Shay Brennan: Clarifies Central Bank Role in Sovereign Bond Prospectuses

Governor Iago, Chair, Governor, very welcome to you and your senior colleagues, and I appreciate your time here at the committee today. I just have a relatively short series of questions, so we might go back and forth on those. Firstly, for what countries is Ireland the home state in terms of evaluating bond prospectuses. We have a list, I don't have it in front of me. You're looking for the detail there, Deputy, just to say that if you are a country, a sovereign within the EU, you don't need to designate a home member state, it is only third countries that need to decide within the EU who's the member state. For obvious reasons, you're within the EU, so Israel has chosen Ireland as the home member state for this. I'll let Gerry. I'm just leaving my list, a lengthy list here. So, we approve prospectuses for Russia, Russia, Russia. We have in the past, for Sharjah, for Russia, for Sharjah, for Turkey, for Russia, as I've mentioned, and for the Republic of Maldives, for the Republic of the Côte d'Ivoire, for the Republic of Armenia, the Republic of Benin, for Ukraine, and that's it. And we inherited the Israeli, as our home state, as a result of Brexit. Did any of those other countries come along at the same time? I don't have the exact answer, but I suspect so, but I don't have the present answer. Okay, okay. In general, what criteria does the central bank use in assessing a prospectus? So, as I was describing, the core question is set out in Article 6, which is in relation to the financial position of the issuer. And then the prospectus regulation sets out, and then there's delegated legislation passed by the European Commission, which sets out in more detail. So, for example, in relation to the Israel bonds as a third country sovereign bond, Annex 10 of the Commission delegated regulation sets out a list of the things that need to be within that perspective. So, that we look at. The Commission, that list of different things, which all relate to, ultimately, the financial position. That includes, for example, what's described around the economy of the issuer, what's described around the public finances of the issuers, the legal and government political system of the issuer. So, all the things you would expect in relation to a sovereign issuer. And we assess not whether they're accurate. You know, we approve over 650 bond, third country bonds, the prospectus for them a year, plus many, many thousands of final terms. So, it is a very, very large operation. So, we are not tasked with assessing the accuracy, and nor could we assess the accuracy, when you think about all that is there. But what we're tasked with is ensuring that what is required to be there under the prospectus regulation and under the delegated legislation that the Commission has made. And particularly, as I say, in Annex 10, is there and is appropriately there. We're also, and the Governor has referred to this, we're also asked to make the assessment, do we think that this is appropriately complete, comprehensible, and consistent? And again, the Commission's delegated regulation will set out, in some clear terms, what it means for a prospectus to be complete, what it means for it to be comprehensible, and what it means for it to be consistent. And those are the things, and it is really important that, you know, Europe and the legislation around prospectus has been around for a long time. And this regulation is the culmination of many, many years of getting it right in Europe. And so, these issues of what are the financial, what are the risks of financial position, is there completeness, is there comprehensibility, is there consistency, and are there right things set out? That is a fundamentally important thing to which we, which we cleave. You mentioned, it might have been Annex 10, where there's a comprehensive list of items you check are present. Is it generally then just a box ticking exercise, you're going down through a list ticking yes, no, or is any of that open to interpretation by central bank staff? I don't think it's accurate to describe it at all as a box ticking exercise. But, nor is it like, for example, it is not the same as what we have in relation to, for example, investment funds. So, for investment funds, in that regime, we have an authorization regime, and a supervision regime. Because in the context of investment funds, it is our job to implement the legislation, which is about determining whether the standards, both of the requirements for issuing funds, and then for managing funds, and administering funds, all of that. So, it's a regulated, it's a set of regulated entities and regulated products, which we are responsible for. This is not that. The prospectus regulation is not about regulated entities. It is about a simple task, in one sense, which is, is this document, or set of documents, is it consistent with the requirements in the regulation? So, it's a kind of a very clean, very straightforward thing. It's not setting up a regulated framework. It's not where we're expected to be sort of following what is going on in these many, many, many thousands of corporates and sovereigns. That is not the task that is assigned to us to do. But to say that it's box ticking also is not quite correct, because what we see our role as being is playing that very important role of the gate, as I've been describing. By the gate, I mean the moment at which an issuance comes into the market, of asking the question. And if you look at the ESMA, the European Super Securities and Markets Authority, if you look at their guidance on this, the word you will see all the time is challenge. It's about challenge. So, at the end of the day, we can't ultimately, as regulators in this space, we can't determine the accuracy of all of the corporates, all of the sovereign issuers. There's no way you can determine the accuracy of everything that is said. What one can do is challenge. Have you disclosed what you need to disclose in this space, in that space, in relation to the financial risks, etc. And so that's what I would say. It's not box ticking. It is a challenge exercise, but nor is it, and it's absolutely not a regulatory regime, as we would have, for example, the fund sector. So, you're taking what's on the application form, or the prospectus, or draft prospectus, you're taking that as read, as in you're not investigating all of the information provided behind that. Do I understand that correct? So, that is absolutely correct. And that is not our task. Because, for example, these documents could be hundreds of pages long. If you think of any, if you think of, take any large corporate, for example, Apple, the responsibility of a prospectus approver is not to say, is this all accurate. You would need a team and teams of due diligence lawyers. That is very specifically not what the prospectus regulation is about. What the prospectus regulation is about is saying, is this sufficiently clear, complete, and consistent, and covering the risks. But ultimately, the liability, and that's very important, the liability rests with the issuer. Ultimately, we can, we can say, no, we don't think there's enough there. But ultimately, the liability rests with the issuer. And we are not in the business, and nor, it's very clear that the prospectus regulation is not asking anyone to assess, is this correct? It is a private thing, in terms of the publication, it's not a private thing. It is for the issuer to make sure that what they're saying is correct. I'm, forgive me, I'm struggling a bit with that. So somebody could put in an application full of falsehoods, and it would make it through the central bank prospectus vetting process, simply because they had written something in the box? So I don't think it would make it through, because I think we, in our assessment of the, whether or not the risks are appropriately disclosed, whether or not the things that are required to be covered under the regulation are there, whether or not there's completeness and consistency. I suspect we would find gaps. But it is not our job, under the regulation, to see, is this accurate? And the regulation is very clear about that, and it's very clear that ultimately liability remains with. So in a way it's a mixed regime. Liability remains with the issuer to get it right. It is our job to make sure that the prospectus is of high quality. I'm... Of good quality, let me speak. Yeah, I'm at a bit of a loss there. So we, well we as in the central bank of Ireland, would say that this prospectus has, this form has been filled out correctly, but the information on it, we can't verify. We would say it meets, it meets the requirements of the prospectus regulation. And the requirements of the prospectus regulation, insofar as applied to what the job we need to do, does not relate to checking the accuracy of everything. What's your own view on that? Do you think the prospectus regulation is deficient here? Well, I think it would be a huge societal burden for the regulator to check every single disclosure, in every single prospectus, it would be, dare I say, billions of pages of checking a year. Yeah, I'm just wondering what's the point of all of this? It is to make sure that the quality of the prospectus, in other words, so the, the, the issuer remains responsible for the accuracy, right? Don't be telling lies. The regulator is, remains responsible for ensuring that the quality of the prospectus, that it is, that there's, what needs to be there is there, that it is comprehensible, that it can be read and understood, that it is consistent, that it's not saying different things in different places, and, and, and, and that it is complete. And that, and that's really important, because that's the, that's the heart of the, of the discussion we're having, that our, our role is a limited role. I, I fully understand, um, and, and sure you can check for consistencies across the document, but it doesn't take away from the fact that the actual underlying information might not be correct. And that's not our job. Yeah. Maybe I could just supplement that a little bit, Deputy, because I think, I mean, I think it's, um, I think what Gerry's trying to also explain is the kind of level of verification that you can actually do in terms of the prospectus, but we have to satisfy ourselves. Because at a very basic level, what are you trying to achieve? You're trying to ensure that an investor that wants to buy any of these securities, um, has enough information for, for, for itself to be able to make an informed investment. And why we speak about the financial position of the issue is that the first thing that investor wants to know is, can they get their money back? That's why we speak about investor protection. It's incredibly important. So that's why article six refers to the financial position. The second thing that article six refers to the rights of the issue. So if I am going to sign up to these securities, well, what are my rights under that? I should know that. And thirdly, then it's what are the reasons for issuance? What's the, what's it going to be used for? So I, I think if you think about what the heart of it's trying to achieve, it's trying to give an investor a reasonable level of information. As Gerry said, we certainly can't verify all of those pieces of information because in a way also that would very much slow down what we're trying to achieve in terms of the prospectuses. Um, but it's, it's also to make a distinction between judgment and the level of verification, but I think it's important to kind of go back to what's it actually trying to achieve for investors. Would it be fair to describe it as regulatory light? So I don't, I think it's more hybrid in a way. So, um, so let's, what motivates most of the issuers that we, we deal with? Um, and, and the sort of the conversations we very often have is they, they, um, they're very concerned that they may be ultimately, you know, find themselves at the wrong end of the legal suit with their investors, right? So the, a very significant driving force in how this, the overall market works is that, that contractual relationship between the issuer and the investor and the knowledge that if they said there something that's wrong and money is lost, they can be sued. So, so, so that's the, the major context. And then we're, we, we're inserted by the regulation into, into the middle just to make sure that the regulation meets those, sorry, that the prospectus meets those quality standards. I know it's a bit, but it's a complex framework, but if, and that's why it's so different to the funds context, where the funds context, we are the ones who are responsible, uh, for ensuring that what, what's coming in is how it should be. Okay. So, so you, you, you folks would be comfortable that an investor who bought a bond or whatever, in, in, in, offered an exchange in Germany, for example, and lost money on it and decided to take legal action, uh, that the Irish central bank having approved the initial prospectus would be fully covered because you've carried out your job under the, uh, EU, uh, prospectus regulation. Yes, and indeed it's very clearly set out in, in, in the regulation, um, uh, our approval of its prospectus, uh, and this has to be said in the prospectus, is not an endorsement. It's not an endorsement of the, uh, prospectus. It's not an endorsement of the security. It's not an endorsement of the... No, that's, that's, that's understood. Yes, understood. So, moving on then, we talked about the fees received by the central bank for, for their work in this regard. The number you came back with there seemed quite low. Is, is that in any way a profit centre? And I'm referring to both Israeli bonds in general, uh, prospectuses. Is that in any way a profit centre? Does the central bank make money on that or is that actually a cost to you in carrying out this work? Well, um, it, it's not a profit centre. Uh, we basically, uh, we're funded in two ways. Uh, one, we charge out our costs of regulation and we, um, and, and, and firms and regulated entities, et cetera, pay fees. Uh, and the policy has been that, uh, we try and recover a hundred percent of the fees. Uh, that's done for everybody except for the credit union sector so far. Uh, and then we also, uh, um, have our own investments that we make money from. So, I, I, I'm hesitating what I'm saying now because I don't know when we set these particular fees, but our objective is to recoup our costs as a, as a sort of policy. Our objective is to recoup our costs. Um, so I think profit centre would be a bit of an exaggeration. No, no, but you understand where I'm going. I just want to categorically understand that nobody, well, in the, that the central bank or no Irish government body is making any money off it's work evaluating Israeli prospectuses. Yeah, no, I, yeah, it's a fee. No, no. Okay. Okay. Uh, we talked about, I would say just to give you a sense of that, I mean, we can refer to it, but in terms of what is the costs of actually regulation and supervision, that's contained within our, our, um, our, um, annual accounts. And there's a footnote to the accounts, which, which kind of gives you the size of, of the cost of regulation supervision. And what Gerry mentioned here is a, a, a fee, a much smaller fee, which is in the, the tens of thousands, but it will be larger than that. No, there's an implication, there's an implication going around that money is being made off of this, uh, work. And I just want to put that to bed. Okay. Thank you. We talked about September as the potential rollover date or next date for issue. Well, that is the date that the current prospectus ends expires. How much notice do you get if they're likely to seek to renew? Uh, is it something that just lands in your inbox when the other one expires? Do they have to give you 10, 20, 30 days notice? There's no, there's no fixed, uh, rule. I mean, um, but where, where an issue was, uh, renewing, you know, we, we, we would be expecting to hear, uh, a number of weeks at least in, in advance. So generally takes a number of weeks to, okay, to get from start to finish. Have, has the Irish Central Bank ever refused a prospectus for reasons other than insufficient disclosures, uh, or, or existing sanctions? Again, I'm, I'm, I'm, I'm hesitant to sort of give absolutes, but I, I'm not aware of anything. You mean from a sovereign or from a... A sovereign, yes. Yeah, I'm not aware of it. I mean, there are, the, the, the normal pattern would be that, uh, we would have questions and the issuers would correct the prospectus. So it's pretty, I don't think that we've, uh, I'm not aware that we've ever got to the stage where they have refused to, uh, correct their prospectus. So, so it's generally a matter of working with the issuer to get the prospectus completed as opposed to sending it back saying, this is null and void. No, we normally, I mean, it's normally the issuer's agents who will send it to us. And if we have questions, we just put them back to the issue. Have, have there been any such questions around recent Israeli bond prospectuses? It's a bit, it's a bit tricky to talk about, you know, the specifics, uh, of, of any particular, particular, um, professional relationship that we have with, with, with, with entities that fall within our, our regulatory framework. So, uh, I can't give you specific, uh, we said this, they said that, but it would be absolutely the normal course, uh, that with a, with a bond issue such as this, there would be back and forth challenge and question. And, and what type of, is there particularly areas that come up again and again, uh, errors or omissions that are made typically, or can it be right across the, the forms? Uh, I think it can be right across the, the piece, but, but it's very often in that space of, um, do we think that the risks are, are, are effectively brought out? Okay. And have you ever suspected, uh, that the, let's call them errors, uh, are, uh, deliberate? Have you ever suspected that any of these errors or omissions have been deliberate? I, an issuer trying to cover information, put out information that's... I'm honestly not in a position, uh, to, to say, uh, definitely. Okay.