I move amendment No. 1:

In page 11, subsection (1), line 31, to delete "and" and substitute "or".

This is a technical Bill and most of my amendments are of a technical nature. The definition of dealing in an asset includes "originating, acquiring and disposing" of an asset. I propose the substitution of "or" for "and". It is unlikely anyone intends the originating, acquiring and disposing of an asset to mean dealing. The use of "or" rather than "and" is preferable and I ask the Minister to accept the amendment.

We examined the text of the section to which the Senator's amendment relates and we are happy it is correct. The key point is that dealing is defined as including originating, acquiring and disposing of the asset. Therefore, "and" is the correct word to use after "include". Consequently, I cannot accept the amendment. The Senator raised an important point but we are satisfied we have clarified it.

Does section 3 include tier one and tier two assets?

Yes.

I have some difficulty in understanding this section. Am I to understand that designated mortgage credit institutions are not allowed hold mortgage credit assets as tier two assets and designated public credit institutions are not allowed hold public credit assets as tier two credit assets? Will the Minister of State explain this section of the Bill to me?

I presume the Senator refers specifically to tier one and tier two assets. I will give him the explanatory note on it. He is essentially correct in what he said but I will read the note for the sake of clarity.

Tier one assets are those designated by the European Central Bank for monetary policy operations. These are assets which euro area banks must place with their national central bank as collateral when they require excess cash from their central bank. Examples of tier one assets include Government bonds and high quality commercial paper. For the purpose of the Bill, tier one assets may not be considered as such by a designated public credit institution if they are also public credit assets. This is because the purpose of the definition is to set out assets which are eligible for use as substitution assets. The same assets should not be eligible for inclusion in pools as public credit assets and substitution assets.

Tier two assets are those designated by national central banks for monetary policy oper ations. These are assets additional to tier one assets which euro area banks may place with their national central bank as collateral when they require excess cash from their central bank. The list of tier two assets varies between member states depending on the character of the financial market in each state. Examples of tier two assets in Ireland include commercial paper, high grade corporate bonds and mortgage backed securities. For the purposes of the Bill, tier two assets may not be considered as such if they are also public credit assets, mortgage credit assets or substitution assets. This is because the purpose of the definition is to set out activities additional to mortgage business or public credit business in which a designated credit institution may engage. Assets which an institution may already hold in other ways should not be used to engage in these additional activities.

While it is a very complicated issue, I am sure the Minister of State is correct in what he said.

Subsection (4) allows the Minister to make an order excluding sections in the Bill from applying to certain mortgage credit assets. Will the Minister of State explain the reason these orders should be made?

I think the Senator is referring to section 4(4).

Yes.

As the Senator said, it provides that the Minister may, in an order made under subsection (3), declare the provisions relating to location, loan-to-value ratio and prudent market value do not apply to the asset which he has defined as mortgage credit, or apply only with such modifications as he may specify. The purpose of the subsection is to ensure the maximum flexibility is maintained. More specifically, it will provide for the possibility of including certain proportions of mortgage backed securities in a cover assets pool, if this is deemed an appropriate course of action. That is the point we covered on Second Stage.

I move amendment No. 2:

In page 18, subsection (3), line 38, to delete "institution" and substitute "entity".

Section 5(1)(d) refers to a governmental or public entity which does not include a credit institution or other financial institution, whose financial obligations have the risk weighting referred to in that paragraph only because of its status as an institution. I imagine that this subsection refers to the German Landesbank which receive a treble A rating due to their governmental status. They get this rating because of their status as a public entity, not as a financial institution.

We obviously looked carefully at the Senator's amendment, but the purpose of this section is to exclude claims on state banks from automatically qualifying as public credit. As it stands, the text achieves this purpose. The amendment would not have this effect and I, therefore, cannot accept it.

At a time when we are transferring most of our powers from the Central Bank to the European Central Bank it appears that we are giving the Central Bank more detailed powers under the Bill. I wonder, however, if the bank's staff are trained to deal with measures of this kind? Are foreign banks in the IFSC regulated by the Central Bank?

They are licensed under the Central Bank.

Subsection (3) contains the words "within the scope of those Acts," but it is not clear to which Acts it refers. It seems that most of the functions of the Central Bank are being transferred to the European Central Bank. The Bill, however, gives the bank extraordinary powers. I imagine we will have to train staff to deal with the functions it will have as the new authority. Will the Minister of State explain whether the bank is geared to do so?

The Minister of State has already answered the second question I asked about foreign banks.

Yes.

He said the Central Bank acts as regulator. Subsection (3), line 5, refers to "the scope of those Acts." What Acts are being referred to?

This section sets out the functions of the Central Bank, which have to do with the regulations which are not being transferred by any of the national central banks to the ECB. The Central Bank still has an important regulatory function in its own market. That is the reason the section relates to it specifically. It also deals with other matters regarding the European Central Bank, but not functions of this type. It sets out the functions of the Central Bank which are essentially to approve credit institutions as designated credit institutions for the purpose of the Bill and to regulate them as well as the asset covered securities market.

Explicit functions conferred on the Central Bank under the Bill are additional to those functions it already has in relation to the supervision of financial institutions under the Central Bank Act, the Building Societies Act and EU directives etc. These general supervisory powers also apply to designated credit institutions.

The Senator asked specifically about section 9(3) which clarifies the supervisory functions and powers of the Central Bank under the Central Bank Acts, Building Societies Act, EU directives etc which apply to designated credit institutions subject to modifications as are necessary to adapt them for the purpose of the Bill. The only circumstance in which these supervisory functions and powers do not apply is where they are specifically disapplied by the Bill. This is to ensure no general power or function of the bank overrides the specific provisions applying to designated credit institutions and asset covered securities by the Bill. In other words, we maintain the primacy of what is being established under the Bill.

I wish to ask a general question in relation to fines throughout the Bill. Their size varies enormously and appears not to be necessarily consistent with the potential loss if the section was breached. How did the Minister of State determine the fines which should apply to different offences under the legislation?

Obviously, there are many other pieces of legislation which equally come into play when dealing with fraud, etc. The fine to which the Senator is probably referring is the small fine on summary conviction. There is a larger fine on indictment. There are other Acts in place which cover serious fraud and which are not being superseded. The smallest fine in the Bill is on summary conviction, but if the situation develops into a major crime, obviously there are other laws to take care of it.

Will large banks which get involved in selling this product have to establish a special subsidiary to deal with it or can they deal with it in the normal banking way?

The banks may establish subsidiaries to do so. As the Senator is aware, there has to be a balance in the books of the financial institution as to what way it is to be done. Therefore, it may have to establish a subsidiary which specifically fits within the remit to enter the asset covered securities pool. Some of the mortgage institutions would not have to establish a subsidiary. Designated credit institutions are confined in the range of business activities they can carry out. This means it is unlikely that existing banks or building societies will seek designation in their own right because most of them would have to curtail their range of activities significantly. It is, therefore, likely in the case of mortgage institutions that the institution interested in issuing these bonds will set up subsidiary companies which will apply to the Central Bank for registration as designated credit institutions. This is provided for in section 58 of the Bill.

I move amendment No. 3:

In page 24, subsection (4), line 36, after "institution" to insert ", such conditions as were imposed by the authority under section 14(5).”

Section 17(4) states:

The register of designated public credit institutions must contain the name and the address of the principal place of business of each designated public credit institution and such other information as the Authority determines.

I propose that section 17(4) should read as follows:

The register of designated public credit institutions must contain the name and address of the principal place of business of each designated public credit institution, such conditions as were imposed by the authority under section 14(5) and such other information as the Authority determines.

I thank the Senator for tabling the amendment. Section 14 allows the Central Bank to attach conditions to a credit institution registration as a designated credit institution. Section 16 allows the Central Bank to vary these con ditions and impose new conditions. These conditions are additional to those which the Central Bank may impose on designated credit institutions through its regulatory powers generally.

The provision is designed to resolve any specific issues the bank might consider need to be addressed if it is to award a particular institution designated credit institution status or to allow an institution to keep that status. It mirrors the approach taken to the licensing of banks under the Central Bank Act but it is not envisaged that it will be widely used.

As it stands, section 17(4) enables the Central Bank to record these conditions in the register of designated public credit institutions should the Central Bank decide to do so. However, I would not be in favour of making the disclosure of these conditions mandatory. This is because such conditions might contain sensitive financial or personal information which could have a lasting effect on the reputation of the institution concerned out of all proportion to the reason for which the condition was imposed or, in the case of published personal information, leave the condition open to legal challenge. Furthermore, publication of conditions could damage the Irish asset covered securities market or the financial services industry generally. This would not be in the public interest and it would be unhelpful to the prudent regulation of the market if the Central Bank had to take the impact of publication into account every time it wished to impose a condition.

It is my view that any decision to publish conditions should be left to the Central Bank and each individual case must be considered on its merits. Consequently, I cannot accept the amendment.

Section 20(3) states:

The High Court may order that all or any part of proceedings before it under this section may be held in closed court if the Court is satisfied that it would, because of the nature or circumstances of the case or because it would be in the interests of justice, be desirable to make such an order.

This section sets out the conditions under which the authority may direct a designated credit institution to suspend its business. We should be very wary of granting the courts powers to hold hearings on such issues in camera because certain judgments have been made in the family courts due to the secret nature of some of the cases held there. The conditions should be made public in the register.

I do not agree with the comparison the Senator made. Section 23 provides that in any proceedings before it in relation to a direction, the High Court may make an order providing the proceedings take place in closed circuit if the court is satisfied that it would be in the interests of justice to do so. This provision is included as reporting of proceedings involving a designated credit institution could have a negative effect on public confidence in the institution out of proportion to the issue involved.

Is the figure in subsection (1) an aggregate figure?

It is.

Subsection (4) states: "The Minister may, by order notified in Iris Oifigiúil, vary the percentage referred to in subsection (2) or (3).” Why is subsection (1) excluded?

The condition in subsection (1) is a core point. We have set it at a certain level whereas the conditions in the others allow them to be varied. There may be market conditions or other things that might call for that. In terms of the central basis on which the Bill is based, section 31(1) is one of the core points and because of that it is not open to be changed by ministerial order.

Is the figure fixed? Can it ever be reduced?

No, it may be varied by Central Bank regulations but not by the Minister.

There is a certain flexibility built into the legislation allowing key matters to be regulated either by the Minister or by the authority. How are the powers retained by the Minister and those given to the authority to be decided?

It is an important point. As the Senator knows there was a lot of discussion during formulation of the Bill, largely driven by the representatives of the industry and based on good experience of legalisation and the way the market operates in Germany. It was a question of getting the balance between the responsibilities of the regulatory authority and those of the Minister that would ensure flexibility was built into the Bill. The reason for the flexibility is clear. This is a new product and we want it to work extremely well. We do not want to set it down in such a rigid way that it does not have the flexibility to move with the market. A balance has been struck between the responsibilities of the regulatory authority and those of the Minister. A lot of them are obvious – the actions which the Central Bank should take are, in most cases, obvious. What has been retained for alteration or regulation by the Minister is equally obvious. The balance struck gives an inherent flexibility and all interested parties have welcomed that.

Did I understand the Minister correctly when on Second Stage he said that where a mortgage or loan exceeds 75% the extra percentage is not included in the asset pool?

It is an important point which led to some confusion. People thought that if a mortgage held was greater than 75% of the value it could not be included, but that is not the case. It can be a 100% mortgage. The maximum we will allow into the pool is a 75% valuation. That is not necessarily what the Senator or I might think is the market valuation. It would be a prudent valuation done by the Central Bank and it could be even less again. That is to ensure the quality of the assets and the security and surety of the product available.

Has the Minister an explanatory note on subsection (4)?

It is straightforward. Section 36(4) enables a designated credit institution to remove assets from the cover assets pool where the pool is over-collateralised. Excess value is not wanted.

That does not allow people to withdraw from the pool.

The pool and its inherent integrity has to be maintained. However, if the pool is over-collateralised and the surplus is not needed it can be reduced without affecting the basic integrity of the pool.

Let us consider an example. If my mortgage is in the pool and I want to pay it off, how do I do it?

That is very straightforward and it will happen. As the Senator knows, there will be occasions when an asset may have to be removed by default. It may have come to the end of its life term and it will come out of the pool and be replaced by a new mortgage. An asset belonging to an individual in the pool has no direct implications or effect on the holder.

I move amendment No. 4:

In page 41, subsection 2(d), line 37, after “made up” to insert “and comparative prior-year figures showing the current default status of assets held in the pool at the end of the prior-year period”.

A number of the assets were held in the cover assets pool at the date to which the financial statement for that year was made up. I propose that it should read ". . . at the date to which the financial statement for that year was made up and comparative prior-year figures showing the current default status of assets held in the pool at the end of the prior-year period".

One of the difficulties for an individual investor is that the asset pool to which he or she will have claim is dynamic in its nature. He or she may have an eventual claim on a pool of assets but the exact assets in the pool may vary from time to time. This section sets out the financial statement publication obligations in respect of assets in default. There is the danger of financial institutions replacing defaulting credits with non-defaulting credits to window-dress their financial statement. Requiring the financial institutions to show the current default status of assets held in the pool at the end of the prior-year period will help prevent this. I hope the Minister will accept this amendment.

We were not sure what the Senator's intention was when he tabled this amendment. Having listened to him I am satisfied that the point the Senator made is more than well covered. Section 42 sets out details of the mortgage credit assets contained in cover asset pools which must be cleared in a designated mortgage credit institution's financial statement. It is designed to give the reader information on the quality of the mortgages underpinning the pool. Subparagraph (d), to which the Senator has tabled the amendment, requires designated credit institutions to set out details of assets on which there have been defaults on payments in the previous year. Subparagraph (c) requires the desig nated credit institutions to set out details of defaults at the time the financial statements are made up. Subparagraph (e) requires institutions to record all cases where it has replaced non-performing mortgage credit assets with new assets.

The Bill as it stands requires designated credit institutions to show all relevant information in respect of current and previous defaults in cover asset pools and cases where non-performing assets have had to be replaced. I think that fully meets the questions raised by the Senator.

I move amendment No. 5:

In page 47, subsection 8(a), line 12, to delete “less” and substitute “more”.

It is a little difficult when one does not get help from anyone in the House and is on one's feet all the time. Section 47(8)(a) provides that “a covered asset pool maintained by the institution has a duration of not less than the public credit covered security that relates to the pool”. I propose that section 47(8)(a) should state “a covered asset pool maintained by the institution has a duration of not more than that of the public credit covered security that relates to the pool”.

The section addresses the conditions under which assets may be replaced in a covered asset pool. Other subsections protect the position of the investor by insisting the replacements have a market value and annual interest payments not less than the original assets. "Duration" is not necessarily a positive for investors as it denotes a time risk. Many investors would prefer a shorter rather than a longer duration. That is the purpose of the amendment.

I fully appreciate the difficulties the Senator had working on his own to table amendments on this particularly technical Bill. I compliment him on his efforts. He has put a great deal of work into the legislation, which is welcome. I have examined the subsection the Senator proposes to amend and I am satisfied it is correct as drafted. "Duration" is a technical financial term which measures financial assets in regard to when payments will be received. It is expressed in years in respect of those assets. It is vital that the duration of the covered asset pool is at least equal to that of the securities so that it will contain sufficient funds to pay interest on and redeem the securities. In other words, one does not want a scenario where the aggregated assets collaterising asset covered securities mature before the securities. I must, therefore, reject the amendment.

I move amendment No. 6:

In page 54, subsection (11), lines 46 and 47, to delete "are to" and substitute "may".

Section 58(11) states:

If legal proceedings are pending immediately before the time when a transfer under the section takes effect those proceedings are to continue.

I propose the substitution of the words "are to" by the word "may".

The section deals with transfers of assets between credit institutions. The legislation should not insist that legal proceedings "are to continue" and it should state "legal proceedings may continue" as parties may wish not to proceed for their own good reasons under the changed circumstances.

I am ad idem with the Senator on this point but it is covered by the legislation. The purpose of the subsection is to clarify that if legal proceedings are pending with regard to any asset or business whose transfer is proposed under the section, the proposed transfer will have no effect on those legal proceedings. If the transfer takes place, the transferee assumes the rights and obligations of the transferor in respect of the legal proceedings. The amendment would introduce an element of doubt as it raises the question of whether there might be circumstances in which the legal proceedings may not continue. As drafted, the subsection provides that the transfer of assets has no effect on the legal proceedings other than to make the transferee become a party to the proceedings in place at the transfer. The subsection does not have any implications for the normal conduct of legal proceedings. Whether, for example, the parties to the legal proceedings decide to settle or a court decides to put a stay on proceedings are entirely separate matters on which the legislation does not impinge. I do not, therefore, propose to accept the amendment but the Senator is in agreement with we have proposed.

This is an important section, as it provides for an asset monitor. Will the monitor have an independent role similar to a trustee of an asset pool? Under section 59(6) the Central Bank will set out certain qualifications which the person must meet. What qualifications will be required?

The covered asset monitor could be an institution. It does not necessarily mean that an independent person will be appointed. The Central Bank may decide that an institution should be the covered asset monitor. The qualifications will be decided by the Central Bank. It is not a matter for us. It was felt by all sides that the Central Bank should agree them.

Will the Central Bank permit an institution to act as a monitor of its own funds? My understanding of the legislation is that there must be an individual who has responsibility to monitor—

No, I did not mean to convey to the Senator that an institution would be its own monitor. An individual, an accountancy practice or another company could act as monitor.

I thank the Minister of State, Deputy Cullen, and his staff for bringing the Bill before the House. As he said, it is very technical. When I first read it I thought it was double Dutch, but then I got a feel for what it entails. I hope when this financial product comes on the Irish market it will be of benefit to Irish investors, particularly mortgage holders, and help to give long-term fixed mortgages to Irish mortgage holders

The Senator is one of the few in both Houses who understands the Bill.

I thank Senators for their contributions to the Bill which, as Senator Doyle said, is very technical and complicated. However, it involves a central simple underlying effect which I hope will benefit potential mortgage holders in Ireland, the IFSC and the market in general.

I thank, in particular, Senators Finneran and Doyle for their efforts in what was a worthwhile debate. Senator Doyle kept Committee Stage going longer than they managed to do in the Dáil. I compliment him on so doing. Overall, the con tributions in the Seanad were well worthwhile. I thank you, a Leas-Chathaoirligh, and your staff. I particularly thank my own staff for dealing with what is very complicated legislation and for getting the essential points across to all of us in as simple a manner as possible.