cannot move outside to another organisation.

Mr. Considine: That is it in a nutshell.

Ms Foley: I wish to respond to some of the points addressed to me. I am not happy putting such a distinction between prudential and consumer protection. The Central Bank has said in the past there can be conflicts between one and the other. I would see them as two sides of the same coin. If one of the functions of the prudential regulator is to ensure the integrity of management as it is, how can it inspect banks without looking at how they treat their customers? Is that not part of the integrity of management? I do not accept the distinction between made between both. I would hope that in the future, regulators going out to banks will look at the stability of the institution but also at what is happening to customers and how they are being treated. The Governor said the caveat emptor principle should apply. However, it seems to me that financial conglomerates are so far ahead of us - the small print, the weasel words and the way they abuse customers is appalling. I do not think it is enough to say caveat emptor.

Deputy Noonan mentioned the IBF. In distinction from the banks and the IFSC saying how much they love their regulator, the Irish Banks Federation has abused me for daring to suggest that customers have to kow-tow to banks. I make no apology for that. I would be somewhat suspicious if those to whom I have a regulatory responsibility all started to say how wonderful I am.

Deputy McDowell: That is an interesting example of the differences in mindset between the Governor who says caveat emptor and Ms Foley who said she would be out of a job if we accepted that principle. Perhaps Mr. Considine or Mr. Corcoran can answer this question, what has happened since the McDowell report was published and how do we resolve this?

Deputy Noonan: The chairman became Attorney General.

Deputy McDowell: Has it been resolved?

Mr. Corcoran: No, we published the report as it came from Mr. McDowell. It is in the open forum now. Given the committee’s own report of July 1998 - although it is up to the committee to arrange its agenda - perhaps it should come back on it. The Government will then have to make up its mind. When it does, no one can say they did not get a chance to make a comment on the particular report.

Deputy Noonan: Which Department is responsible for putting the memorandum to Government. Mr. Corcoran’s or the Department for Finance?

Mr. Corcoran: I think it is my Department on the grounds that we have the senior Minister, the Tánaiste.

Deputy McDowell: It might become a joint memorandum.

Senator Finneran: I wish to direct my first question to Mr. O’Connell. The Central Bank is the licensing authority for the commercial banks. If they breach the terms of their licence, what is the penalty?

Mr. O’Connell: The ultimate censure is that we can revoke a licence.

Senator Finneran: It has been brought into the public arena that a bank overcharged and took money belonging to its customers. Would that action deserve censure or the revocation of the bank’s licence?

Mr. O’Connell: That is a matter for the courts to decide.

Senator Finneran: It is not a matter for the Central Bank?

Mr. O’Connell: Overcharging must be proved. I do not think the Central Bank would necessarily be able to prove it in all cases. It becomes a matter for the courts.

Senator Finneran: So, if one of the banks licensed by the Central Bank overcharges, it is not a matter for the Central Bank, but for someone else. It is not covered under the licence.

Mr. O’Connell: If it overcharges a customer, presumably there is a dispute between the customer and the bank.

Senator Finneran: I am not talking about that but about a scam exposed earlier this year involving one of the banks.

Mr. O’Connell: If it is proven, we obviously would take a very serious view of it and would react accordingly.

Senator Finneran: Has the Central Bank taken any action on the matter?

Mr. O’Connell: I do not believe the matter has been proven. It is still an alleged offence. That is my knowledge and information.

Senator Finneran In the event of it being proven, would that mean there had been a breach of the guidelines covering the licence?

Mr. O’Connell: Yes, there would be a range of penalties we could consider. The ultimate penalty would be the revocation of a licence.

Ms Foley: On a point of information for the Senator, National Irish Bank gave back £130,000. Is that not—

Senator Finneran: That seems to be fairly substantial proof.

Mr. O’Connell: My understanding is that there are court inspectors examining this. I am not aware that they have issued their report yet. I would await their report before the Central Bank would take any action on this.

Senator Finneran: We will leave that.

Ms Foley: It should also be said that the investigation—

Mr. Corcoran: Regarding where we are on the inspectors of NIB, there has been a number of court cases, as Deputies will be aware, but the inspection is continuing. Up to now it has cost £1.4 million.

Senator Finneran: I wish to direct another question to Ms Foley. A building society which recently became a bank had a customer who had £20 in an account for a number of years. It grew to £24 over four or five years. They recently received a letter to the effect that the balance of their account was now down to £19 and that there would be annual charge of £5. The bank will legally have robbed the customer of the £20 inside 12 months, even though there are no dealings on the account. When questioned, the bank said this was cleared by the Director of Consumer Affairs and was part of the charges it can now implement. It is extraordinary that an account which predated the change of name and nature of the building society can have the £20 held in it by the customer legally taken away within 12 months. It would be £10 per quarter if the account were in arrears but I suspect one cannot take what is not there.

Ms Foley: It is true that I have a role in approving bank charges which are notified to me. Under the legislation, I must take into account various statements by the institution in question. Not knowing the exact circumstances here, I presume—

Senator Finneran: I am talking about First National, now known as First Active.

Ms Foley: No, I mean the particular account concerned. I presume it has become a current account when it possibly was an investment account in the building society. There are different conditions in such a change.

Senator Finneran: It changed from a building society—

Chairman: We cannot go into the minute detail of it.

Senator Finneran: It just shows what financial institutions can do once they become banks. That is the point I am trying to make. Mr. Corcoran gave a forthright contribution and I am impressed that he does not seem to have an axe to grind in so far as, while most Departments want to hold on to business and sections, he indicates that they would lose about 60 jobs. It is generally understood that the Central Bank has done a good job on the prudential side, despite the fact I mentioned a certain case before the courts. Why then is it assumed that it would not do just as good a job in the consumer protection area, given the other areas it has taken on, such as the Stock Market and the Financial Services Centre—

Chairman: That has been covered already, Senator.

Senator Finneran: Furthermore, if it was not involved and did not have responsibility, why should there not be public confidence in the Central Bank?

Mr. Corcoran: I would say the public confidence is not there for this reason: the ordinary person believes that, if it comes to a dispute or a balance of interests between a private commercial bank and the individual, the Central Bank will side with the bank rather than the individual.

Chairman: Does anyone wish to make any further comment on that?

Deputy Belton: When the Central Bank was notified by the managing director of a financial institution that other financial institutions in opposition to it were carrying on in an improper manner, it seems the Central Bank was powerless to deal with that matter. How would the Central Bank’s position be improved if the Governor’s proposal to locate the SRA within it was put in place, given that the bank could not deal with the other situation?

Mr. O’Connell: Chairman, I am not quite clear. What specific situation are we talking about?

Mr. Belton: I am talking about DIRT, where the managing director of a building society notified the Central Bank that other financial institutions were carrying on in an improper manner while that building society was conducting its affairs to the letter of the law.

Mr. O’Connell: I think the Deputy is referring to a case back in the 1980s.

Mr. Belton: Correct.

Mr. O’Connell: I think the issue that was reported to the Central Bank related to exchange controls, that they were being breached. The Central Bank was acting as agent at the time for the Minister for Finance. It passed that complaint on to the Minister for Finance who, I understand, in turn, took the matter up with the Revenue Commissioners. We debated it at the DIRT inquiry some weeks ago. It was back in 1985 or 1986.

Mr. Belton: That is correct.

Mr. O’Connell: Exchange controls are gone now.

Mr. Belton: Is there any direct role in the SRA for the Revenue Commissioners?

Mr. O’Connell: No, not that I am aware of, and I am not aware that that is the position in any other country which has an SRA.

Mr. Belton: Thank you.

Senator O’Toole: I wish to return to the issue of the sharing of information which was raised earlier by a number of people. I am not clear about it. The Governor said that European law forbids him from sharing information to the extent that it is shared among regulators but not with a third party, whatever that might be in this situation. Ms Foley spoke in her presentation of mega-regulators. Am I correct in assuming that these mega-regulators also have a prudential role? If they do, that presumably encompasses various forms of regulation, which means they either can or cannot share information among their different roles. What is happening in Ireland at the moment?

Mr. O’Connell: We get information every day, both from home and abroad. We are not allowed to share any information we receive about individuals or individual companies with a third party. That basically is the situation at the moment. Ms Foley was saying that I could not pass on information to her. That is the truth. That is the reality. That is the law as it stands at the moment. I am posing the question today if there is room for some slight modification in the law which might give us more openings than we have at the moment. I leave that question on the table.

Senator O’Toole: Will Mr. O’Connell explain what that means? What he seems to be saying is that, were Ms Foley to be moved to the Central Bank as the new commissioner, she could be given the information.

Mr. O’Connell: She could, yes.

Senator O’Toole: That seems a very Jesuitical point.

Mr. O’Connell: Provided she did not pass it on to any third party.

Senator O’Toole: Information is an issue in this case. If there is a prima facie case that the law is being broken, must we wait for three years of examiners’ inspections before we can do something about it? We are told that there must be certainty before any move can be made. However, for an ordinary person, the return of the money would be evidence enough. I do not want to deal with that matter, just to use it as an example.

If the current prudential role forbids action to be taken until such time as there is an absolutist position, how can you move from using that confidential information on behalf of the consumer? I cannot see how it could happen.

Mr. O’Connell: I am by no means happy with the present situation. I think there is room for some modifications in the present situation to get over the problem being articulated. There is a real problem.

Senator O’Toole: I am not sure if somebody wants to say something.

Ms Foley: It is a question of fragmentation. In respect of a mortgage intermediary whom we were regulating in terms of being in credit, there was information in the papers that the Central Bank was not happy and investigations were going on. In regard to his business dealings with us we were unable to get information from the Central Bank to protect the customers he would have dealt with. It seems to me that they need to be under the one roof. My office would not move lock, stock and barrel.

Senator O’Toole: I used that only as example. There is no question about that. I know exactly what you are talking about.

Ms Foley: I hope so. Clearly, I would happily give up my functions in relation to the Consumer Credit Act because the expert financial body is going out with one hat looking at the prudential side of these institutions and also looking at the consumer side. The big financial institutions can come in to us, a small office of civil servants, and blind us with science. They can come in, under the Act, with their commercial justifications and we do not have the expert staff, as mentioned earlier, to challenge them enough. I would be happy to lose that part of my responsibilities and concentrate on the mainstream consumer issues, all the normal consumer issues, and not have a regulatory role.

Senator O’Toole: Without wishing to sound patronising, the presentations were fine. I do not think the Governor needs to defend the Central Bank because its role is seen in that sense. What we are trying to establish at this side of the table is if the sum of the parts is greater than the whole? I am not convinced by the structure that the Department of Finance gave us. It is neither one thing nor the other. It is nearly an accommodation address. Effectively what we are doing, in your model, is putting together the regulatory role and making it answerable to the board of the Central Bank, not to the Governor. In one sense this is an odd arrangement and it may be going too far with the issue. What I would worry about is that you are not talking about a new revised board, but the board of the Central Bank which has been set up to do a particular job. I am worried about the mindset issue but not about the individuals working in the bank. A board has been set up to do a particular job, and that is a job we know. That it would take over a new area of responsibility, for which it was never chosen and in which it has never developed an expertise, is an impossible task, as you have outlined. I would like to hear a reply on the issue.

Mr. Considine: To go back again to the types of organisations, page 35 of the report deals comprehensively with the difficulty of exchanging information. It is clear that where there are separate authorities, as there are now, the information cannot flow from the Central Bank to Ms Foley’s office. Three other possibilities were looked at. The first was two competent authorities with one having a consumer protection function. The conclusion was that it may be difficult to get the degree of legal certainty required to put this model forward as a solution. That is one. The subsidiary responsible for consumer protection was looked at as well. In that case, as well, it was felt it may be difficult to get the degree of legal certainty required to put this model forward as a solution though it is not clear if the uncertainty in this case is as great as it would be if the consumer protection function was to be assigned to a separate organisation. There is less doubt in that case. Combining the prudential regulation and consumer protection functions in one body, as both the green field site and our proposal would do, is the best bet in this regard. There is no express provision in EU law prohibiting the State establishing an SRA having both prudential and consumer focused functions although legal certainty is elusive there being limited evidence in case law in circumstances where no gateway for the transfer of confidential information between the two functions is expressly provided for. It is considered that, on balance, it is possible to pass information between the prudential side and the consumer side of such a body and be used by it for its statutory functions. That is a very important—

Senator O’Toole: May I ask one question? I have no doubt the European law is clear in terms of confidentiality but I find it hard to believe that it has facilitated the exchange of information which is not bonded as certitude. I believe that has developed through practice. In other words, it is provided in European law that one Central Bank will pass information to another, on which they do not have proof.

Mr. Considine: Yes, as regulators. The whole regulatory area is developing and it has not all necessarily developed at an even pace. This may be one of the explanations for it. So far as we can figure it out, that is the legal position now. You went on to deal with our particular model. The first thing about that is that the Central Bank also supports this model. The reason it gives such a degree of autonomy to the regulatory side, within the Central Bank, is because we feel there may be a lack of confidence that needs to be addressed. If it was not absolutely clear that the regulatory function had a very strong standing within the Central Bank and also that the consumer function had a statutory base and also that any consumer coming to the Central Bank with a complaint had the right to go to an independent Ombudsman; the whole question of attitude does not come into it. You have rights, under law, which you are entitled to exercise as a consumer under our model. You asked me about the board of the Central Bank.

Senator O’Toole: Just to be clear it was only about that that I mentioned attitudes.

Mr. Considine: I know, yes. It is a public interest board. I am not really aware that the people who would be appointed to it would be any less sympathetic to the concerns of consumers than they would be concerned to have a sound regulatory system. In that sense I agree with Ms Foley that consumer and prudential are two sides of the same coin. The worst that can happen to the consumer is that the bank collapses. That is clear. The next step is the one to one relationship between the consumer and the institution. It is there our model is particularly strong in giving the customer the right to make sure, under law, that his or her case is heard.

Senator O’Toole: In terms of the two roles we are trying to come to a conclusion and it is very difficult. Certainly, there is no doubt the community has great confidence in the Central Bank in its current role. What is not clear is if the community, on behalf of the consumer, would have the same role in the Central Bank. That is the questionable point. In setting up the structure to create consumer confidence would it be done best in a stand alone or green field site or by trying to harness the general confidence in the Central Bank’s current role? I honestly do not know the answer. While I have learned something from the debate I am not sure that I am any clearer about the position.

Senator Dardis: I will be gonged out in a minute’s time because we are going to have a vote. I will make my points but whether I will be here to hear the answers is another matter.

I want to pick up on the last point raised by Deputy Noonan. The disappointment from my point of view is that I see turf wars being fought. There is a reluctance to relinquish control other, than on the part of the Department of Enterprise, Trade and Employment, and perhaps I would also exclude Ms Foley from this criticism. The Governor made a point about the consumer regulation being high profile, but I would say it is much more than that. We are at the point where it is a central fact of modern life. It has taken years to get agricultural bodies to accept the fact that there must be consumer representation by right on them, something which is now accepted. This must become a much more widespread principle. The question is whether this can be accommodated within the structures advocated by the Department of Finance or the Central Bank. It comes back to Mr. Corcoran’s very important point about mindset. It strikes me that in some of the language we have heard the mindset very definitely exists. The Governor made a point about the caveat emptor principle, and I am as much a supporter of the free market as anybody, but if I go to my local livestock mart to buy a bullock from a cattle dealer I still expect it to have a tag in its ear and I expect the card of the Department of Agriculture, Food and Rural Development to accompany it. I also expect the regulatory system to be in place. This is precisely the same as the issue we are discussing. I do not think the State can absolve itself from the responsibility to regulate on behalf of the consumer, because it is an unequal contest. Everything in Ms Foley’s presentation - she catalogued the things and we do not have to go back over them - shows there has been a succession of incidences which underline the fact that the contest between the consumer and the banks and those with the lawyers, expertise, structure and edifice has been totally unequal. Our responsibility is to try to equalise that contest to some extent. The question is how we can do this.

Is the governor saying there is really no better way than the current way? He has indicated how he is impatient with certain aspects of his own work and how he feels it might be improved, but there has to be a better way then the current way.

Mr. O’Connell: Does the Senator agree that the way now being put forward by the Central Bank in the document in the way forward?

Senator Dardis: No.

Mr. O’Connell: The Senator does not agree with our document.

Senator Dardis: No.

Mr. O’Connell: I am not aware of anybody else who has produced a document. I am talking about the document we produced on the consumer roles.

Senator Dardis: We have had several views of a differing nature presented to us this evening. The Governor made a point that it was common knowledge that the banks were quite disturbed at the prospect that the bank might be the regulator in the future. It may be common knowledge among the banks—

Mr. O’Connell: I am talking about the banks in the financial services centre - I am talking about foreign banks.

Senator Dardis: It may be common knowledge among them, but it is certainly not common knowledge in a wider context, and that again underlines the point—

Mr. O’Connell: Look at the weight of submissions made to the McDowell committee. Look at the way they came out in favour of the Central Bank. Do we ignore all that? Can we put all that under the carpet?

Senator Dardis: What we are saying is that we are trying to equalise the contest.

Mr. O’Connell: I totally agree, and I—

Senator Dardis: Sorry, if that makes life uncomfortable for them—

Mr. O’Connell: No, it does not. I was the very first person here tonight to say that we need an extended consumer role. It is the one issue I think we are all totally and absolutely agreed upon.

Senator Dardis: The governor talked about unprecedented change and challenge—

Mr. O’Connell: Absolutely.

Senator Dardis: —in regard to the arrival of the Bank of Scotland.

Mr. O’Connell: Can I talk about the Bank of Scotland?

Senator Dardis: I would say it is an unprecedented opportunity.

Mr. O’Connell: Maybe I should talk about the Bank of Scotland for a minute. The Bank of Scotland has come in fishing in the Irish market, something the Central Bank welcomes. We welcome competition and I assure the Senator that there will be more entrants. This is simply the working of the Single Market. However, it is not quite as simple as it sounds. I should remind the Senator, firstly, that the Bank of Scotland is operating from a very low base and is not providing any jobs in the country, something that should be borne in mind. One of the dangers here is cherry picking, with the big boys coming in and the small boys going under.

Senator Dardis: Does the Central Bank regulate the Bank of Scotland?

Mr. O’Connell: Absolutely not, we cannot do so. All of this is not quite as simplistic as has been presented here tonight.

Senator Dardis: I am not asking the Governor to disregard any of his current obligations and I fully understand that tax affairs is a different issue which has been thrashed out very well in the past few weeks. We are saying that there has to be a degree of flexibility from all concerned—

Mr. O’Connell: The Senator is absolutely right and I totally agree with him.

Senator Dardis: —which will bring us forward to a point where the various conflicting forces can be reconciled to the common good. That is our obligation on this side.

Mr. O’Connell: I entirely agree and I welcome this debate which has been very open and interesting.

Deputy Deenihan: First of all I think it is very appropriate that we have divergent views. It has been a very interesting experience for all of us. I feel it is very important that people express their different views on the issue because, as Mr. O’Connell has said, it is a very, very complex area and it will become more complex as the market opens up. Mr. O’Connell gave the example of the regulation of the Bank of Scotland and that he will have no say in regards to it. Therefore it is also a broader European issue.

We are here asking questions and on the admission of those before us they have done their job commendably well. However, the Legislature’s failure to act has brought us to these difficulties. In a way we, as parliamentarians, have created the problem. The problem reflects perhaps a lack of business acumen in the Dáil. On education issues, for example, we are very good - both of us are from teaching backgrounds. However, when it comes to financial affairs I do not think we have been that good. Because we have failed to act previously, we are being forced to act now. That is why the witnesses are before us. We are under pressure from the consumer to act. Hopefully on this occasion we will come up with a right balance and recipe.

I agree there will be tension in the role of the Central Bank between consumer protection and supervision, something which will be inevitable. The Department of Finance obviously favours the role of consumer protection being within the remit of the Central Bank in some kind of new format while Mr. Corcoran and Ms Foley favour something different. At the same time what we do not need is confusion. We do not want to end up with something which is questionable at the moment being made worse. We must be very careful in getting the right balance.

The few contacts I have in the international banking circuit, who have interests in Ireland, are quite concerned that the reputation of Irish banking has been tarnished by these scandals. It is effecting our reputation abroad and eroding what was a very good reputation. I ask the governor to expand on this, say whether it is true and whether the scandals are effecting us in any way. Is it effecting investment in the country, including in the IFSC?

Also, the credit union issue will come up again for debate. Do those before the committee think credit unions should be subject to the same new regulator as the other financial institutions? This was a big issue in the last two budgets. Credit unions are very powerful and we are more effected by them than the banks as they have more investors - people we know, small investors. Credit unions are organising a big lobby to ensure they are exempt from the regulator.

Mr. O’Connell: I am coming across the kind of questions the Deputy said he is encountering. Of course I am at the moment, and we are getting publicity we could do without. However, I have no evidence whatsoever that this has any impact whatsoever on investment, be it financial or otherwise. This debate is very forward looking and we should ask ourselves about the type of banking system we will have and the type of banking or financial system we want ten years from now.

There are huge changes ahead and the Bank of Scotland is just a small example of that. This must be legislated for. I said already, and I repeat, that following this shake-up I would like to think we will still have an indigenous banking system.

The credit union question is an issue for the Minister rather than for the Central Bank.

Deputy Deenihan: You will not give us a view on it?

Mr. O’Connell: I will not.

Deputy Deenihan: You are wise a north Kerry man. The Governor and I attended the same school.

Ms Foley: In relation to the Bank of Scotland, may I say, lest I am accused of being simplistic, I am not necessarily telling everyone to go to the Bank of Scotland. In fact, I warned consumers about the charges as distinct from low interest rates. However, why did it take the Irish lenders until the Bank of Scotland arrived to drop the rates? Why were they not questioned previously about the interest rates which they were charging?

In relation to credit unions, they should come under a single regulator. The rules should be the same for everyone, therefore the protection for customers should be the same for everyone. Credit unions, some of which were very small at one stage, have grown to be very large and should be treated as serious financial institutions. They ought to welcome that growth and access to regulation. Again, we are talking about improved regulation for everyone and I would question those who are against improving the regulatory system.

Mr. Considine: This is one area about which we are in agreement. The first paragraph of the summary states that in particular a statutory position of registrar of credit unions should be established within the SRA. The sensitivity of this issue was to the forefront in the minds of the members of the group. We paid a lot of attention to this issue. The Single Regulatory Authority will try to bring together all the areas that can be usefully brought together to allow them to benefit from the expertise accumulated within the Single Regulatory Authority. Ireland, being relatively small, needs to get the maximum advantage from experienced people. If the credit unions are within the umbrella of the SRA, with a statutory appointment of registrar of credit unions, that would achieve both objectives in the sense that they would have a degree of autonomy and also be able to benefit from the expertise that will be available within the SRA on a range of issues.

Mr. Corcoran: The credit union movement is very important. There are approximately 500 credit unions in existence at the moment. There are five or six top credit unions and the top one has assets of approximately £80 million. It decreases rapidly after that. Depositors in credit unions would be better protected by the arrangements proposed here, that is, the functions of the Registrar of Friendly Societies in relation to credit unions being brought into the SRA. At the moment there is a staff of 18 or 19 in the Registrar’s office. These people are dealing with the credit union friendly societies and a number of other organisations. A credit union failure, even a small one, could lead to a systemic failure. In other words, if the one down the road goes, the one in the next town is under pressure to repay the debt which it cannot do. That would be better handled within a bigger body such as the Single Regulatory Authority. So it is a question of getting competencies such as financial skills and financial regulation together. The report makes it quite clear - the Registrar is aware of this - that there is a credit union ethos and that that must be respected and that smaller credit unions have not the same resources to make returns in the way the banks can. I am not too worried about what is proposed because I do not think it will interfere with the credit union ethos.

Deputy Deenihan: Does the Governor think that he can accommodate the tension referred to by Carmel Foley, and which I fully understood, within a single body?

Mr. O’Connell: Do you mean the sharing of information?

Deputy Deenihan: No, the tension between consumer protection and prudential supervision. There must be some conflict there.

Mr. O’Connell: There is tension in every good organisation. It is up to management to handle that matter and turn it to positive advantage.

Deputy Deenihan: It is not tension between people but between two different philosophies.

Mr. O’Connell: Between ideas. I am satisfied that this can be overcome. It has been overcome successfully elsewhere so why not here? We are very open to it.

Deputy Stanton: I compliment the delegation on their presentations. First, can I ask the Governor how many banks he supervises in regard to prudential matters? He said that in the last 20 years we did not have any failures. Were there any near misses? I am not seeking names of banks but how hard did he have to work in this area? Second, is it true that Ms Foley has no information at the moment regarding prudential matters and the financial institutions and that she makes decisions regarding bank charges without being in possession of that information? I take it this is not the case in other jurisdictions.

Ms Foley: Before the Consumer Credit Act gave my predecessor responsibility for bank charges, that responsibility resided in the Central Bank. Prior to that they did have that role. Now we make decisions on the information available to us from the institutions.

Deputy Stanton: You are not concerned about the solvency of the bank? This does not affect your decision-making?

Ms Foley: Bank profits mean that we do not have to worry about their solvency. The banks are making enormous profits.

Deputy Stanton: Exactly, that comes back to my original question to the Governor.

Regarding the regulation of insurance companies, how many companies are involved and have there been any near misses in the last number of years? Can I ask Mr. Corcoran if regulators in other jurisdictions also regulate the profits of companies? This happens in California where insurance is concerned. Does he see us going in that direction and could there be a similar situation where the banks are concerned if we link in bank charges and possibly profits? Perhaps he could comment on that issue.

I ask the Governor what would the Central Bank be left with if it lost the prudential role? What affect would this have vis-à-vis staff numbers and so on? Regarding the lending of money and solvency of banks, do you take into account the present situation where there is a lot of money in the market, especially where mortgages are concerned? Is there a danger to banks if interest rates rise? If this were to happen, would the Central Bank have a case for invoking its prudential card in controlling the amount of money banks lend to people seeking mortgages?

Mr. O’Connell: There are 49 licensed banks, 28 of which are in the financial services centre. In addition, there are approximately 25 European banks branching in here at the moment. This amounts to approximately 75 banks at present.

The number of staff employed by the Central Bank on regulation duties is approximately 140 at the moment; our total complement is about 600. Most of our work is in the area of monetary policy - payment systems and managing foreign reserves and so on.

That is where the bulk of our people work. We also print bank notes and coins in Sandyford where we employ approximately 200 of the 600 people I mentioned. That gives an idea of the size of the operation. In reply to your question as to where we should control bank profits, the short answer is, no. That is not the way the world is going. We would be odd man out if we put ourselves in that position. We are, naturally, very concerned about interest rates and their impact on banks as well as borrowers. We require banks to do stress testing and will continue to do so.

Deputy Stanton: You have started that?

Mr. O’Connell: Yes, this year.

Deputy Stanton: Is this the first time you have done that?

Mr. O’Connell: Yes, it is the first time we have done it in a very formal overall basis. We have done it from time to time in individual banks in individual cases. It is the first time we set up a new system. That system will roll-over about every six months.

Deputy Stanton: If you lost the provincial side, what effect would that have on you?

Mr. O’Connell: If the prudential activity is to locate elsewhere we are still responsible for the stability of the banking system. We do not have a choice in that matter. We are still the lender of last resort. We inevitably are going to duplicate some of the work that a new agency would do.

Deputy McDowell: I appreciate you are anxious to finish Chairman but I would like to raise a matter which I do not think has been touched upon yet.

When the NTMA was set up a number of years ago, one of the reasons given for it was that they wanted greater flexibility in terms of the sort of staffing arrangements they would have and the sort of money they would pay them. They took on a fair number, as they still do, of short-term staff. Given the way the financial services sector is changing this is surely a case where cross fertilisation between the public sector and private sector is appropriate and that perhaps people working on short term profitable contracts would be a good thing. I wonder to what extent that can be accommodated within the Central Bank as things stand. Would it not be easier to do it?

Mr. O’Connell: On the contrary, I suggest it might be more difficult. The problems and advantages one would have are the same with either situation. The Deputy’s idea is a good one.

Deputy McDowell: You would have to change your staff structure. I am not saying you cannot change it but is it not easier to come to it anew rather than trying to change an already established structure?

Mr. O’Connell: I think you would walk yourself into problems in that respect also no matter what kind of institution you are dealing with. We would certainly see ourselves, if we have a regulatory function, as being quite flexible.

Chairman: On behalf of the members of the committee I would like to thank—

Deputy Stanton: Sorry, Chairman, I have not received an answer to some of the questions I raised.

Mr. Corcoran: We have about 120 or 130 insurance companies divided between life and non-life insurance. The purpose of the regulation is to ensure the insurance companies have the money to pay claims when they are due. That can be very far into the future. With environmental claims and claims in relation to health such as carcinogenic complaints the claim could be 50 years after the event. There is a difficulty in making estimates for the future. In the case of life assurance companies we have an actuary in each company which acts as our agent within the company and makes sure the money is available. We do not have actuaries in non-life insurance but the returns are made and an assessment is made on the basis of ratios that have been agreed with Brussels and are used internationally. We are quite confident that there are no insurance companies regulated by us as of now at risk.

Deputy McDowell: Do we know how many foreign based banks you do not regulate?

Mr. O’Connell: Very few. There are 23 EU bank branches and we do not regulate them.

Deputy Stanton: —can you tell me?

Mr. O’Connell: There have been difficulties from time to time.

Ms Foley: The extraordinary arrogance of some financial institutions needs to be challenged by a dedicated new single regulator. I feel consumers deserve nothing less. It is up to the legislators now to provide that.

Chairman: On behalf of the members of the Committee I thank Mr. O’Connell, Ms Foley, Mr. Considine and Mr. Corcoran for their attendance today which resulted in a very interesting and informative discussion. It has shown that there is 99 per cent agreement between us. Some politicians will make their decision at the end of the day.

The Joint Committee adjourned at 8.20 p.m.