Saturday 17 November 2018

IFSC heads fear over-regulation in knee-jerk reaction to local crisis

Joe Brennan

AS banks and sovereign governments vie with each other globally to raise trillions of dollars in the bond markets, a little-known Irish unit of one of Italy's largest banks emerged as the top debt issuer in Europe last year.

Intesa Sanpaolo Bank Ireland, whose origins can be traced back to the establishment of the IFSC in 1987, and which has been headed by Pier Carlo Arena for the past five years or so, issued $176bn (€129bn) of bonds and notes last year in 1,136 deals from Dublin.

It beat Dankse Bank's $162bn (€118bn) of paper issued out of Copenhagen, Germany's Kreditanstalt fur Wiederaufbau ($131bn) (€96bn) and even the kingdoms of Netherlands ($98m) (€72m) and Belgium ($97bn) (€71bn), according to data from Capital Market Daily.

The feat is all the more remarkable given that almost 18 months ago, banks operating in the IFSC saw their liquidity temporarily sucked out the door as the Government introduced the domestic banking guarantee.

"We weren't given any warning about the guarantee and we felt we were being left high and dry," said a senior banker with another international bank in the financial hub.

"But, all of a sudden, a bank like Anglo Irish Bank, which had been losing hundreds of millions (of funding) by the day, was able to turn around and raise hundreds of millions."

While the impact of the initial euphoria of the domestic guarantee soon died down and liquidity flowed back into IFSC financial institutions, the impact of the domestic banking crisis still hangs like a dark cloud over the centre.

The virtual implosion of the domestic sector has seen the Government here, like others internationally, push to overhaul the watchdog system, with the days of Ireland's principle-led, rather than rules-based, regulatory approach all but over.

IFSC figures fear that regulating systemically-important Irish retail banks and international financial services firms on the same basis will seriously damage the IFSC's competitive edge. The Financial Services Consultative Industry Panel chairman David Went warned last year that a "one-size-fits-all" approach could reduce the IFSC to "a wasteland"within a decade.

In the gleaming new Liam Carroll-built 165,000sq ft office block in the south docklands, which offers views of the concrete shell that was to become Anglo's new headquarters, Willie Slattery, head of State Street in Ireland, is concerned that the domestic crisis could also lead to a knee-jerk regulatory approach to international firms operating here.

"I've a significant concern that it could lead to changes in the nature of the relationship and engagement between the regulator and the IFSC, which could do tremendous damage to our competitiveness," said Mr Slattery.

"It's not that we are advocating loose or lax standards. In more than 20 years of the IFSC's existence, activity here has been conducted with probity and professionalism on the back of a strong regulatory environment and oversight -- and in the real work of peer-to-peer regulation and respect."

The fact that employment in the IFSC has largely held its own around the 25,000 mark -- broadly across the three sectors of fund services, banking and insurance -- has confounded many observers, who predicted its demise as the global financial crisis crescendoed in 2008.

Estimates at the height of the crisis that up to a third of hedge funds would go bust globally and kill off Ireland's fund administration industry have proved unfounded, said Mr Slattery. State Street, which employs more than 2,000 workers in Ireland, is the main player in this field, servicing both hedge and more traditional funds.

State Street shaved its global workforce by 6pc in late 2008 and froze salaries last year. However, it has hired an additional 100 staff in Ireland since last October -- helped by the 'post-Madoff effect'.

In light of the $50bn Bernie Madoff fund fraud, Mr Slattery said there had been a hike in demand from investors for hedge funds to be serviced externally.

Others in the industry say the domestic crisis has helped the IFSC price itself back into the global market. Anecdotal evidence points to new recruits in the funds industry starting off on two-thirds of boom-time salaries, with new office rental agreements coming in at least 30pc lower.

Meanwhile, the recent move by former Barclays high-flyer Roger Jenkins to locate a boutique corporate finance firm in the IFSC, targeting deals expected to emerge from the global financial crisis, has also raised eye-brows.

Alan Merriman, the former EBS finance director who has been brought in as chief operating officer of the firm, said the decision to locate in Dublin "demonstrates the real potential for the IFSC and Ireland to move up the value chain". The country's favourable holding company regime and 12.5pc corporate tax rate also played into the move.

But one senior corporate financier said: "It's certainly encouraging seeing developments like this, but there needs to be a concerted effort to attract more niche industries, such as private equity firms."

He said the recent Finance Bill, which reintroduced tax incentives for foreign executives, or the so-called remittance basis of taxation, should be used to attract financial players disillusioned by Britain's controversial super-tax on high earners and special levy on bankers' bonuses.

Dermot O'Leary, chief economist with Goodbody Stockbrokers, said: "The IFSC, in general, has developed as a back-office centre for the financial services industry. With the backlash we're seeing in London, maybe this is an ideal opportunity for the IFSC to pitch for more front-office activities."

Mr Slattery welcomes the Government's U-turn on the remittance tax issue, and said that without the cost-cutting measures announced in the December Budget, Ireland would be facing the same prospects as Greece, which is effectively having austerity measures imposed on it.

However, he said the effect of the emergency budget last April left Ireland in a position where its top earners were paying more tax than traditional high-tax countries.

A comparison table compiled recently by PricewaterhouseCoopers shows that the effective tax rate on a married couple with two children on more than €400,000 now stands at over 45pc, ahead of France, the UK, the US and Germany. Ireland also tops the list in the categories over €150,000 and €250,000, it shows.

"In the same way that you need a competitive corporate tax environment to compete for mobile investment, you also need competition for highly-skilled, mobile employees," said Mr Slattery.

The Finance Bill also introduced specific tax measures aimed at wooing the world's increasingly important Islamic banks and funds. The IFSC is already home to 5pc of Islamic, or Sharia, funds and 20pc of Sharia funds outside the Middle East.

And the legislation provided clarity on the tax treatment of funds managed from Ireland. A new EU directive allows for a fund management company in one member state to manage funds in other jurisdictions.

Meanwhile, plans for a new 'Green IFSC', to provide a centre for green investment, fund administration and carbon-trading markets, are also gaining ground in government circles.

Padraig Rushe, a director with Bank of Ireland Corporate Banking and chair of the IFSC Banking and Treasury Group, recently said that the setting up of a green hub could create thousands of jobs and boost the Exchequer's tax receipts by up to €1bn within five years, under a best-case scenario.

A senior financial services figure said: "Ireland's already got a strong reputation in the renewable energy field, with companies like Airtricity, NTR and OpenHydro. Shouldn't we be able to build a world-class infrastructure in financial engineering for this sector as well?"

While industry observers are calling for some sort of central figure or agency to go out and explain what the centre is about and market it internationally, Ireland's membership of the "onshore" EU club stands to its advantage in the face of a growing international aversion to tax havens and countries with banking secrecy rules.

The recent appointment of Matthew Elderfield as head of financial regulation and the Government's move to re-merge the watchdog with the Central Bank, within the context of a pan-European reform, should also enhance Ireland's standing, The heavyweight watchdog figure, who previously worked with the UK Financial Services Authority, was actively involved in assessing the type of business the IDA is looking to attract in his most recent role as chief executive of the Bermuda Monetary Authority.

But news this week that Mr Elderfield is looking to almost double the watchdog's staff count has also startled some observers.

"I think it is a great thing that the new regulator is hitting the ground running. We need a really competent authority that will have the right staff that know what's actually going on in the IFSC," said one source close to the industry consultative panel.

"We need regulators that will have the confidence to move quickly on things that need to be fast-tracked, but also have the authority to say no to certain unwelcome activities."

But what is really upsetting some is that the regulator plans to levy industry for all of the costs of increased regulation, rather than the traditional 50pc cost.

"It's one thing to charge the domestic banks for the full cost of regulation. After all, they're going nowhere," said the source.

“But it’s going to be extremely challenging to attract more firms to the IFSC when the regulator is trying to recoup all of the regulatory costs from a small sector. After all, increased activity in the centre brings more corporate and income tax into the Exchequer

Business Newsletter

Read the leading stories from the world of Business.

Also in Business