IFSC needs light regulation.
If Ireland abandons softer regulation, we will have one of the most stringent financial sector regulatory environments in the world, writes Séamus Mulconroy.
The IFSC has been one of the outstanding success stories of modern Ireland, a public-private partnership that worked, the brain child of entrepreneur Dermot Desmond, backed by the then taoiseach Charlie Haughey.
It transformed an area of disused docklands into a major international financial services. Half of the world’s top 50 banks have Dublin operations. According to the IDA, up to 16,000 professionals work directly in the international financial services sector, and a similar number are employed in support sectors such as legal and accountancy services.
Nor is employment confined to the IFSC, and many IFSC firms have sizable operations across the Republic, including State Street in Kilkenny, GMAC in Mullingar, MBNA Carrick-on-Shannon, Cigna Galway to name but a few.
While the new buildings along the north shore of the river Liffey are impressive, the sheer scale of the operations managed from the IFSC is even more impressive.
The net asset values of domiciled investment funds amounted to €498 billion, while cross-Border life assurance premiums amount to €5.6 billion. The tax revenue to the Exchequer has been equally impressive – in 2002 alone, IFSC companies paid €700 million in corporation tax.
In the early days the value proposition for the IFSC was simple: low corporation tax, a light touch regulatory regime – as little red tape as possible – and an English speaking workforce located in the EU. It was a value proposition that appealed to the international financial services community as attested to by the rapid growth of the IFSC. Just remember that the IFSC was still only a concept in 1986.
However, we live in a constantly changing world and as so many investment products stipulate, past performance is no guarantee of future performance. The IFSC faces many challenges, new competitors are emerging both from within and outside the EU eager to replicate our achievements and frankly to steal our lunch.
The IFSC must adapt to the challenges of the future. The Future Of The Services Sector In Ireland, a consultants’ report prepared recently for the IDA, highlighted some of the opportunities which exist. Just as in the past, having the right regulatory regime will be crucial if we are to seize these opportunities. Recent high-profile scandals in the reinsurance industry in the US and Australia have focused attention on the regulatory regime under which the IFSC operates.
Both Justin O’Brien, director of corporate governance at Queen’s University, Belfast and Liam O’Reilly, chief executive, the Irish Financial Services Regulatory Authority, have both recently written in this newspaper on the issues involved. I do not propose to examine the specifics of the case quoted, but rather to look at the issue of regulation in more general terms.
At the first hint of any scandal, governments and regulators are always called on to act. The cry goes up immediately that something must be done – whether or not that something makes sense or not is another question.
Despite what media commentators always argue, not every scandal requires a government or a regulatory response. Neither government nor indeed regulators should strive to create a risk-free world or a risk-free business environment.
To quote Tony Blair:
“Instead of the ‘something must be done’ cry that goes up every time there is a problem or a ‘scandal’, we make it clear we will reflect first and regulate only after reflection.”
Business is constantly changing and change carries with it new risks. If we seek to pre-empt every risk through regulation, we will simply add to the cost of doing business and drive businesses to other locations.
The essence of business is that investors take risks to gain returns; business without risk would be like the sea without salt.
Charlie McCreevy encapsulated the challenge for regulators in a recent speech:
“My appeal to you is when regulating, to give due weight to the need to strike the right balance between prudential and investor protection considerations and the need for competitiveness and innovation in financial services. “Don’t try to protect everyone from every possible accident. Concentrate on the big things that really matter, and leave industry with the space to breathe and investors with the freedom to learn from their mistakes.”
He also forcefully made the point that those mis-sellers and wrongdoers who break the rules must be punished severely.
In an increasingly competitive world, I fear that if Ireland and the IFSC abandon their commitment to light-touch regulation, the result may be that we have one of the most stringent regulatory environments in the world and very few companies left to regulate.
Light-touch regulation does not mean a free for all or the condoning of illegal or immoral practices; it does mean as Charlie McCreevy says striking the right balance between protecting the public and the integrity of the market and stifling business with burdensome regulation and unsustainable costs.
As the Progressive Democrats have found to their benefit, advice from Charlie McCreevy is always worth listening to.
Séamus Mulconroy is the Progressive Democrats’ director of policy.
© The Irish Times. 20th Jan 2006