Contents

Executive Summary

1. Introduction
2. Review of IOSCO Objectives and Principles of Securities Regulation
   
   1. Regulator
   2. Self-Regulation
   3. Enforcement
   4. Cooperation in Regulation
   5. Issuers
   6. Collective Investment Schemes
   7. Market Intermediaries
   8. Secondary Market
3. Staff Commentary

Text Table

Table 1. Ireland: Observance of IOSCO Objectives and Principles—Summary Assessment

I.  Introduction

1.  In connection with the 2000 Article IV consultations, Ireland participated in the Financial Sector Assessment Project (FSAP).¹ The assessment of Ireland’s financial system included an assessment of the individual components of the sector as well as a review of systemic stability, including of potential vulnerabilities that could arise from the interlinkages among different financial sector participants.

2.  The attached report reviews Ireland’s compliance with the principles put forth by the International Organization of Securities Commissions (IOSCO). At its 1998 Annual Conference IOSCO adopted the Objectives and Principles of Securities Regulation, setting out core principles on that topic, which could be used as a guide for supervisors of regulatory financial institutions dealing in securities trading. The principles are based on three fundamental objectives of securities regulation: (a) the protection of investors; (b) ensuring that markets are fair, efficient and transparent; and (c) the reduction of systemic risk.

3.  The Objectives and Principles were proposed by IOSCO to give guidance to regulators, and to serve as a benchmark against which to measure progress toward effective regulation. In some areas, the Objectives and Principles may be satisfied by one of a variety of regulatory approaches since legislation and regulatory structures may vary between jurisdictions. The principles stress that the securities markets are changing rapidly as a result of the impact of new technology and thus underscore the need to give careful consideration to the adequacy of the existing regulatory arrangements in the light of those changes in the market.

4.  In Ireland, the domestic securities sector is small but securities-related activities in the International Financial Services Center (IFSC) are significant. The domestic securities sector consists of the Irish Stock Exchange (ISE), securities brokers, mutual funds and investment intermediaries. There are two branches of foreign futures exchanges. The mutual funds industry is a significant part of operations in the IFSC. Notwithstanding rapid increases in stock prices and market capitalization in the mid-1990s, the size of the domestic securities sector is constrained by a shortage of listed stocks and a paucity of government and corporate bond issues. In contrast, securities activities in the IFSC have been buoyant with the number of funds and promoters increasing rapidly. Ireland is the second largest hub in Europe, after Luxembourg, for mutual funds.
 

II.  Review of IOSCO Objectives and Principles of Securities Regulation

A.  Regulator

Core Principles 1-5

5.  Overall supervision of the securities sector is vested in the CBI. Three supervision departments exist within the Bank: (1) Banking Supervision Department (BSD); (2) Securities and Exchanges Supervision (SES) which has responsibility of the regulation of all investment intermediaries; and (3)IFSC and Funds Supervision (IFS), which is responsible for the authorization and regulation of mutual funds. In the securities markets, the CBI’s authority covers brokerage and dealing activity, fund and portfolio management, collective investment schemes, primary and secondary securities markets and IFSC entities. Informal but regular and constant communication takes place between the CBI, the ISE and the DETE.

6.  The Board of the CBI has a supervisory role vested in it by law. Board members are appointed, in the public interest, by the Minister for Finance (the Minister). Senior CBI officers appear before committees of Parliament, the CBI must report to the Minister and to Parliament annually and is subject to government audit office audit.

7.  The Central Bank Act, 1971 to 1997, together with the Investment Intermediaries Act, 1995, the Stock Exchange Act, 1995 and mutual funds legislation, provide the framework for supervision. Powers available to the CBI include the power to require meetings and submission of financial returns on a regular basis (according to risk assessment), to conduct inspections and to impose capital and other supervisory requirements. The CBI may suspend the business of a regulated entity, require disposition of assets and other measures as deemed necessary.

8.  Statutory instruments such as legislation and regulations are public documents, and set out criteria for the authorization of a securities firm. A Handbook for Investment Firms was issued in September 2000, which consolidates and upgrades previous requirements in this area. This applies to members of the ISE as well as firms engaged in the provision of investment business services. A Financial Services Policy Group has been established within the CBI to ensure that consistent practices are adopted across all supervision departments.

9.  The CBI is subject to confidentiality requirements under the Central Bank Act, 1989 as amended by various Acts. There are specific requirements of the Bank’s Code of Conduct covering confidentiality and other aspects of staff obligations.

B.  Self-Regulation

Core Principles 6-7

10.  The ISE is responsible, among other things, for monitoring compliance with the Code of Conduct applicable to members of the exchange and the investigation of customer complaints. The responsibilities and duties of the respective parties are set down in the Stock Exchange Act, 1995. There is appropriate use of self-regulatory organizations (SROs). SROs are subject to supervision by the CBI and are subject to rules of fairness and confidentiality when exercising delegated responsibilities.

11.  The ISE is subject to supervision by the CBI under the provision of the Stock Exchange Act, 1995. It is required to observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.

C.  Enforcement

Core Principles 8-10

12.  The CBI has comprehensive powers to inspect, investigate and monitor the activities of investment firms and stockbrokers. These powers are laid down in the Investment Intermediaries Act, 1995 and the Stock Exchange Act, 1995.

13.  The Investment Intermediaries Act, 1995 and the Stock Exchange Act, 1995 provide the CBI with a comprehensive legal framework within which to carry out its statutory functions. The appointment of a panel from which Determinations Committees will be appointed has been finalized. (The Determinations Committees will have the power to reprimand or fine firms in respect of minor breaches of the legislation.)

D.  Cooperation in Regulation

Core Principles 11-13

14.  The CBI has the power to share both public and non-public information with domestic and foreign counterparts in accordance with the provisions of Section 16 of the Central Bank Act, 1989 as amended by subsequent legislation. Since establishment of the Forum of European Securities Commission (FESCO) a multilateral memorandum of understanding has been developed to facilitate sharing of information and market surveillance. As such, the CBI is required to share both public and non-public information with the other signatories to the document (i.e., all securities regulators in the EU).

E.  Issuers

Core Principles 14-16

15.  The ISE requirements for disclosure are those of the London Stock Exchange in general terms. Undertakings for Collective Investment in Transferable Securities (UCITS) are subject to EU mandated disclosure requirements. Domestic collective investment schemes and other issuers are required to make initial disclosure and mandated annual and half-yearly reports.

F.  Collective Investment Schemes

Core Principles 17-20

16.  Collective investment schemes are authorized in Ireland by the implementation of EU UCITS Directive, the Unit Trusts Act, 1990, Companies Act, 1990, Part X111, and Investment Limited Partnerships Act, 1994.The legislation and Notices issued by the CBI under the provisions of the legislation, set standards for the eligibility and regulation of those who wish to market or operate a collective investment scheme.

17.  Rules governing the legal form and structure of collective investment schemes and for the segregation and protection of client assets are contained in the legislation.

18.  Disclosure requirements for UCITS are contained in the UCITS Regulations. Supplementary conditions to these requirements have been set down by the CBI and are contained in Notice UCITS 6. Disclosure requirements for non-UCITS are contained in Notice NU 9.

19.  Rules for the valuation of assets of collective investment schemes must be contained in the constitutional document and approved by the CBI. Essentially, assets must be valued at market value or, if not available, at probable realization value which must be estimated with care and in good faith. Units in a collective investment scheme must be issued and redeemed at net asset value plus/minus relevant charges.

G.  Market Intermediaries

Core Principles 21-24

20.  The legal basis on which the examination of applications is carried out is Section 10 of the Investment Intermediaries Act, 1995 and Section 18 of the Stock Exchange Act, 1995 as appropriate. The CBI has intensive oversight of cases where some risk of failure is apparent and requires constant reporting of that situation.

21.  Prudential compliance requirements are advised to all firms when authorized. The CBI recently completed a review of its supervisory requirements including general and supervisory requirements, advertising requirements, and the Code of Conduct. They were issued to all supervised firms in a single handbook. Client money requirements are currently under review.

22.  The Investor Compensation Act, 1998 provides that where an investment firm is unable to meet its obligations arising from claims by clients and has no reasonable opportunity of being able to do so, the CBI shall notify the investment firm concerned of its intention to make a determination to that effect. Where this notification has not been appealed or the High Court has turned down such appeal the CBI may make the formal determination. Such determination will then set in motion a process whereby the Investor Compensation Company Limited will actively seek claims from affected clients. Claims will then be processed and in due course compensation will be payable in accordance with the provisions of the Act in respect of valid claims.

H.  Secondary Market

Core Principles 25-30

23.  The ISE is subject to supervision by the CBI under the provisions of the Stock Exchange Act, 1995. The ISE can take direct action in respect of brokers, report to SES or in cases of insider trading, directly to the Director of Public Prosecutions. During 2000, the ISE switched from telephone reporting of trades outside of the exchange’s trading hours to screen trading and reporting.

24.  High levels of retail business in the brokerage industry and a shortage of experienced staff in brokers offices points to the need for continuing vigilance and early identification of risks to the system of technical and staffing difficulties when high volumes of trade occur.

III.  Staff Commentary

25.  Ireland broadly observes all IOSCO principles, which are implemented in a manner suitable to a small market. The detailed assessment of principles can be summarized as follows:

• Concerning the principles relating to the regulator, arrangements for cooperation between local regulators, although informal, allow for effective cooperation given the size of the market. However, while the CBI is presently adequately staffed in the relevant areas, further tightening in the market of experienced staff could impact negatively on the CBI.

• On self regulation, given the size and complexity of the markets, it is not considered appropriate for the regulatory regime for the securities market to make further use of SROs at the present time. Specified standards include those governing constitution, capital, governance, membership and operations as set out in the legislation. The legislation requires the CBI to regulate and supervise the stock exchanges and their member firms.

• On enforcement of securities regulations, inspections and the requirement for reports are on routine periodic basis, risk assessment basis or on complaint. The CBI has independent statutory powers not dependent upon judicial action.

• Regarding cooperation in regulation, the principles are observed. Lack of MOUs with countries outside of EU does not preclude cooperation and assistance where requested.

• As to the principles relating to issuers, there is full, accurate and timely disclosure of financial results and other information which is material to investors’ decisions. Holders of securities in a company are treated in a fair and equitable manner.

• On collective investment schemes, the principles are observed. However, some products issued by insurance companies are similar to products issued by unit trusts or other collective investment schemes regulated by the CBI, but it is unclear whether IOSCO Principles are applied to insurance issuers, as they are regulated by the DETE. There is a proper and disclosed basis for asset valuation and for the pricing and redemption of units in a collective investment scheme.

• On market intermediaries, authorization involves examination of each application, including financial position, main shareholders, directors and senior managers, internal controls and systems and the ability to comply with supervisory requirements. All market intermediaries are required to comply with ongoing capital and other prudential requirements that reflect the nature of their activities. There is a procedure for dealing with the failure of a market intermediary in order to minimize damage to investors and to contain systemic risk.

• Regarding the principles for market regulation, the CBI has extensive surveillance and inquiry powers and uses regular and risk-based inspections. The integrity of trading is maintained through fair and equitable rules. The ISE is subject to regulatory oversight by SES. The CBI has the ability to issue directions which clearing and settlement organizations must follow.

• In light of the high degree of compliance with the IOSCO principles, major challenges are likely to relate less to the current regulatory framework, but to maintaining vigilance as certain parts of the markets are growing. In addition, and in view of the large international presence of securities operators in Ireland, it will remain important to adapt securities regulation and supervision to the fast changing market environment and the developments in IOSCO principles.

¹ The assessment was prepared by the International Monetary Fund and a group of peer assessors as part of a Financial Sector Assessment Project (FSAP) mission. The team was led by Tomás J.T. BaliZo and included Anne-Marie Gulde, Angeliki Kourelis, and Armando Morales (all MAE), and Euan Abernethy (New Zealand Securities Commission). Inputs were also provided by Natalia Koliadina (EU1), and other EU1 staff.