The international financial services industry, which has been extremely beneficial for Ireland, now faces a myriad of challenges, from the exponential change in the scale of globalisation to the fact that competitors are now emulating Ireland’s low rate of corporation tax.
Accordingly, Ireland has set out to identify key areas where a position of competitive strength, differentiation and critical mass can be developed. On 15 September 2006 the Taoiseach, Ireland’s prime minister, issued a paper titled ‘Building on Success’, which sets out specific action points for implementation with a view to developing international financial services in Ireland from a number of perspectives – namely the regulatory environment; the legislative and fiscal environment; expertise in marketing the Irish financial services industry; skills, education and training; product development, innovation and R&D; and the essential conditions for the industry.
The Irish government has formulated six principles that it utilises to ensure good regulation: necessity, effectiveness, proportionality, transparency, accountability and consistency. In addition, the financial sector is represented on the Business Regulation Forum, which enables industry to highlight regulations that are problematic to business.
The financial regulator operates a principles-based approach to regulation and requires those operating in the industry to be fit and proper individuals who apply sound corporate governance principles and act honestly and ethically at all times. Since ‘Building on Success’ was issued, the regulator has announced guidance and structure for the implementation of these principles; has progressed the establishment of specialist units; has progressed the streamlining of the authorisation process; and has taken steps to eliminate inefficient regulatory reporting. The regulator is also recruiting further specialist staff who have the expertise to regulate an increasingly complex and diverse industry, and is making these staff accessible to the industry.
During 2007 the financial regulator hopes to develop service protocols that will establish targets and define respective expectations for the various types of interaction between the industry and the regulator; to clarify its role in relation to innovation and product development in the industry; to clarify its role in relation to the regulation of wholesale and retail financial service providers; and to continue to seek efficiencies in the general authorisation process.
The regulator is also considering a review of current outsourcing activities, taking account of international best practice in this area. A Financial Legislation Advisory Forum is proposed under the auspices of the Department of Finance to ensure structured engagement with industry on the development of the legislative framework so that regulation is well targeted and enforced, without unintended side-effects or disproportionate compliance costs.
In relation to the funds industry, the regulator commenced a review of the minimum activities requirements in respect of the administration of collective investment schemes in conjunction with the industry during 2006. It has also announced the introduction of a new investment fund structure, which will not require regulatory approval prior to launch, and is considering improvements/amendments to the funds application forms and will provide further industry workshops.
With regard to the insurance sector, the financial regulator continues to seek the active participation of the industry necessary to inform its contribution to the Solvency II project. It has engaged external consultants and will maintain its commitment to ensuring dedicated expertise and engagement with the industry on the forthcoming regulatory regime for reinsurance, including finite reinsurance and reinsurance special purpose vehicles (SPVs). The regulator also accepts that the application of the 80-20 rule is not appropriate or necessary in all situations and is prepared to modify or waive the rule depending on circumstances; it is committed, through the forum of the Captive Working Group, to exploring all legitimate issues impacting on the development of the captive sector in Ireland. A review of the sector has been initiated.
In relation to the banking sector, the regulator will introduce effective methods of consultation; will continue its engagement with the industry on the implementation of the Capital Requirements Directive; will circulate the final paper on a new liquidity framework to industry during 2007; is awaiting guidance from the Committee of European Banking Supervisors on the amendment of sectoral exposure rules to reflect the specialist nature of international banking; and will undertake a review of the deposit-taking rules, particularly as they apply to the use of repo funding.
Legislative and fiscal environment
A major consolidation and modernisation of legislation for company law and financial services regulation is in progress, based on extensive stakeholder consultation and with specific aims and objectives. The structured involvement of the stakeholders is considered central to the successful development of the proposed legislative system, so existing ad hoc consultative arrangements will be formalised and developed through the establishment of the Financial Legislation Advisory Forum, which again has specific objectives.
The Department of Enterprise, Trade and Employment is also endeavouring to facilitate solving some tricky funds accounting issues.
The Irish government will also be exploring the issue of broadening the remit of the Company Law Financial Services Unit so as to increase focus on responding to needs of the international financial services industry. ‘Building on Success’ details some changes in the corporate tax system that will assist the funds, treasury and leasing sectors, some with immediate effect.
‘Building on Success’ details a wide variety of initiatives that will be undertaken by the Industrial Development Agency (IDA) Ireland in its marketing role, while Enterprise Ireland will continue to support the development of indigenous companies with export potential, including a large and growing group of companies in the financial services industry. ‘Building on Success’ also details the potential and priorities for supporting these indigenous companies.
Skills, education and training
‘Building on Success’ sets out a series of priorities and measures to ensure that the educational and skills provisions required to sustain and further develop the industry are put in place. A Centre for Financial Services Skills will be established, together with an International Financial Services Skills Fund. The Centre for Financial Services Skills aims to develop a world-class research infrastructure. The centre will be headed by an academic director for financial services and will involve several institutions collaborating together, collaborating with industry and collaborating internationally to ensure the delivery of best practice world-class quality higher education and research in the area of financial services quantitative management.
State training agency Forfas undertook a broad review of services innovation to propose changes in the way innovation policy will be reinvigorated and managed, and in turn these will lead to policy proposals. ‘Building on Success’ also explores steps to develop R&D expertise and to promote innovation effectively by a continuous process of foresight, policy development, implementation and monitoring, with in-place funding schemes, priorities, objectives and targets being aligned strategically, with clear lines of responsibility agreed between funding bodies, agencies and industry.
The paper also recommends steps to promote and develop interdisciplinary research collaborations between the industry and academia.
Finally, ‘Building on Success’ explores essential conditions for a thriving financial services industry, such as cost competitiveness, investment in infrastructure, government support and partnership, and policy consistency.
It is both exciting and gratifying to witness the depth of analysis, engagement and commitment in ‘Building on Success’ and to see just how much progress has been made to date on the many initiatives outlined in the paper. We can expect further innovation and evolution in a dynamic environment that is forward-looking, responsive to challenge and ready to avail itself of the opportunities presented by the continuous changes in the international financial services industry.
–Brian McDermott is head of investment funds and Nollaig Greene is an associate at A&L Goodbody