Investment intermediaries face tougher regulation


INVESTMENT intermediaries will have to comply with a more demanding regulatory regime under the supervision of the Central Bank, according to its governor, Mr Maurice O'Connell.

Mr O'Connell stressed yesterday that, while many may complain that such a system would be too strict and too costly, particularly for smaller businesses, the Central Bank would have to insist on taking a more stringent approach in its supervision of the sector.

The Minister of State for Enterprise and Employment, Mr Pat Rabbitte, announced last week that the Central Bank was to take over the regulation of investment intermediaries, a role which is now largely undertaken by the Irish Brokers' Association.

The Central Bank governor told the Dail Select Committee on Enterprise and Economic Strategy that proper supervision of the sector presents some "unique difficulties" that should not be understated. The committee was holding a two day investigation into the collapse of the Taylor Group.

As many of the smaller intermediaries are involved in a range of business activities, acting as everything from insurance agents to deposit takers, Mr O'Connell said the Bank would have to insist that all investment activities be "ring fenced" and accounted for separately.

"Where there is a mix of insurance and investment, there needs to be a clear understanding about the division of supervisors responsibility. In short, these intermediaries would be subject to a discipline more demanding than what they have been accustomed to.

Mr O'Connell warned that if this was not feasible in some individual cases, he failed to see how "proper" supervision could be exercised. "We will have to sort out what arrangements can be applied. We may have to look to reaching an understanding on these arrangements between a number of different regulatory agencies."

He believed there may be up to 800 firms offering various investment services in the Republic.

The Central Bank would need "significant additional resources" to undertake new supervisory responsibilities in this sector, he said.

The only alternative to Central Bank supervision, Mr O'Connell said, seemed to be some form of self regulation. This, he added had particular merit in the case of smaller operations, provided that adequate resources were made available.

"It must be appreciated that centralised control is inevitably more cumbersome and time consuming."

Mr O'Connell also mentioned to the committee that there had been suggestions from time to time that perhaps a new authority was needed to supervise all financial activities.

The Central Bank governor emphasised, however, that no system of supervision was foolproof. "Every system needs the co operation of the entities that are being supervised. Supervision may be a deterrent but it will not eliminate fraud," he said.

Mr O'Connell said it had been demonstrated again and again that even the best regulatory systems can be outwitted by people determined to engage in fraud.

The Central Bank is currently co operating with the Department, of Enterprise and Employment on an informal basis and would continue in that vein until a new statutory basis had been finalised, according to Mr O'Connell. The IBA would continue in its supervisory role until next March.

Mr O'Connell said that, depending on how the existing legislation was amended, the responsibility for supervision of intermediaries could be simply transferred to the Central Bank, which would act as an agent to the Minister for Enterprise and Employment. But he warned that other deficiencies within the Act would have to be looked at in the longer term. "While there are no major loopholes, there are deficiencies of a technical nature which the Central Bank would bring forward for consideration."

The governor assured the committee it would investigate all complaints brought to its attention and would work closely with the Garda Fraud Squad when necessary.