Oireachtas Joint and Select Committees
Tuesday, 30 May 2017
Joint Oireachtas Committee on Finance, Public Expenditure and Reform, and Taoiseach
Brexit - Recent Developments and Future Negotiations: Discussion (Resumed)
We will resume our consideration of Brexit and will consider matters relating to financial servicesI welcome Mr. Pat Lardner, chief executive, Irish Funds Industry Association, Mr. Marc Coleman, director of Financial Services Ireland, FSI, and Dr. Aidan Regan, assistant professor of politics and international relations at University College Dublin.
I draw the attention of witnesses to the fact that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by the committee to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable.
Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House or an official either by name or in such a way as to make him or her identifiable. I invite Mr. Lardner, Mr. Coleman and Dr. Regan to make their opening statements.
Mr. Pat Lardner:
I thank the Chairman and members for the invitation to participate in today’s meeting.
Irish Funds - the Irish Funds Industry Association - is the representative body for the international investment community in Ireland. Founded in 1991, Irish Funds represents fund managers, depositories, administrators, transfer agents, professional advisory firms and other specialist firms involved in the international financial services industry in Ireland. Our members provide services in respect of funds domiciled in Ireland in addition to those domiciled overseas. The investors in these funds are from more than 70 countries around the world, the investment managers of the funds originate from 50 different countries and the underlying investments held are also truly global in nature.
Before I go into the detail on Brexit, let me explain what Irish Funds do. At the most basic level the industry in Ireland provides a range of services, including investment management, risk management, fund administration, advisory oversight and governance, which allow investors to pool their moneys together collectively via funds in a regulated environment to invest so as to generate returns and manage risk. Regulated investment managers provide the ideas for these strategies and consequently our role is that of enabling investment and savings. Ireland’s funds industry has four core characteristics. First, it is an export-based services industry whose size and trajectory is not dependent on that of the domestic economy in Ireland. Second, it plays an important role in delivering investment capital into economies. Third, it is highly regulated and benefits from EU financial services passports, which I will come back to in the context of Brexit, and fourth, it is sizeable and successful in both European and global terms.
The fund management and fund services industries play a key role in helping people provide for their futures and channel savings to companies, Government agencies and financial institutions who have a variety of short and long term capital requirements. By collecting investment capital and deploying it efficiently to generate investment returns with a range of risk-return objectives, the industry also supports the development of a capital markets union, which is a key building block of the European Commission’s investment plan for Europe.
The business of internationally-distributed investment funds is highly regulated and Ireland has developed into a significant domicile and administration centre for such fund products within a legal and regulatory environment supervised locally and anchored in a number of European directives. These facilitate EU market access by way of a combination of financial services passports, the ability to delegate certain activities, equivalence rules and other requirements. Ireland is a major fund export centre that connects investment expertise and investor demand - this has supported the growth of both our own and the wider EU funds industry during almost three decades.
Mr. Pat Lardner:
At the end of 2016, total world-wide investment fund assets amounted to €41.3 trillion. Investment fund assets domiciled in Ireland amounted to €2.1 trillion, representing 5% of global investment fund assets and 15.2% of European fund assets, making Ireland the third largest home for regulated funds globally and the second largest in Europe. The growth of the industry has resulted in success for investors, providers of funds and fund services and for Ireland, both directly and indirectly, through the employment of more than 14,000 people living in at least 15 counties throughout Ireland and by providing a compelling proof statement of the country’s ability to develop and scale specialist financial services. In this regard, I also note our involvement in and support of the IFS2020 strategy and the IFS Ireland banner brand through our own promotional activity and in providing secretariat support to the industry advisory committee under IFS2020.
The United Kingdom’s decision to leave the European Union will have a significant impact on the European and Irish investment funds industry, given the level of interconnectivity that has existed over many years. Specifically, UK individuals and institutions have invested significant sums in EU-regulated investment funds that are domiciled in other EU countries, including Ireland. EU-based firms are significant providers of investment management services to EU-regulated funds that are distributed throughout Europe and beyond. These considerations will be relevant to all EU countries but especially those, like Ireland, which are recognised funds centres. According to the data available to us, more than 2,000 Irish-domiciled funds are registered for sale or distributed in the United Kingdom under passporting arrangements. Approximately 170 UK-based firms provide services via delegation to Irish domiciled investment funds. In addition, we believe that there will be changes to the way in which asset and fund management services are structured and delivered across the EU, which will provide opportunities for Ireland if we can provide solutions. I stress the word "solutions".
It is important to acknowledge that there are risks to Ireland’s industry associated with the decisions firms will make. There are also existing measures in the IFS2020 strategy action plan for 2017, which will further support the development of the industry, for example, the updating of Ireland’s investment limited partnership legislation.
In terms of our activity and priorities, like most other entities we have structures within the association to respond to Brexit. Given the nature of our sector and membership, Irish Funds is the most active of the financial services sector trade bodies in Ireland when it comes to international promotion. Between April 2016 and the present, we have hosted over 20 international promotional events in 15 different cities across the world.
Additionally, last week we hosted our 19th Annual Global Funds Conference with delegates from Asia, Europe and North America attending. Given the Brexit debate a significant focus has been on the solutions that Ireland can provide. The emphasis on solutions is key and we know there is interest in what Ireland has to offer. In saying this I must acknowledge that much remains uncertain. One of the few consistent features of the process to date is that most people’s assumptions regarding what will happen, when it will happen and how it will happen have all been incorrect. At this point our working assumptions are: the UK will leave the Single Market and Customs Union; the likelihood of a special deal in relation to financial services is low; and with the disconnect that exists between the timeframes linked to the political processes and those governing commercial decision making businesses are now moving to making their own decisions.
Ireland must demonstrate unambiguously, not only to the UK but also to the wider international market that the funds industry here is prepared for Brexit, ready to facilitate both existing and new business and remains in a strong position to act as a bridge to the EU market. We do not see this as “I win, you lose” situation. Instead we are focusing on providing solutions. Today we provide solutions to both EU-based managers and those outside the EU and will continue to do so post-Brexit.
We have three over-arching priorities in discussing Brexit with stakeholders at home and abroad. We represent these as overlapping circles. I will turn first to the issue of inbound distribution access. This means maintaining continuity of UK investor access to Irish or EU domiciled funds, or in other words the ability to distribute an Irish fund into the UK market. The second circle is the maintenance of UK management rights. Many Irish domiciled funds appoint an external investment manager based in the UK and this needs to continue. The ability to delegate is a vital component of efficient fund structures in Europe. The third circle is growth opportunities. There are opportunities for Ireland to further expand its asset management and fund services offerings provided we: maintain an agile and effective toolkit for product and service providers; deliver a regulatory and business environment which is in equal parts robust, clear, responsive and efficient; and continue to promote Ireland in a relentless, joined up and compelling manner.
Before concluding I wish to make a number of final points. There is insufficient private saving occurring when it comes to long term needs. This is not caused by Brexit but we should not allow the Brexit process to disrupt existing savings patterns. Functioning and minimally disrupted savings and investment markets benefit investors, policy makers and economies. Given the size of the total European funds industry, greater emphasis should be placed on seeking effective grand-fathering and transitional arrangements.
Brexit is surfacing both political and competitive tensions across the EU which we should not ignore. Any moves to limit the access investors have to a wide breadth of fund choice or which seek to create barriers to the supply of expertise which supports our global industry should be resisted. Most of the focus in relation to Brexit is relatively short-term. We must not lose sight of the fact that one of the most vocal proponents of open markets and free flows of capital, which have benefitted not only Ireland’s funds industry but many other industries here, will no longer be at the policy, regulatory and political tables within the EU. This requires a continuing and significant uplift in Ireland’s contribution to these debates, especially as policy is formed. Our bilateral relationships with the UK at all levels and especially in relation to regulatory matters remain very important. Given we do not know the final outcome we will need to be poised for quick and effective action if required.
Promotion of the industry, which is funded by our members and the commercial sponsorships we seek, is done in close co-operation with the office of the Minister of State for financial services, various Government Departments, especially the Departments of Finance and Foreign Affairs and Trade, as well as IDA Ireland. We acknowledge the support received and equally point to the value we have provided by developing and building a number of valuable platforms globally for Ireland’s international financial services message to be broadcast. We look forward to finding new and innovative ways to partner with Government to build on the already significant contribution of the industry to Ireland’s national economy which will also support the IFS 2020 strategy.
Mr. Marc Coleman:
I am grateful for the chance the committee has given Financial Services Ireland to highlight our views on Brexit. Ireland has a once in a lifetime opportunity to attract financial services jobs to the State, possibly in their thousands. We need to maximise our competitiveness, vis-à-visother jurisdictions, as soon as possible in areas such as skills, infrastructure, regulation and taxation.
Financial Services Ireland is part of IBEC, Ireland’s largest business representative body accounting for seven in ten private sector workers in Ireland. Financial Services Ireland is the oldest and only fully cross-sectoral body in financial services representation and, with other stakeholders, we have assisted the building of Ireland's financial services employment from a very small number thirty years ago to tens of thousands today. Our forthcoming industry survey, to be published in the autumn, will provide up-to-date data from across the country on employment totals and on contribution of the sector to the Exchequer. We will be happy to share this information with the committee.
We are particularly keen to promote regional employment in our sector. When we were entrusted as the first secretariat to the IFS 2020 industry advisory group we supported this point strongly. On a practical level through IBEC we help our members to understand the challenges of Brexit, for example with the IBEC publication Brexit: A Guide for Your Business. We promote awareness of Brexit regionally, such as at our event in Limerick on 5 May. I can talk more about that and we will replicate it around the country in order to highlight the potential.
Our work on the skills aspect is also very relevant to Brexit. Our Summit Finuas Network programme - part of Skillnets - assists employees to train for newer and better employment. Our new proposed apprenticeship scheme will bring new talent into the industry as it continues to grow and give opportunities to young people and our Career Start programme has helped hundreds of employees in the industry to find a path back to work after job loss. We see the social dimension in this respect as being very important.
As well as benefitting workers themselves, all efforts to increase access to financial services talent will help our economy by ensuring that firms that want to locate here can find the skill sets they need. We have led our industry’s analysis of Brexit and its consequences. We hosted the first seminar after the Brexit referendum was called in June of 2015 and hosted the first ever post-referendum analysis of its consequences in June of 2016.
I will now turn to what we are asking of Government and Opposition in relation to Brexit and financial services. First we ask for an understanding of how vital financial services are to Ireland's economy now. With a hard Brexit posing a significant employment threat, we will need to hold on to existing financial services jobs in the sector and maximise its undoubted further employment creation potential. We need to channel jobs growth into regions that could potentially be adversely affected by job losses in other sectors. To those ends we fully endorse IBEC’s call for EU 27-British negotiations to secure a smooth exit, a smooth transition and the closest possible business relationship for Ireland and Britain in the future, in terms of North-South links in financial services but particularly in relation to east-west Ireland-Britain trade relations. We emphasise that Ireland and Europe will remain part of a dynamic global financial services market where competition will intensify. Britain will continue to be a powerful force in global financial services and minimising disruption to Irish-British links in this regard is in our interest and in the EU’s interest.
With thousands of current jobs and potential new jobs in play, jobs that are or could be located all around Ireland, Financial Services Ireland is specifically calling for the following measures. We welcome IDA Ireland's success in recent announcements of firms that are locating here and, in relation to firms relocating to other jurisdictions other than Ireland as a result of Brexit, we would welcome a constructive assessment of these decisions, positive and negative, to get the best understanding possible of the issues driving these decisions.
Second, and this touches on Mr. Lardner's point, we would like to see an early commitment to comprehensive transitional arrangements to reduce potential market disruption and to provide certainty to employees and clients of financial service providers in Ireland, the UK and EU 27. A transition arrangement is needed so that there will be a relatively predictable environment for business to take place in over the next few years while the future EU-UK trade deal is worked out.
Third, we need continued access to talent. Our sector’s progress in job creation draws strength from its ability to retrain staff for new challenges and bring in talent from abroad. A business environment with policies that strengthen employer-driven training and make Ireland competitive for highly skilled workers will protect thousands of existing jobs and create hundreds if not thousands more. It is also worth highlighting the diaspora, many of whom have gained relevant experience abroad and who might like to live and work in Ireland again.
Fourth, we must ensure that Ireland adheres to EU benchmarks for regulation but also that Ireland benefits from equality in terms of Ireland’s position in this regardvis-à-visother jurisdictions. This means a fair regulatory environment across Europe. We must also ensure that EU regulators engage in structured dialogue with the UK post-Brexit and, more generally, with the US and other relevant global financial centres.
Finally, as all organisations are looking at their own talent pipelines due to Brexit and in light of the critical role of the regulator, we support its ongoing efforts to do the same.
Dr. Aidan Regan:
I saved my presentation on the cloud so, in the absence of Internet access, I will speak from memory. I was invited to speak for five minutes, and I have five points, which is one per minute.
As someone with a certain amount of expertise in international and comparative political economy, I am asking whether Brexit paves the way for greater tax harmonisation in the European Union. The short answer is "Yes". First, the UK post-Brexit is no longer bound by those EU directives which are specifically aimed at tackling aggressive tax planning and competition and tax avoidance. This includes the anti-tax avoidance directive which is due to be implemented in 2019, with five specific clauses that each member state must implement. The UK is not bound by the directive on administrative co-operation, which is about transparency and accountability in information sharing, and it will not be bound by the new European Commission proposal on a common consolidated corporate tax base, CCCTB. It will also not be bound by EU state-aid rules. I will focus on the CCCTB and the recent proposal from the European Commission in 2016.
In the absence of a common consolidated corporate tax base and in the context of economic uncertainty, Brexit provides a short window of opportunity to take advantage of international tax law at the moment, as the EU is well aware. This can include attracting UK businesses to Ireland so that they can move over their one-stop shops here. They will no longer have access to those Single Market rules and are talking about merging UK businesses with Irish subsidiaries and moving EU parent companies in particular into Ireland in order to take advantage of transfer pricing. Those flexible arrangements are still in place and the financial industry is trying to take advantage of that. Ireland is marketing itself to attract that kind of behaviour and activity - in effect, trying to attract a certain kind of foreign direct investment, FDI.
In the medium to long term, everything depends on the EU-UK negotiations. This is my third point. The likely outcome from what we know at present is that some sort of Swiss plus-type arrangement whereby Britain will seek sectoral and industry-specific deals in those negotiations, something similar to what Switzerland currently has. What this means for Ireland is that the United Kingdom will have much greater scope to carve itself out as an aggressive corporate tax, low-tax regulatory economy in north-west Europe. This is not good for Ireland. It is the likely medium-term outcome of Brexit and the medium-term outcome of what is likely to happen in the EU in response to Brexit.
This leads to my fourth point. European integration reflects the direction of travel for the remaining member states of the EU. This is particularly the case for countries of the eurozone; we even hear talk of a eurozone parliament or treasury or the equivalent of a budgetary minister. It is well established from a political economy perspective that the Franco-German preference is very much more in favour of increased fiscal integration. The Franco-German preference is for increased tax harmonisation in particular. Only a few weeks after Brexit, the European Commission put the CCCTB proposal back on the table. Pierre Moscovici knows well how and why this is the opportunity to get that through, particularly in light of the changing Franco-German preference. Anyone who spends time in Brussels will know that the Commission is very determined to make this happen and to push it through.
The new CCCTB proposal is slightly different to the previous version. First, they have suggested that it will take place over two stages. The first will seek to agree a single set of EU rules to calculate the profits of multinationals in Europe. That is that it will seek to establish the common base for what is taxable within the European Union.
Dr. Aidan Regan:
It is turned off.
The second, and perhaps more controversial, dimension of the CCCTB is how to agree to divide up those profits and how to agree what is taxable income in each member state, based on assets, labour and sales. This committee knows, and analysis by ESRI has shown, that Ireland would lose out on that basis given that a lot of multinationals transfer profits from their sales of products in other EU countries back to Ireland, even though the sales and activity do not take place here.
The second big change with the CCCTB that the Commission proposes, and which the Franco-German strategic alliance favours, is that it would be mandatory for all firms with revenues above €750 million. There will be an additional research and development incentive scheme for small and medium-sized enterprises to sign up to. The overarching context of the CCCTB is that it is explicitly framed to tackle corporate tax avoidance. Previously, it was explicitly framed as a mechanism to enhance a single market and economic activity. This time there is a clear strategy to the effect that this is fundamentally about putting an end to corporate tax avoidance within the EU. The Commission has launched a concerted campaign, particularly aimed at European Union citizens, with videos on YouTube as part of its campaign to gather support for this. It is within EU citizens' interests for those who avoid paying taxes to pay their taxes and that activity is taxed where it takes place.
Where does this leave Ireland? Brexit will accelerate the drive to harmonise corporate income taxes. The probability of this being successful has increased significantly, not least because of a change in voting at the European Council. With Britain gone from the Council, a large number of the votes have been removed. To pass a common consolidated corporate tax proposal would require unanimity.
However, it is likely that Germany and France will seek to build consensus on this proposal and that they will try to do so through a side-payment system to the country which is most vocal in the absence of Britain, which, of course, is Ireland. What is Ireland's position? What is the Danish position and the Dutch position, given that these countries represent about 2% to 3% of the European Union's population? In voting terms and in real terms, they are not a large bloc. In a sense, this is the fundamental question facing Irish society. Ireland is already in the spotlight in Brussels, Frankfurt and Paris for facilitating global corporate tax avoidance, not least in the Apple case. Significantly, it represents a small portion of the overall population of the European Union. Hence, a core political economy question for Ireland is whether it is in Irish interests to veto such a strategic policy which is fundamentally aimed at building the problem solving capacity of the European Union to avoid the potential side effects of a country in the north west of its region turning itself into a low tax regulatory environment. In a sense, the future of the Eurozone is a Franco-German, not an Anglo-American, growth model. This poses major questions for the State.
I thank all of the delegates for their detailed presentations. The committee has already considered the issue of the common consolidated corporate tax base, CCCTB, and put a recent opinion to the European Union in December 2016, utilising the powers of national parliaments under the Lisbon treaty.
I welcome our three guests and thank them for their opening statements which we received in advance. I will start with Mr. Regan and pick up on the theme on which he focused. He made a very explicit connection between the CCCTB and Brexit, making the point that the European Union was very determined to proceed with the CCCTB proposal. We saw this ourselves in the committee room when the Commissioner came before us. Mr. Regan is also saying, however, that it has become more likely as a result of Brexit. Is he saying this is simply a function of the changed dynamic within the European Council in terms of voting arrangements, even though unanimity is required? Why is he saying it has become more likely?
Dr. Aidan Regan:
It has become more likely because, as everybody knows, Britain was the most vociferous voice against the CCCTB proposal. It was absolutely unafraid to use its veto in the case of something like this coming along in actually forcing a vote, but, of course, one would not vote on it. With Britain gone, a variety of policies come into play that will strengthen the voting behaviour of France and Germany within the Council. It has become much more difficult for a small open economy on the periphery of north western Europe to become the biggest obstacle to what the core strategic players in this process want.
While it may well be an uncomfortable position for any Irish Government to be in, our view in Fianna Fáil is that we should veto the CCCTB proposal if it is brought before us, certainly as constituted. It has a journey to go, but it is undoubtedly an attempt to harmonise the corporate tax regimes in Europe. As they cannot get at our rate directly, they are coming at it through the back door by having a common set of rules as regards how to arrive at a taxable base and then deciding where the profits are to be taxed. I take Mr. Regan's point, however, that it is quite possible that Ireland will be put in that position in the relatively near future. Do Mr. Coleman and Mr. Lardner have any comment to make on the issue? How important is Ireland's corporation tax regime to the success we have had to date in attracting internationally traded financial services? If the CCCTB proposal were to take the edge off that advantage, what impact could it potentially have on FSI?
Mr. Pat Lardner:
I have a couple of points to make. The first is that we need to clearly separate what will happen and what might happen as a result of Brexit. This is not in any way to discount whether the CCCTB proposal will progress. There are a number of European directives to which the United Kingdom is a party and which govern the passporting and provision of financial services. These form the primary set of considerations that firms are looking to resolve. I would make this the priority.
To reply to Deputy Michael McGrath's specific question, the way and manner we have managed to compete and attract financial services activity has been the result of many things. Mr. Coleman has mentioned a number of them: skills, taxation and a strong regulatory environment. Linking with a point made, it is quite an assumption to make that the United Kingdom will naturally navigate towards being a low-regulation environment. In the discussions we have had there at least, this does not seem to be the case. It runs contrary to what we understand is the position of the UK regulator.
Irrespective of whether the CCCTB proposal comes onto the agenda, there are many reasons firms need to create solutions to the problems created by Brexit of market and customer access. Ireland's combination of skills, efficiency, a business and regulatory environment and an ability to deliver services within timeframes to meet global needs is among the range of things that allow us to compete.
On the subject of trade and Brexit, it is very clear what the Irish position is. Essentially, we want a free trade arrangement between the European Union and the United Kingdom. What are Mr. Coleman's views so far on the positions of the European Union and the United Kingdom in terms of the public commentary and the negotiating positions have set out on financial services?
Mr. Marc Coleman:
Regarding the proposals from the Commission, let me remind the committee and everybody else that the OECD has just overseen the most significant change in the global corporate tax regime in nearly one century. It was a constructive, global and non-ideological co-operative effort in which Ireland played a full part in working towards a corporation tax system that would link profits with substance. That should not be undermined by a deviation by any source, without naming any particular one. Deputy Michael McGrath and Mr. Regan have both referred to the issues arising in the Commission. Let us not forget also that George Osborne has spoken about a 12% tax rate in Britain and there are similar moves being made in the United States. It is in our national interest to reiterate how we have been team players in the OECD process.
The attractiveness of Ireland as a location for financial services investment has been built over 30 years. Financial Services Ireland, FSI, has been a partner with the Government and other stakeholders since its inception in 1985. It is not just a matter of corporation tax; it is also a matter of skills, the business operating environment and people. When it comes to attracting the financial services jobs we need to compensate for possible losses in other sectors, however, it would certainly be extremely unhelpful to this country if it were to move away from what has been a global, constructive approach with the OECD.
Mr. Marc Coleman:
Our key demands are that we maintain the competitiveness of the transparent 12.5% corporation tax system. Where necessary, we may need to supplement the corporation tax regime with improvements in key areas of our FDI offering. We may need to stand ready to react if the US corporate tax changes challenge our growth model and we should resist efforts at EU level at a deviation from the OECD's approach in which we have co-operated fully.
Mr. Lardner mentioned some specifics in his opening statement. He referred to three overarching priorities, the first of which was inbound distribution access or, "in other words the ability to distribute an Irish fund into the UK market". What is the legal underpinning of that in the context of EU law and what is the challenge to securing that into the future in the context of Brexit? What is required in the negotiations to agree a way forward?
Mr. Pat Lardner:
Approximately 2,000 Irish funds are sold or distributed into the UK. That is a significant proportion of our funds. They are distributed on the basis of, for example, the UCITS directive, which allows a fund established in Ireland and regulated by a national competent authority - in our case, the Central Bank of Ireland - to be accepted for sale in another EU jurisdiction. If the UK ceases to be a member of the EU, we must find another basis for that.
This is a fluid situation but, to our understanding, there are ways in which the UK authorities could enable that to happen. There should be an encouragement from our side to allow that in the absence of any deal. I understand that we are a part of a larger negotiating team when it comes to matters of exit.
As well as looking for the ability to distribute an Irish fund into the UK, a large number of Irish domiciled funds rely on UK investment management expertise to provide part of their service packages. We would want the ability to delegate to continue. That is not specifically prohibited in all cases, but we have outlined the fact that, were it to be the case that UK firms could not provide those services, it would be detrimental to the interests of EU investors from a product choice point of view and, as a flow-on from that, detrimental from an Irish industry perspective.
It is clear from the EU negotiating position that negotiating the terms of the exit is the first priority, for example, securing the rights of EU citizens in the UK and vice versa, the financial settlement and the issues around the Six Counties. It seems to be accepted that negotiating a longer term trade deal will take time and, as such, there may be a need for transitional arrangements so that there is no cliff effect. In terms of financial services, is there an equal imperative to avoid a cliff effect whereby the UK falls out of the EU, these directives fall and there are no transitional arrangements? How serious a potential issue is that?
Mr. Pat Lardner:
Mr. Coleman will discuss other sectors, but the issue is significant in the case of funds. Even if someone is living in the UK and invests in a fund based in the UK and Ireland, that capital is being employed across Europe. We have a €13 trillion base of European investment funds. To disrupt those savings patterns without some form of grandfathering and transitional arrangements would be cutting off the lifeblood that goes to finance companies, Government agencies, financial institutions and all of the things that have a very deep need to drive on growth in employment not only in Ireland, but across Europe. In all of our submissions and my comments at this meeting, we have stressed that grandfathering and transitioning are important because of the point to which the Deputy alluded, that being, how long it takes to negotiate these types of deals.
Mr. Marc Coleman:
If I might echo that, we need to understand that where a bank, insurance company or funds company is domiciled does not affect the fact that the services it provides benefits citizens across Europe. For example, a bank located in Ireland might invest in a small olive tree farmer in Greece, creating employment in that country. As such, we need to be careful of narratives that are overly jurisdictional.
My final question relates to the once-in-a-generation opportunity that Brexit presents in terms of financial services. Do the witnesses have observations to make on how we have been doing thus far? We have had some wins and a number of significant losses in the form of wins that did not materialise, with other jurisdictions being chosen instead. Have the witnesses comments on our regulatory capacity to accommodate significant new entrants in different streams of financial services?
The Minister of State, Deputy Eoghan Murphy, referred to other countries potentially engaging in regulatory arbitrage, unfair regulatory competition and making promises that they might not be able to stand over and deliver upon, given that we are in a single European market with a single supervisory environment in respect of financial services.
Mr. Marc Coleman:
I might take those questions first. As to how we are doing, an intense wave of decisions are being taken in the first two or three quarters of this year by firms relocating from London. I concur with what Mr. Martin Shanahan of IDA Ireland said recently, in that the idea that the entire City of London is going to up stakes and move to Dublin is not realistic. London will remain an important centre. However, I noted a study published in February by the Bruegel institute that stated that, in terms of the wholesale banking sector in London, approximately one fifth of activity could relocate to Dublin. That is 6,000 jobs and is not to be sneezed at.
There are 700,000 people working in the City of London according to a TheCityUK report. Every 1% of that number that we can get is 7,000 jobs. If we even get 3% or 4% of employment from London, which could be approximately one fifth of what might relocate to Ireland, it would represent 10,000 or 20,000 jobs. That could make a significant contribution to offsetting job losses in other parts of the country.
It is early days yet to know how we are doing. We have had a couple of wins with Citadel, Legal & General and, slightly before Brexit, Credit Suisse. This is why FSI would like to see an assessment of the decisions made to date and what has driven them so that we can precede any comment with a clear understanding.
In terms of regulation, as a former central banker in the European Central Bank, I understand that central bankers have to do what they have to do. Let us note that the regulator did a fantastic job during the crisis in restoring our country's reputation. That in itself is a great asset as an attractor of foreign direct investment. I note, however, that the Central Bank has a new strategy from 2016 to 2019. I welcome the Governor, Professor Lane's statement at our annual lunch last year when he noted that the regulator's job was not to prevent firm failure, but market failure. We are seeing a constructive evolution in the Central Bank's approach. We are in a new reality now that we are out of recession and our reputation has been restored. I hope that the new strategy will reflect that. We want to work with the Central Bank and support its call for the resources it needs to meet the demanding challenges not just of Brexit, but of financial technology, or FinTech, which is presenting major challenges to central bankers and regulators. We want to work with the Central Bank so that we can give it industry's thoughts on how best to tackle those.
Regarding the European dimension of this, I welcome the Minister of State's comments. I also welcome the European Insurance and Occupational Pensions Authority, EIOPA, which is trying to survey the behaviour of a sample of various regulators around Europe so as to establish a benchmark and determine the average standard of European regulation. Once we have a benchmark, we can ensure that there is no arbitrage, whereby someone somewhere suddenly and opportunistically undercuts Ireland. If we have worked as hard as we have to restore our reputation, which has benefited Europe, we are entitled to expect that we are not in any way disadvantaged by that.
I would emphasise that everything I have said needs to be done as quickly as possible in terms of understanding the decisions that companies are making, helping the Central Bank to fill the 200 places that are necessary and achieving fairness in the European regulatory environment. Speed is of the essence, given that decisions will be taken in the next couple of months.
Mr. Pat Lardner:
To follow on from Mr. Marc Coleman's comments, we have seen a number of wins. I will not go into the specifics of company names but a good number are involved either directly in the funds business or as a consequence of needing asset management related solutions that link into funds or direct asset management provision. I stressed the idea of relentless promotion in my opening comments. I used the word relentless specifically on the basis that the timeframe is the here and now, as Mr. Coleman points out. We know that in specific cases being able to get to senior executives to give them good information and good access has been very important. All of the work being done by the various players has been welcome but it needs to continue for a period of time backed up by very clear communications about requirements. When people go through the two steps of the process they do their fact find to decide whether they will make an application for regulatory authorisation and we give them as much clarity and information about it as we can. When they want to engage in that process we bring them through the regulatory service. I describe it as a service and we provide it as quickly and as efficiently as possible. It is not to say we sacrifice or compromise on standards but ultimately business people want certainty and they want it as quickly as possible.
On the point about capacity, we are very supportive of anything the Central Bank would like to do in resourcing. We have a very good and open dialogue with the Central Bank. We provide it with feedback as we hear of things in the marketplace in an appropriate way respecting our different mandates.
There was a point made about regulatory arbitrage. I made the comment in my opening statement about raising both political and competitive tensions in Europe, which is the case. We should not assume everybody else has the same mandates and approach we have. It does not mean it is right or wrong; it is just a fact. There is ultimately a link between our economic policy, which is around jobs growth and economic growth, and how we deploy it from the point of view of getting firms to do business here. We want to see a fair and equal playing field across Europe. It is a pretty competitive marketplace out there.
There was a point made about promotion and it is why I mentioned the way we partner. There is very good work being done by IDA Ireland, the foreign consulates and embassies. There is also a very joined-up approach to promotion in lots of other jurisdictions in a six-month to 12-month timeframe. We need to be top of our game in that regard.
I welcome the three speakers. It has been quite informative and it is interesting to get their perspectives. I will start with the political-economic element of this. I want to kick the tyres a little bit. I do not think it follows that the direction of travel will be closer to European integration. The Franco-German alliance has been quite strong since the end of the Second World War. It may have been under threat but the election of Macron has settled it. I agree with Deputy Michael McGrath on the veto. The veto still exists and there is very clear, unambiguous messaging about Ireland's position on the veto. There are other smaller countries that potentially have similar positions to ours. It is not just one country on the western periphery setting its face against the 26. There will be other countries as well. The Dutch, the Danes and others might be in a similar position to us. I want to get the witnesses' perspective on it briefly because it is 5.04 p.m. We have until 5.30 p.m. but Deputy Tóibín wants to get in as well. The briefer the answers, the more we can get through. I want to get a sense of the BEPS and OECD process. As far as I am concerned, it is a transparent, open and clear process we have subscribed to as a country. Will the witnesses discuss it?
Dr. Aidan Regan:
The European Commission wants to go further than BEPS because it wants a unitary approach which is in recognition that firms are transnational and can move across jurisdictions. We have just been talking about cross-border capital flows, the extent of inter-country and inter-firm linkages and the supply chain. The idea that firms could be split up in different ways benefits the firm. From a political perspective, the Commission wants to identify the overall revenue, income and profit that are taxable. It would like to see it done through a common base. In that sense, the common consolidated corporate tax base is very different to the OECD proposal. It is not surprising that industry is supportive of the OECD proposal but not supportive of the common consolidated corporate tax base. Most research suggests that EU citizens, for the most part, are very supportive of it. It has become a highly salient political issue across European Union countries that certain small, open economies are effectively facilitating firms to avoid paying taxes in their countries where labour income tax is increasing. We often forget that in Ireland. The Deputy is right that Ireland is not alone in its opposition. There are other countries with similar regulatory tax environments that facilitate corporate tax avoidance and aggressive tax planning such as the Netherlands, Luxembourg and to a certain extent Denmark and the Baltic states, which have a different approach. They will simultaneously oppose this.
What is the position if there is no political willingness, unanimity or treaty change any time soon? My opinion is woe betide any nation that tries to propose a referendum on any changes to the CCCTB or any matter of tax competency in the EU treaties. They would find it quite difficult.
I will park it for a second. I just wanted to make the point that I do not think the so-called new paradigm is necessarily a new paradigm. The Irish position is unambiguous. It depends on who is in government at a particular point in time. We will not be presumptuous.
I want to talk about prudential supervision. Do Mr. Pat Lardner or Mr. Marc Coleman know how many new authorisations have been granted by the Central Bank across financial services in the past six or 12 months?
Mr. Pat Lardner:
I do not have those numbers to hand. In the fund space the bank publishes new authorisations of funds and investment firms on a monthly basis. I do not have those to hand. Anecdotally, while we have seen a continuation in growth in the fund space, I do not think at this stage it is necessarily related to Brexit. It is natural growth rates we have seen for 25 years.
Do we know how many changes there have been to existing operations in terms of new authorisations? There is an authorisation for a very specific activity. If one wants to change that activity they have to seek a change to the authorisation.
Mr. Pat Lardner:
I am not speaking as a lawyer. To the extent an entity already has an authorisation and seeks to vary it, I am not certain it might manifest itself in numbers. It is more a varying of an existing licence or an authorisation than a new one. I defer to colleagues from the Central Bank who can speak in more detail on it.
Mr. Pat Lardner:
One last comment. One of the things that we are clearly seeing is that entities that have existed and BEEN licensed may expand the nature of their authorisations under things like MiFID, for example, to allow more front office. That is something that we would expect and in the discussions at least that we have had with potential incoming participants that has formed part of the discussion base.
Mr. Marc Coleman:
We do not have the data to hand at present. We are happy to get it in the next couple of days and communicate it to the committee. FSI's concern is less on the quantity of authorisations and more on the efficiency and proportionality. When it comes to the authorisation process, as the Deputy indicates, authorisations should be proportional to the change in the nature of business and the size of business being brought in. That is where we would like to be as helpful as possible to the Central Bank in improving knowledge and understanding of industry. I have a degree of sympathy for the regulator's position because industry is changing very rapidly. FinTech and dynamic change within the industry and moving boundaries between different sub-sectors present all regulators with a challenge.
In fairness to Mr. Coleman, he referred to FinTech earlier. That has the potential to be a game-changer around how business is done. This leads me then to seek a perspective from the witnesses on the existence of the European supervisory authorities, the Single Supervisory Mechanism for instance. If a company in the UK is thinking of moving outside of the city of London for instance, and I do not confine that to a geographical space but rather the city of London as we know it, if they are thinking of moving to Dublin they presumably still have to subscribe to those rules and adhere to those two regulatory mechanisms.
I put it to the witnesses that the decision to locate in Dublin is a marginal call. It is a competition between Dublin, Paris, anywhere in Switzerland or effectively anywhere across Europe. The decision to move to Ireland may not necessarily be predicated only on the skill-set. I have worked in banking myself and anyone smart can be trained within a short eight-week window. There is not necessarily a need for a long apprenticeship, anybody can be trained in any country with the right type of approach. My point is that the call to move to Dublin could be predicated on quality of life indicators as much as regulatory or prudential supervisory ones. There is no certainty about this whatsoever, we are still in a nebulous space because the political negotiations are nowhere near getting down into the nitty-gritty yet. If we are talking about winning jobs post-Brexit, however, the decision to move to Dublin would not necessarily be predicated on the financial culture but more on the question: can my employees live, work and exist in this city? That is as much a decision on the call to move here as anything else.
Mr. Marc Coleman:
I enthusiastically endorse that. I have worked and lived in Frankfurt, Dublin and Amsterdam. I would not live anywhere other than Dublin and that is not just because I am proud, patriotic and Irish. We have a fantastic country here. We have so much to offer, which is why it is very important that we remove any unnecessary obstacles in that regard. Quality of life, as the Deputy points out, is a huge factor and one that could yet work very strongly in our favour.
Mr. Pat Lardner:
What prompts somebody to come here is, irrespective of Brexit, is that they want to access certain types of clients or to provide certain services. The ability of Ireland to be able to execute is going to be the key. I again refer to Ireland, given that we have national industries now in lots of sectors of financial services. What firms will seek to do, naturally and understandably, is to adhere to all regulatory requirements, manage their business and serve their customers in a way that provides as little disruption as possible. What we ultimately have to try to do is to enable all of the reasonable regulatory obligations to be met but allow firms to execute their business effectively and to get them, if they are new, to start a business footprint that can be scaled over time. The biggest thing that has generated growth in financial services, and I will speak for funds but I think it serves elsewhere, is getting a locally-based management team that is incentivised to grow the business, whether that is in Limerick, Cork, Dublin, Kilkenny, Galway or wherever it might be. That is ultimately what we want to get out of these processes and to be fair, that is really what we have been doing for the past 25 years. It is just that we now have a catalyst driving those decisions in a very compressed timescale.
Dr. Aidan Regan:
I actually do not think that Ireland is very competitive in attracting much FDI from London and that is precisely because we do not have the local capacity in the city in Dublin. Housing, for example. Most of these firms are very aware of this. They have been over doing their work, they talk to people, they know the public infrastructure, they know about the quality of the health care and the education system and they know about the massive shortage of available housing. Even if Ireland got a small percentage of that FDI from London, let us say it is 1%, let us say it is 10,000 jobs, that is also going to put massive upward pressure on existing services such as housing. We have to have a holistic approach when examining this and while it is important that industry and Government call and push for this and welcome it, a more objective economic analysis would have to look at those factors.
Being deliberately parochial here, I suggest to Dr. Regan that an IDA strategy for those kinds of wins does not have to be centred on Dublin. It can be centred on Limerick or Cork if we are talking about quality of life indicators, because the technology allows for it now.
Mr. Pat Lardner:
As Mr. Coleman mentioned, Northern Trust started in Limerick with 17 employees. They now have more than 1,000 employees. Three of the last five members of our association are firms that have come and set up premises in Cork. While I do not in any way discount some of the constraints we have, we have the ability to do this if we are joined up, deliberate and positive about wanting to get the business. That is really important because there are many other jurisdictions that have no reservations or hesitations about saying how well able they are. If we are determined enough to do it we can do it, but have to be determined and relentless.
Mr. Marc Coleman:
In response to Dr. Regan's point, do not assume that there is no housing shortage in other cities. The cost of accommodation in Frankfurt, London and Amsterdam is possibly higher. We need to be very careful that we do not do ourselves down. This is why we call again in FSI for a comprehensive understanding of such decisions that have been taken to date so that we have data before we make judgements.
The challenge for an opposition TD is to focus on the problems without doing us down. That is the difficulty because we obviously want to make sure that we have a positive message to send. The truth is that in so many areas and especially in the greater Dublin area we are currently at infrastructure capacity, whether it is housing, transport, hospitals, education etc. Two years ago we had PayPal asking its staff to tell them whether they had a spare room or not so that they could offer that to their workers. That is a major difficulty. We cannot underestimate it. We have a job to make sure that we actually focus on it.
In general, the major difficulty that we have at the moment is that there is so much conjecture. There is also a lot of confusion within businesses. InterTradeIreland has identified that 98% of businesses do not have plans to deal with Brexit because of this confusion. It is quite clear from the witnesses' evidence that our market here is very intermeshed with the British market in many ways.
The funds sector, while very large in terms of money, is probably the same size as the horse industry in terms of jobs and there are about 14,000 jobs in the horse sector. Jobs per euro, there is a very different ratio to what there would be to different sectors within the economy. What types of exposures exist in the funds sector to the Irish economy? Perhaps the witnesses might talk us through that first of all.
Mr. Pat Lardner:
Between 14,000 and 15,000 jobs are spread in 15 different counties.
In the context of employment and income levels, they are populated by a full range from graduate entry levels up to executives. From an economic contribution point of view, therefore, they are probably pretty good. One of the points I made earlier is that an interesting aspect of funds and of other internationally traded financial services is that, as a diversifier within the economy, they are pretty good because they are not correlated to domestic demand. That does not make them better or worse, it just makes them different. From an employment content point of view, we would not have seen any dip in funds over what was a very difficult period here in Ireland and other places.
On the point about where this leaves us regarding competition, we are very enmeshed not only with the UK but also with Europe. An Irish-domiciled fund is sold in 70 countries around the world. By the last count I had, probably less than 1% of the assets in all of those €2 trillion worth of domiciled funds are assets invested in Ireland. It is not, therefore, an industry that was specifically created to invest in Ireland, although, in fairness, in recent weeks, the European Investment Bank came to Dublin to talk about the way it deploys money into things like the real economy, be it infrastructure, property or private equity, in order to try to encourage investment in Irish SMEs and Irish projects as part of the development of industry broadly here.
Mr. Pat Lardner:
It is probably 1% of assets. An investment fund does not provide any call on the State. There is no call on the State's resources and the balance sheet. It is a relationship between an investor that provides risk capital to an investment fund and its manufacturer to generate an outcome, whether that be income, capital or some combination. It is in no way the case that the growth of the fund sector in this country creates risks of a specific or systemic nature for our actual jurisdiction.
When the Brexit process and discussion started, the pitch was made that the UK wanted to stay within the passporting facility. It seems that this has receded somewhat and it is likely that the UK will look for an equivalence agreement of some sort. What would that look like and how would it affect Brexit for Ireland?
Mr. Pat Lardner:
I will confine my comments to funds and let Mr. Coleman speak more broadly. Equivalence, as a concept, exists under certain European directives. It is not universal and is fraught with some difficulties in that under equivalence, I view you as being equivalent at a point in time so it becomes more difficult in terms of permanence of supply of business relationships. The feeling that there might be some level of universal equivalence between the EU and the UK is problematic. There is an equivalence in terms of the Irish regulators' recognition of the UK regulatory supervisory environment and the way in which firms conduct their business which should permit, other things being equal, a continuation of business.
Mr. Marc Coleman:
I must keep my remarks broad and again stress that it is in the EU's interests, as well as our interests, to maintain the closest possible link with what will possibly remain the greatest centre of financial services on the Continent. We would strongly argue against a short-sighted and knee-jerk approach to this.
On the Deputy's point about capacity constraints, I reiterate IBEC's call for us to take a more generous approach to public investment in order to avoid restricting our options. We believe that plans to have a debt-to-GDP target of 45% are not necessary. We should be more generous. This is crucial when it comes to getting jobs in the west. Northern Trust is in Limerick, which we visited, while FEXCO is in Killorglin. The mid-west is doing very well because it has a great airport, a great university and good roads to Dublin. If we could create a conurbation involving Cork, Galway and Limerick, we could have something approximating a rival population to Dublin. This is Ed Walsh's great idea. We are also going to go to the north west, the midlands, the north east, the south and Cork. There are great examples, not just in the big cities. Aon is in Mullingar while Zurich is in Wexford, as are BNY Mellon and PWC. State Street is in Kilkenny. Bhí an Teachta ag labhairt as Gaeilge. Tá seans againn anois leis an earnáil FinTech postanna a chur in áiteanna nach rabhamar ábalta postanna a chur ann cheana, mar shampla, Pramerica Prudential i nDún na nGall, FEXCO i gCiarraí agus Aon i gContae Iarmhí. To get back to English for those who do not speak Irish, the big wins are going to be in the big cities or the conurbations if we can create them but there is the really exciting prospect with the FinTech sector of also delivering jobs growth to more remote rural communities where we have been struggling for decades to bring high-value-added employment.
Aontaím go huile is go hiomlán leis an bhfinné mar gheall ar infheistíocht. That is one of the areas of joint agreement between IBEC and Sinn Féin.
Dr. Regan mentioned that one of the threats is that the UK would nearly become the Switzerland of the north-west Atlantic. If that is the case, strategically, it would be logical for the UK to seek to lock the EU and itself into the closest possible regulatory equivalence and ensure that there is no deviation that will create a pull all the time. The closer the UK is to the EU, the less damage it can do in that space.
Dr. Aidan Regan:
The first observation is that the UK, particularly London, is the FDI hub into Europe. I know we talk a lot about Dublin but the UK is where the vast majority of external FDI goes, even within the EU, so there are clearly bilateral implications. As matters stands, the UK has made it very clear that it will be outside the customs union, which poses all sorts of issues for Northern Ireland, such as where the Border will be because there must be an external frontier. To a certain extent, the UK has subtly threatened that it would engage in regulatory competition unless it got a very favourable trade agreement. From Ireland's perspective, agrifood would be massively implicated because the UK would suddenly be importing low-quality food from outside the EU such that we would be competing on cost, not quality.
Very good. The witnesses mentioned tax. I would be a very strong advocate for tax justice, which is really important. One of the major difficulties around the world is that push against tax justice. This State's reliance on corporation tax as part of our competitive advantage is a difficulty for us and leaves us overexposed in this space. We need to develop our other competitive opportunities and advantages. Has anybody made an effort to quantify the damage the CCCTB would do to us materially?
Dr. Aidan Regan:
If I remember correctly, the ESRI carried out a study and this committee did work on it and produced some kind of data. The problem with those models is that they are based on certain assumptions. There are a lot of assumptions. If one assumes anything, one can effectively generate the outcome one wants. I would suggest that we do not really know but we do know, broadly speaking, that those countries which effectively facilitate companies to set up subsidiaries within other companies in order to attract and transfer the profits of the sales of their goods and services in other countries back to those subsidiaries are likely to lose out because under this common consolidated approach, the profit generated would go to the country where the sale took place. Therefore, Ireland would lose out on that basis. I am not sure how much it would lose in terms of revenue but the ESRI has produced an econometric study which says that it is not insignificant - it is quite significant. However, from the EU's perspective, that is secondary because it would be looking at it through quite a different lens, which would be that it is fair or just that the money goes to where it was generated.
To a certain extent, it would be an attack on some elements of our economic model. One of the things that struck me about Dr. Regan's evidence was that the Franco-German strategic alliance is seeking even further integration.
Dr. Regan mentioned budgetary offices and so forth. There is a strong feeling throughout Europe that the EU is already over-reaching and that this has led to the British choosing to leave. In many ways, the push towards EU harmonisation is the cause of EU break-up. Would it be possible to operate the CCCTB in a two-speed Europe in which core countries would go one direction and some of the peripheral countries would remain outside it? I imagine that would still have an economic affect?
Dr. Aidan Regan:
The Deputy makes an interesting observation. The technical answer is yes there could be enhanced co-operation among a core set of countries, which exists already for the financial transaction tax, but that is not quite where these countries would want to go. As long as Ireland can do what it does there is very little point in having a CCCTB. However, as I said, there could be enhanced co-operation among a set of countries would that allow them to pursue - to use a popular term now within Europe - a multi-speed Europe and differentiated types of integration.
Will Brexit impact on the capital markets, bearing in mind the dominance in that regard of London? On the capital markets unions, CMU, flagship initiative by the EU, what will be the likely outcome of that initiative?
Mr. Marc Coleman:
That is an excellent question, Deputy. Financial Services Ireland, FSI, was one of the first respondents to the Green Paper issued by then Commissioner Lord Hill in April 2015. I would like to think we were trying to lead the conversation in terms not only of the benefits to SMEs of having more diverse access to sources of funding but the benefits to the EU. One of the problems with the common corporation tax base is that it inflicts the disadvantages of tax harmonisation on Ireland but it does so without any fiscal harmonisation in terms of spending. We do not get any of the advantages. I believe it will fail because the political inconsistencies in the idea have not been fully thought through. Interestingly, were CMU to be established across the EU, it would help channel savings funds not only from demographic groups that have high savings - older citizens - to younger citizens that need them but from larger corporations to SMEs and start-ups that need them. It would also channel funds from regions that are wealthy to regions that need more investment. It is a means of achieving very important social objectives using a market discipline. It could also help Europe to emulate some of the United States' success in creating a very successful market for venture capital. We spoke earlier about Limerick. The Collison brothers come to mind as an outstanding example of what Irish people can achieve. They have achieved in California partly because there is a very friendly environment in America for raising venture capital.
The CMU initiative is a great project. The Commission has launched a half-time consultation on it, the results of which I have not yet fully digested. Obviously, the key champion of capital markets is now absent. I hope that, drawing on our great legacy as a team player in the EU and as a country that stood by the rules, worked with Brussels and the Commission, we could be a friendly voice within the EU, such that we will be able to say that while it may not have agreed with everything that Britain stood for in terms of financial regulation this is intrinsically a good idea for Europe because it will do all of the things I outlined earlier, such as channel funds from people who have them to people who need them. It could also be a great assistance to the eurozone because, without Britain, the EU is going to be much more like the eurozone. There will be greater similarities between the EU and the eurozone given that a capital markets union would help spread the shock of any recession more evenly across the EU.
If we can come at this debate again with a new pro-European set of arguments, we might be able to play a part because even though we are a small country we have a great influence in Europe.
Mr. Pat Lardner:
While Mr. Coleman has given a very comprehensive answer, I would like to add a couple of points. There are elements of the capital markets that will be potentially more greatly impacted, such as infrastructural projects. There are a lot of open debates around that issue, which again are political, so I will not offer an opinion at this stage on that issue.
Following on from the recent visit here by representatives of the European Investment Bank we know one of the by-products of some of the changes that will occur. They spoke about the way in which they deploy capital to projects. The European Investment Bank has invested approximately €395 million in Irish projects. If one of its shareholders has up until this point been the United Kingdom and the United Kingdom will no longer be a recipient of those projects, or at least a primary recipient, it opens up greater opportunities. Hence our focus on investing in the real economy.
On the review of the capital markets union project, we would have been a very significant contributor to the original consultations on capital markets union, primarily on removal of barriers to cross-border distribution of funds, first to get capital into economies, second to provide choice to investors and third because it is in the interests of our industry as well. Because of the occurrence of and the process around Brexit there are aspects of the CMU project that will take a lower priority. Following on from a conversation we had with the Commission two weeks ago, it is interesting to note that it will continue to try to have barriers to cross-border distributions removed. Linking that to the point made by Mr. Coleman, there are already areas where industry, and Ireland as a place where there is a reasonably significant financial services footprint, has the ability to impact, and constructively so, the direction of travel.
I thank the witnesses for their opening statements and interactions with members. We look forward to hearing from them again at a future date in regard to this and, perhaps, other matters. I propose that we suspend now for a few minutes to allow the witnesses to withdraw and our next witnesses to take their seats.
We are dealing with No. 6, session B on Brexit matters relating to financial services, resumed.
We are joined by Mr. Ed Sibley, director of credit institutions, Mr. Gerry Cross, director of policy and risk, and Mr. John Flynn, head of Irish economic analysis, from Central Bank of Ireland. I welcome Mr. Sibley, Mr. Cross and Mr. Flynn to the meeting.
Before we hear from the witnesses I must draw their attention to a privilege notice that I am obliged to read to them. I wish to advise the witnesses to the fact that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by the committee to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable.
I invite Mr. Sibley to making his opening remarks.
Mr. Ed Sibley:
I thank the Chairman and the committee members. We very much welcome the opportunity to appear before them today to discuss Brexit. As the Chairman said, I am joined by Mr. Gerry Cross, director of policy and risk, and Mr. John Flynn, head of Irish economic analysis.
In our opening remarks I will start by making a few key points which summarise our overall perspectives and approach. I will consider the overall effects of Brexit on Irish financial services. I will outline our approach to dealing with the challenges of Brexit for existing firms. I will summarise our approach to engaging within the Europe supervisory framework. I will provide a brief overview of our engagement with firms considering relocating business from the UK and I will also cover the Central Bank’s approach to the resourcing challenges it poses.
To start with a few key points, the Cental Bank's mandate and mission of protecting consumers and safeguarding financial stability underpins our approach to dealing with Brexit. In this regard, I would highlight that the Central Bank has been working on Brexit-related risks for nearly two years and, overall, we still consider that Brexit will have negative effects for Ireland. From an early stage we have sought to ensure that financial services are adequately prepared and resilient enough to cope with plausible stress scenarios related to Brexit. It is both desirable and realistic that decisions related to the relocation of activities from the UK to other parts of the EU be driven by factors other than regulatory and supervisory differences.
The Central Bank's approach across different financial services firms is consistent with there being commonality across sectors in many of the key regulatory and supervisory issues to be considered as part of any relocation of activities from the UK. The Central Bank is engaging effectively in influencing European regulatory and supervisory approaches to dealing with Brexit-related issues, as well as operating consistently with them. We expect Brexit to have significant impacts on the Irish financial services industry, with some negative but manageable impacts for domestically focused firms and those with a UK focus. We expect a material increase in authorisation activity due to UK firms seeking to relocate some of their activities.
I will briefly cover the macroeconomic impacts. Ireland has a substantial, complex and multifaceted financial services sector. Brexit effects on the financial services sector will, therefore, vary accordingly. For domestically focused firms, the Brexit-related effects on the domestic economy will be critical. While a wide range of factors will determine the precise impact on Ireland's economy, our analysis is that the overall economic effects for Ireland in the short and longer terms will be negative, and will be much worse if there is no free trade agreement.
Furthermore, a hard Brexit may also require sudden regulatory and financial adjustments, given that UK financial services firms would lose passporting rights to operate across the EU and vice versa. This risk is likely to be associated with a period of heightened uncertainty in the financial services sector. This emphasises the importance of a transitional period to mitigate potentially disruptive cliff effects and the associated financial stability risks.
I will turn to the Central Bank's approach to existing firms operating in Ireland. Prior to the referendum, we carried out extensive analysis of the regulatory, policy, economic and broader financial sector effects of a potential Brexit, including the risks arising for the firms supervised by the Central Bank and for the bank itself. That work prepared us for a number of potential Brexit scenarios.
The Central Bank set up an internal Brexit task force in advance of the UK referendum comprising representatives from across the bank. Its work is ongoing and it provides comprehensive assessments of Brexit-related matters to the Central Bank's financial stability committee and the Central Bank commission.
From a regulatory and supervisory perspective, the focus has been on ensuring that regulated firms are addressing and planning for the effects, such as currency movements, liquidity provision and so on. We continue to push regulated firms across all sectors to plan and adapt to the potential implications of Brexit.
In terms of European engagement, the lessons from the global financial crisis remain fresh in the minds of the European regulatory community and form the foundation for assessing the implications of the new organisational configurations that Brexit will trigger. For these financial stability reasons, the importance of a robust approach to prudential supervision is a widely held view. The post-Brexit evolution of the European financial system cannot involve any dilution of the capacity of supervisors to ensure effective regulation of international financial services firms.
At a European level, in light of the obvious material Brexit impacts on the State, the Central Bank has been to the fore in the discussions on the regulatory and supervisory approach to Brexit across all three European supervisory authorities, ESAs, and the work of the ECB and the single supervisory mechanism, SSM. The aim of this approach is to mitigate against the risk of regulatory and supervisory arbitrage and to ensure that, regardless of where a firm relocates to, it can expect a consistent application of the applicable EU regulatory standards and intrusive ongoing supervision.
Specifically, the aim is to ensure that the Central Bank is operating in line with European regulatory and supervisory norms and is being effective in influencing them. We are satisfied that this approach is correct and proving worthwhile, and it is clear through our interaction at the European level, but also with individual firms, that the opportunities for regulatory arbitrage are being successfully targeted and addressed.
The role of the SSM in banking supervision ensures that there is a level playing field in terms of banks. Although there is more national autonomy in respect of other types of financial services firms, national regulators operate within the broad framework of the European system and there is a significant, if incomplete, convergence. With a broadly similar regulatory framework across member states, the primary focus of firms in Brexit planning should be on non-regulatory criteria such as business model fit, legal systems, workforce, quality of relevant infrastructure and so on.
The SSM and the ESAs are developing guidance that will set out the approach they expect to see adopted by national authorities and firms themselves when dealing with Brexit-related matters. The bank has also been actively involved, via ESA working groups and membership of the relevant boards of supervisors, in contributing to ESA considerations of Brexit issues across all sectors.
We have had significant engagement with firms that are considering relocating business away from the UK. This includes currently authorised firms that are considering changes to existing operations and those that are considering seeking entirely new authorisations. This engagement represents a major increase against normal activity and has been observed across all sectors. In addition to individual engagements, we have held a number of round tables with industry to detail our approach and hear views, with accounts of these meetings published on our website.
In terms of our approach, we have dealt with all inquiries in an open, engaged and constructive manner. We are approaching new authorisations and material business model changes in a similar way through a clear, well-structured, transparent, consistent and predictable authorisation process. Our approach is in line with sound practices agreed across Europe and our responsibility is to ensure that firms authorised to operate from Ireland are soundly run in compliance with EU requirements. To this end, we seek to ensure that an entity will be substantively run from Ireland and that the set-up permits effective supervision, with local management accountable for decision making. Moreover, we are actively considering the financial stability risks associated with potential changes to the financial services sector in Ireland.
Nonetheless, it is clear that London will remain an important location for financial services activities. The level of activity that moves from London because of Brexit is highly uncertain and contingent on the outcome of the negotiations between the EU and the UK. In the face of this uncertainty, hundreds of meetings are being held across Europe between firms and regulators as each seeks to navigate a path through the uncertainty created by Brexit. Firms that are considering moving activities from the UK are typically visiting several jurisdictions to assess the fit of each jurisdiction for their businesses. They are then whittling those locations down to two or three possibilities and, in all likelihood, might have further visits. They will make their decisions and inform the regulator and other stakeholders, and they will then embark on a formal application process. Even at this latter stage, a submission of a formal application may be several months away. Different firms are at different stages of this process.
In the same way as scores of meetings are being held in Dublin, they are also being held in Paris, Frankfurt, Amsterdam and so on. The number of meetings held to date gives no indication as to the likely outcome, nor does the number of applications or expressions of interest give any sense as to the size, scale or complexity of an operation. Based on the many meetings that we have had to date, though, Ireland can expect to receive a meaningful share of the activities that will move from the UK.
I will turn to the Central Bank's organisation. The bank is committed to ensuring that we are well positioned to predict, understand, assess and respond effectively to developments arising from Brexit. Of critical importance, we are seeking to ensure that we have the skills, experience and resources that will enable us to deal with the authorisation of new and materially changed firms and their subsequent supervision and possible resolution. While the common European approach should ensure that regulation is not the deciding factor for firms in their relocation decisions, it is important to bear in mind why we regulate in the first instance - to have a well-functioning financial sector, to safeguard stability and to protect consumers. We have approved the recruitment of additional staff and set up new teams in order to manage Brexit-related authorisation queries across all sectors. The need for further resources is being kept under constant consideration.
The Central Bank has taken a proactive, considered, adaptive and influential approach to dealing with the impacts of Brexit on financial services and beyond. We remain conscious of the likely negative effect of Brexit on the Irish economy. Our approach is anchored by the core mandate of protecting consumers and safeguarding financial stability. We are working effectively to operate within and influence European norms so that relocation decisions will be based on factors other than potential regulatory or supervisory differences across Europe.
I will be brief, as I am under time constraints, so I apologise in advance. I welcome the submission. Were we seeking the Central Bank's state of play in the context of what is still arguably a nebulous process in terms of the politics of Brexit and the negotiations therein, this would be a good one.
I will ask a simple question to seek a better understanding of the nature of authorisations. Mr. Sibley referred to "currently authorised firms that are considering changes to existing operations and those that are considering seeking entirely new authorisations". Will he give us a brief sense of what that means in real terms? What types of changes to those authorisations and new authorisations are being discussed? Will he break them down by sector? Do they relate to banks, fund managers, financial services and so on?
Mr. Ed Sibley:
I will answer some of that and then Mr. Cross will come in. Some of the financial services sector in Ireland is focused domestically and some internationally. That is very evident in the banking sector and in other sectors. Similarly, in the UK there are many firms that are focused internationally rather than on servicing the UK economy. There is a risk associated with Brexit for firms currently located in the UK that focus on servicing the EU in that they will no longer be able to provide those services or those lines of business. They are actively thinking about where they are currently located in other parts in Europe and if they can transfer business operations from the UK to those existing entities. That is what we are seeing. In banking, that might result in what is today a relatively small entity in Ireland becoming a very material and much more complex entity in the services it provides. There are also entities in the UK that might not have a footprint elsewhere in the EU but are providing services to the rest of the EU. They are more likely to think about setting up a new entity and undertaking that somewhere in the EU in order that they can continue to service their customers and clients across the EU.
Mr. Gerry Cross:
I might add more colour to that. As Mr. Sibley said, since the end of last year we have seen a significantly heightened level of engagement and interest from these firms. They are at the stage of exploring options, looking at Ireland, Germany and Paris. To answer the second part of Deputy Sherlock's question, that is across a very wide subset. In banks, it is the investment banking part which is being broken out somewhat and considered separately. We see it in the asset management sector, insurance, the payments institutions and e-money firms. Within the market sector we have seen a variety of different types, whether they be MiFID firms - firms licensed under market instruments regulation - or asset managers, and we have seen interest from different types of trading platforms, so it goes across the full gamut. It is important to say, as Mr. Sibley has described, that it is very much a process and a discussion, and firms are at many different stages in making their assessments and considerations. It is wide ranging, very active and, as Mr. Sibley said, one's conclusion is that there will be a meaningful increase in our applications.
It is taken for granted that the same rules apply in all EU countries regarding the treatment of these potential firms, but rules have interpretation and interpretation leaves space. How do we manage consistency in interpretation across the rules everywhere given that some states have communicated differentials in treatment in the future?
Mr. Gerry Cross:
That is an important question and one on which we have been very focused over the past six months. It is important to recognise that the Brexit effect is giving rise to a set of new issues that we have not had to deal with before such as the issue of substantive presence, that is, the extent to which a firm is substantively present in a jurisdiction. While that is not a new issueper se, it is new the force and intensity with which it now arises. Similarly, there are technical issues such as how much risk one can back out to one's UK parent. There are a range of new issues. The question of how much one can rely on the fact that a particular firm is already authorised by the UK. Can one therefore fast-track it? All these are new and challenging issues which need to be considered. When we started the process some six or eight months ago, different jurisdictions were in slightly different places on that and it was not clear what the right answer was. Going from one jurisdiction to another, firms could see that there were different approaches in one place to another. Quite quickly, we and others raised the need for consistent answers to this with the European authorities, whether it was the Single Supervisory Mechanism for banks or the European supervisory authority for insurance companies and for markets firms and so on, or else there would be a very difficult situation where firms were given different answers in different countries. Progress on this has been substantial. Over the past six months and over the past ten weeks in particular, we have seen a real change in the dynamic. The Single Supervisory Mechanism, SSM, came out with guidance five or six weeks ago on these issues. That changed the nature of the debate. Firms immediately saw that there was European guidance on the issues. On the supervisory authorities, ESMA has been very active from the beginning, EIOPA has been active and the European Banking Authority is also developing guidance which we can expect to see emerge over the coming short period. Already everyone in the market knows that guidance is coming and probably has a good sense of what it will say. We welcome that and have been actively engaged in it and, as Mr. Sibley said, are at the forefront of it.
There is no point in having guidance if it is there in letter but does not do much. However, the supervisory authorities are putting in place modalities and mechanisms for giving effect to it. They are limited in their legal powers. They do not have strong enforcement powers against authorities but they are putting in place interesting methods for checking what different jurisdictions are doing in real time to understand the types of decisions or issues and how they are being resolved in different jurisdictions. I cannot get ahead of this. We are expecting some of these things to be published in the period ahead, but it is a significant step forward in creating a level playing field.
Mr. Ed Sibley:
To add some colour to that, let us take banking as an example. The ECB, through the Single Supervisory Mechanism, is responsible for authorising any material changes to a banking licence or any new banking licence across the eurozone. That level playing field is hardwired into the system. I sit on the supervisory board of the Single Supervisory Mechanism, so I see every single bank authorisation that comes through and we can be assured that at banking level, there is absolute consistency of standards in terms of authorisation and material changes. What the SSM is doing, by leading in getting guidance out and discussing these issues early, is making sure they set the standard at a European level and that is being picked up by other European supervisory authorities which do not have quite as strong a mandate but which have a mandate nonetheless.
Mr. Gerry Cross:
I am sure the witnesses at the previous session were very articulate about this, but one of the complexities is that all this is happening during a period of great uncertainty. If we knew what the political deal would be at the end, life would be a lot easier for everyone, but we are all trying to manage that uncertainty. The committee will have heard this but what we are seeing is that many firms in industry are acting on the basis that they are hoping for the best but planning for the worst. That is probably a reasonable approach. The UK remains a member of the EU until it no longer is.
It is not for me to talk at all about the political level.
At the supervisory level in supervisory authorities, I see the UK remaining a very committed participant in the conversations and remaining very engaged. In this context, we are trying to work on the right and best solutions. The UK sees itself as very much having a stake in the supervisory solutions. We must remember that these entities are currently in the UK and are moving part of their activities to Europe. At the end of the day, in many cases those activities will still be part of a wider group which has a home in the UK. There are some conversations of which the UK will not be a part. In many respects, there remains important interests and we must get the right answers in terms of what is good quality supervision in these cases.
I thank Mr. Cross. The presentation referred to the financial stability risks. Obviously, as a country which has gone through the gamut of difficulties in terms of financial stability, what are the financial stability risks? Again, to a certain extent this is all based on conjecture because we have very few hard facts. What financial stability risks would be added to the country in this process?
Mr. John Flynn:
I can talk a little bit about the economic impact. In macroeconomic terms, the economic impact of Brexit comes from the fact it will have significant implications for trading agreements between the UK and the EU. That will have implications for trade and other things such as labour markets, investment decisions and capital flows. As Mr. Cross and Mr. Sibley alluded to, the impact of Brexit in broad economic terms will be the same as with financial services. The impact will depend on the terms of the UK's exit, in particular the timing and nature of the final trade deal. It will also depend on the nature of the transitional arrangements, if any.
Ireland stands out in economic terms as the EU economy likely to be most affected by Brexit. This obviously reflects the size and nature of our trade and financial links with the UK. It also reflects the fact we share a land border with the UK. In economic terms, Ireland's reliance upon the UK export markets for international trade has reduced over decades. It is now much less than it was at the time we joined the European Economic Community. As an economy, Ireland is still very reliant on the UK. If we look across EU countries, we find it is the most reliant of all EU countries on the UK and UK export markets. Certain sectors are more reliant on the UK than others.
Financial services often create exposures for governments. Much of the focus is on the migration of financial services from London to Ireland. Given the trauma we have just experienced, which of those types of financial stability questions would come our way?
Mr. Ed Sibley:
In the case of those firms which are focused on the domestic economy, the factors to which Mr. Flynn referred are definitely at play in terms of our thinking and making sure they have considered them robustly, as well as the potential impacts and making sure they can survive the plausible stress associated with them. Some of those firms are directly connected to the UK, have exposures to the UK or are linked to businesses in the UK and therefore need to think very carefully about that. We are pressing them to do so.
In terms of our thinking around the deepening or increased complexity of the financial services system in Ireland, we are acutely conscious of the legacy of the crisis and the impact it had on the State. We have learned a great deal in terms of our ongoing supervision and the intensity of that supervision. We are also thinking about it from a resolution perspective. As we consider things from the perspective of individual firms in terms of new entities or materially changed entities, we are thinking about how they would recover or be resolved if they got into trouble. Systemic risks are associated with some of the more complex activities coming into the State, whether it be investment banking, broker dealing and so on. We are very alive to the risks and thinking about them from the perspective of individual firms and a system-wide perspective to make sure the lessons learned from the crisis are not forgotten.
Mr. Ed Sibley:
I can understand the motivation behind the question. It is difficult to answer in a simplistic way because we have had many meetings with firms, but they are at very different levels in terms of their decision-making and stages of their decision-making. As I alluded to, in terms of fact finding at an early stage, typically they are engaging with multiple stakeholders, including regulators.
The reality is that when we speak to these firms, while they might be visiting Dublin, they are also visiting Frankfurt, Paris, Amsterdam and so on. At an early stage, companies are having meetings in multiple locations and are then shortlisting and thinking about deciding between two places, and Dublin may be in the frame at that point. It is also important to bear in mind that there are very different sizes, scales and complexities in some firms. At one end, one might meet a global investment bank and at the other a relatively small asset manager or something along those lines. It is very difficult to give an answer to that question that will not be misleading or give an answer with a degree of confidence that it will not be picked up in the wrong way.
Mr. Ed Sibley:
In my opening statement I referred to "scores". We have seen a material change in the level of activity in terms of the engagement are having with firms. As the Governor previously mentioned, the activities that are coming out of the UK, such as they are – as I said earlier, London will remain a very important part of the financial system - will be spread across the jurisdictions I mentioned rather than all of them coming out. It is very speculative to anticipate how much is moving out. It is pretty likely that firms will move out across different jurisdictions rather to than one or two individual ones.
The financial services sector is an area that is continually evolving and has created certain niches and very specific, focused or specialised areas. It encompasses areas that we in this country have not perhaps had experience of with regard to regulation. With regard to the capacity of the Central Bank to deal with the volume of work that is potentially coming its way and the specialisation of some of the sectors, will the witnesses outline the capacity available? I understand great work has been done in recruitment and development.
Mr. Gerry Cross:
One of the great merits of the Central Bank is that we are an integrated regulator. We cover the full span of different sectors. That gives us an ability in terms of how we see the full picture and our expertise, but also to cross-fertilise. We see that in some of our conversations with firms which might be bringing activities to Ireland which may be relatively new to us. However, in terms of how they are constructed, we can pull expertise from different parts of our organisation and quite quickly put in place a very clear and effective way of approaching that.
As Ireland already has a very significant international financial services sector which covers a large range of activities, we are starting from a good position. Beyond that, in the past five years the resourcing base within the Financial Regulator part of the Central Bank has been enhanced materially. We have seen growth and are in a process where we are already responding to events, for example, the development of the SSN in response to our revised approach to supervision. We have been in a phase of enhancement which has been positioned to get to grips with this. We use a risk base and a reprioritising approach in order that we can move resources coherently and effectively around the organisation. We have acted in a very integrated way. Across the sectors we have pooled our resources and thinking such that we are in good shape to have the discussions and bring expertise to bear. The Governor has said we will increase resources, as necessary. At the end of last year we made plans to provide additional resources for Brexit-specific things that we could identify, encompassing 28 additional resources for authorisation activities, and fo which we committed to recruiting. We also made contingency plans and are in the process of reviewing and potentially further enhancing the resources we need. The various parts are coming together.
To return to the issues of stability and exposure, the idea that there was a danger that we would end up with a shell-type firm with low value to the economy but high risk was discussed. Is there any way to mitigate it? Firms might move what is necessary to function within the new EU environment and load the exposure or risk to the State, but there would be a very low jobs value or benefit to the economy.
Mr. Ed Sibley:
That is a basic part of the authorisation process and ongoing supervision. We have absolutely no tolerance for shell companies. There is an inherent tension in that Brexit is imposing a cost on firms that they would not necessarily want to have imposed on them and that they would not have been looking for. There is a tension in terms of the activities firms may want to retain in the United Kingdom, but at the same time we will absolutely not stand for shell companies. What we are looking at is making sure there will be substance in activities relocated to Ireland, that the decisions, strategies, risk appetite and risk and control frameworks will be driven from Dublin. That is part of the authorisation process. We will ensure that will remain the case through ongoing supervision. We are also actively considering what will happen if one of these firms fails as part of the authorisation process. What would happen if it were to get into trouble, or its parent company or a sister company were to get into trouble? How would it deal with it? How would it recover in that circumstance and if it was unable to recover, how would the problem be solved? We are actively thinking about that matter in terms of the firms operating today and it is at the forefront of our minds for the firms coming in to make sure these systemic risks will be managed to the extent that they can be.
Mr. Gerry Cross:
The concept of equivalence has been developed and operated in a particular context. It takes different forms and is not a coherent cross-cutting concept. One will find a piece of European legislation and an article will lay out what will happen if there is a decision on equivalence. It is sporadic and not ideal. It has been developed for third country jurisdictions that are distant from Europe. It is a process which can be lengthy and complicated, but it can also be reversed quite quickly for political reasons. It is, however, a difficult concept. The future of equivalence might be discussed during the negotiations as part of the political discussions in the context of the United Kingdom being outside the European Union but next to it with a very large financial services presence. The discussion will be about enhanced equivalence and how it might become a more significant tool. I am speculating, but it is one of the lines of discussion. There may be other discussions about different concepts of equivalence, but, as it stands, the concept was not developed with this type of situation in mind.
In terms of the Solvency II directive and third country equivalence, it applies to reinsurance firms but not to insurance companies, e-money or payment services. Is that a big problem for insurance firms that might potentially relocate to Ireland that these mechanisms do not apply here?
Has there been much interest in FinTech? Ireland has a reasonably good base of technology companies. It may be an area in which there is more portability than in other areas. Perhaps Mr. Cross might give us his thoughts on the sector.
Mr. Gerry Cross:
The answer I gave Deputy Sean Sherlock is appropriate. Interest has been spread well across the sectors, including, in particular, the payments sector. I stress what Mr. Sibley said, that it is a process. We have had conversations, but it does not mean that anything will happen. We have had a material number of conversations, including wwth companies in the payments sector.
In the last week or so the Governor made a speech which included a piece on FinTech. The FinTech sector is important. Financial innovation is something of which we are aware with a significant presence in our bailiwick. We engaged well and appropriately with representative associations in the field and are conscious of the challenges financial innovation poses for existing firms. We are also conscious of the benefits financial innovation can bring for consumers and businesses. The challenge for us, as regulators, is to understand what is happening in this space, what the implications are for regulated firms and to be conscious of proportionality in the regulatory space and how it works.
It is a complex piece of financial innovation. It is easy to say, but it has many moving parts, of which we are conscious. We have cross-organisational thinking and working and try to prioritise the issues that are most relevant.
Mr. Cross referenced proportionality. Will he develop that point? In the old days there was light touch regulation which we did not want. Some were looking for it and, in hindsight, it was not the right way to go. To what does proportionality refer?
Mr. Gerry Cross:
There is an ongoing discussion in Europe about heavy legislative pieces that take many years to design and how to make them manageable for smaller, emerging firms, but there are no easy answers. There is a rule book, by which one is bound, but in the context of discussions with our European colleagues, one seeks to identify whether there are supervisory approaches that can be less demanding. It is, however, a challenging question.
Mr. Ed Sibley:
To a large degree, it is baked into our supervisory approach. Leaving banks to one side for a moment, we have a prism framework which is focused on probability, risk and impact. According to the risk a firm presents from a financial stability and a consumer protection perspective, the potential impact associated with these risks determines the level of our supervisory engagement. In the case of banks, it is driven by the SSM methodology which was based originally on the Irish methodology. There is, therefore, a degree of proportionality baked into our supervisory engagement and approach. It is driven by risk and impact, albeit that we have the common rule book and regulations to which Mr. Cross referred.
The common rule book is in place. In theory, every member state should adopt the same approach, with the same level of regulation and intrusion or otherwise. Mr. Sibley may be unable to answer this question, but certain countries are rushing to attract jobs from the United Kingdom. They are stating, "Come here and it will all be fine." It has been suggested the Central Bank, as the regulator, is not in a position to act as a salesman, that that is the job of others. Is there a sense Ireland is seen as being a little more reticent about being open for business? The Central Bank job's is to regulate. Does Mr. Sibley get a sense that other countries are being more aggressive in their sales pitch and in that regard suggesting regulation will not be an issue?
Mr. Ed Sibley:
Different entities and parts of the State have different responsibilities across the system. We clearly have a responsibility to ensure effective regulation, financial stability and consumer protection. For good reason, the competition element of our mandate is no longer with us, about which there is no controversy. I refer to our opening statement. We have been clear on the need for regulatory convergence and made sure that is happening, both across countries and across sectors. While there may have been a little political noise earlier - I cannot talk about specific countries - opportunities for regulatory arbitrage have been closed by the actions being taken. Moreover, in our engagement with firms of substance there is not that much interest in driving, or looking for, a great deal of regulatory convergence. They respect and look for a credible, solid, strong regulator. Our absolute objective in our engagement with these firms is to show that we are transparent, open, predictable and capable of both progressing applications in an orderly fashion and in supervising them in an ongoing fashion. That is the role of the Central Bank and what are firmly making sure we are doing.
Therefore, in terms of competitive advantages other countries that might be trying to suggest they have, through lighter touch regulation or easier rules, realistically every one has the same rule book and, regardless of in which country one operates within the European Union, one is subject to the same level of supervision and regulation.
It is important to nail this issue. References have been made in the media to countries stating, "It is all grand and the Central Bank of Ireland is more difficult to deal with or more by the book than we could be."
Mr. Gerry Cross:
There is clearly a single rule book. The challenge is presented by the fact that the new issues have not had to be dealt with previously. Our view all along has been that we need to get to the right answer which, on the one hand, is appropriate and correct and, on the other, as Mr. Sibley said, recognises the constraints within which firms are operating and that Brexit is not of their choosing. We have a pragmatic, constructive engagement with them. The bit that was missing from it six months ago was that there had not been a discussion at European level about the correct approach to take to these issues. That discussion has been and is being had and it is proving to be very constructive and productive. That is the main issue on which I would focus.