Tuesday 23 April 2019

Masters of the universe raking in billions for the IFSC

Ken O'Brien

THE Taoiseach recently felt the need to issue a special report on the IFSC's future. Uniquely, the financial services industry retains a special position within the Taoiseach's Department - a legacy of the 1980s when it was set up. But does it still deserve it?

Why not agriculture, or IT or biotech or pharma?

The reason is partly the IFSC's role in history - and its unexpected success - thanks to the vigour of the original prime movers: Dermot Desmond and CJ Haughey. But it is more than that.

Financial services do have a special role, because at the heart of every Government there is a Department of Finance - the financial services industry, after all, was originated by governments needing to raise capital to wage wars.

The success of London as a financial centre in the 1800s was sparked by the funding of wars - and it was not until the Sixties and Seventies that the first real stirrings of Irish financial independence were seen, culminating in the break in the link with sterling.

The first notions about the development of a financial services industry in Ireland in the 1980s mostly centred on emulating imperial capital markets models like London's, with an emphasis on front office activities.

One of Desmond's key contributions was his proposal for a back-office IFSC, servicing front office London.

The British were happy to buy into this because it did not threaten London as a financial centre, and the idea of Dublin as an offshore centre fitted neatly alongside other British (or formerly British) offshore islands, Jersey, Isle of Man, Guernsey, Bermuda and Cayman.

The EU helped to made this a de facto reintegration of the old financial union between Britain and Ireland, as it opened up the whole European market to Ireland's brand new centre, set up in 1987.

Very quickly we learned how to play the offshore-onshore game, and by racing to implement pan European financial services establishment directives, became one of the most dynamic of EU jurisdictions.

In all of this there have been many movers and shakers - at a political level Desmond and Haughey were prime movers (although John Bruton was actually the first to put IFSC legislation on the books in the early 1980s).

Albert Reynolds followed Haughey as a keen supporter of the IFSC's early development.

One of Bertie Ahern's first engagements with IFSC companies was as a constituency politician.

When he launched the 1994 edition of the Finance Dublin Yearbook, his particular focus was to persuade IFSC companies to locate in the Custom House Docks, as they were then obliged to do.

Bertie has adopted a national view on financial services. Speaking of the need to spread the industry, when launching his IFSC report Building on Success, he spoke of the need for the Regulator to stay keenly aware of the needs of the industry.

The level of economic growth and the health of the economy are central to the competitiveness of the IFSC, a point Brian Cowen made in a speech this month. The IFSC contributes hugely to the Exchequer, but the economy also contributes to the IFSC.

One example of how this works is that no bank can have a credit rating higher than its national domicile. This applies not just to the native banks but also to those in the IFSC and who issue debt out of there.

Ireland attaining triple AAA ratings on foot of the economic turnaround of the early Nineties was a key underpinning for locating a critical mass group of HQ and branch banks in the IFSC.

This high-level support for the IFSC continued, though Charlie McCreevy, as Minister for Finance, adopted a less statist approach, pursuing a competitive markets agenda, which bolstered the success of the IFSC.

This helped particularly in an era when the march of regulation in most of the IFSC's global markets has continued relentlessly.

Today, as the EU Commissioner for the Internal Market, and hence as the EU's supremo for financial services, McCreevy is IFSC's most influential asset.

He was voted best ever Minister for Finance in a poll by Finance Magazine in 2004 - but his decision to abolish the ceiling on employer PRSI contributions was deeply unpopular in the IFSC, being seen as a tax on high-quality, and high-paid employment.

A similar move was seen in this year's Budget (equally to the dismay of the IFSC) with the abolition of the remittance basis of tax.

In casting a paternal eye westwards he is abetted by two MEPs who sit on the Economic and Monetary Affairs Committee of the EU parliament (responsible for drafting and examining financial services legislation at an EU level), Eoin Ryan and Gay Mitchell.

Other politicians have made key contributions, notably Michael McDowell, who, as A-G put a lot of effort into developing state-of-the-art law, such as the Covered Bond legislation, and Mary Harney in her time in the Department of Enterprise and Employment.

Ruairi Quinn has been Labour's main player to date - with his New Labour-style comment as Minister for Finance: "I'm for the IFSC - after all I'm on 10 per cent."

The IFSC has been blessed by the work of skilled public servants, such as Frank Mullen of the Revenue Commissioners, who delivered key agreements at times when the status of IFSC tax schemes have been threatened. He has also overseen the establishment of a tax treaty network that now covers over 40 countries.

Other key players were Maurice O'Connell (when the Central Bank was in charge of financial services regulation) and Dermot Quigley in the Revenue Commissioners.

The mantle of financial regulation has now passed to the Financial Regulator, where Pat Neary is probably the most powerful individual as far as IFSC firms are concerned.

The Financial Regulator recently set up a board to mediate between it and the industry, and James Deeny, formerly chief executive of HSBC Ireland, holds the hot seat.

The early vigilance to keep a clean corporate image was down to Felix Larkin in the Department of Finance, Frank Mullen, and, in the Nineties, Brendan Logue of the IDA, who, was part of a campaign to wipe out a mushrooming of Irish offshore shell companies in the late 1990s.

Nowadays, influence in the IFSC operates at micro levels - where, much of the work of the centre involves the development of complex tax and regulatory arrangements, in structured finance and funds for example.

In this the major lawyers and accountants have been key players - with names like Pat Wall, Mary Fulton, Marie O'Connor, PJ Henehan, Cormac Murphy, Paul Reck, KPMG's Paul McGowan, Brian Daly, and a little known back-office player - Frank Carr - one of the geniuses of Irish tax over the years of the IFSC.

Among the lawyers, bright young Turks have come to the fore - such as Turlough Galvin, and Michael Jackson in MOPs, while long standing pillars of the IFSC include Paul Dobbyn, David Dillon of Dillon Eustace, Ronan Moloney, Kevin Murphy of Arthur Cox, Ambrose Loughlin, and John Larkin in William Fry.

The lawyers have been central, and they will be pivotal to the success of the IFSC in the years to come. Alongside their growth has also been been the Irish Stock Exchange - which, had it been anywhere else, might have shriveled up and died. Dublin would have gone the way of its Belfast and Cork counterparts, were it not for the vision of people like Maire O'Connor, who was instrumental in the development of Ireland as a funds listing centre in the early Nineties, and Tom Healy of the Exchange, who has overseen the emergence of the Exchange as Europe's largest listing centre for funds and asset backed securities (ABS), and for new hybrids of ABS that are constantly being developed.

Alongside the lawyers and accountants, many of whom contribute to legislation in response to submissions from the industry, are the formal representative bodies.

Because of its position as part of Ireland's Social Partnership structure, IBEC's body, Financial Services Ireland, has a special position at the right hand of Government - its chief executive Aileen O'Donoghue sitting on the Taoiseach's Clearing House Group (chaired by the Secretary of the Government, Dermot McCarthy), a body that discusses IFSC matterson a regular basis.

Another position at the right hand of the Government is occupied by Pat Farrell of the Irish Bankers Federation, whose position derives not perhaps from the fact that he represents banks - but also because he is former general secretary of Fianna Fail.

The hard working representatives of the two other key sectoral pillars of the IFSC are funds representative by Gary Palmer, and insurance rep Sarah Goddard.

Overseeing all sectors of the IFSC is Deirdre Lyons of the IDA.

According to the Finance Dublin IFSC Yearbook, in December 2005 there were 453 international financial services companies - employing a total of 19,095 people, up by 1,485 or 8.4 per cent on the previous year.

These are the real players who make the IFSC a reality.

William Slattery has managed to combine being head of the biggest IFSC employer, State Street, with the time for passionate advocacy of the causes of IFSC development, and for its contribution to the Irish economy.

Slattery has been a thoughtful forthright critic of the Government IFSC policy from his time as a regulator himself, and as head of FSI. When in the Central Bank, he created the foundation of the modern IFSC funds industry in the early Nineties through his progressive and far-seeing technical excellence.

Other movers and shakers are Aidan Brady, chief executive of Citigroup, Mike Ryan, of Merrill Lynch Capital Markets Bank, Giovanni Lombardo of Pioneer, Gerhard Bruckermann, of Depfa, Henning Ludolphs of Hannover, Rick Hodgdon of Transamerica, Frank Monks of Nexgen, Rachel Panagiodis of Hansard, Michael Brady of XL, and John Gilsenan of Porsche, straddling both treasury and insurance.

The life assurance sector too has been notable for the contribution of Colm Fagan, chairman of the society of actuaries, and whose entrepreneurial venturing has leveraged a whole sector of Italian life insurance companies into the IFSC.

The two big banks have always been pivotal in their involvement in the IFSC - AIB initially represented by Michael Buckley, and in most recent years by Colm Doherty, and in Bank of Ireland Padraig Rushe.

The funds industry is actually the most prolific sector in employment terms - rapid employment growth being experienced by the new firms like Joan Kehoe, Quintillion, and her former employer PFPC, Harley Murphy's Mellon, Gerry Brady, Capita, formerly Bank of Bermuda, Ronan Daly's BISYS, and Dermor Butler of CHAM.

The IFSC is a growing empire, at whose head sits the Taoiseach.

He recently said he was keen that it should remain a special responsibility of the department.

Back in 1987 finance was not a national industry but in 2006, with well over 100,000 people employed in it, and at least an additional 100,000 likely to be employed in it in the next 10 years, it is on the way to becoming an industry whose vital interests will need to remain close to the heart of future Governments.

It too will remain vitally important to the overall health of the economy, particularly because it is capable of virtually infinite expansion, because its markets are global, rather than just national - important at a time when the Central Bank, for example, is beginning to fret about the size of the country's balance of payments deficit - a cloud that has not haunted the Irish economy since the bad old days of the early Eighties.

Ken O'Brien is the publisher of 'Finance Magazine' and 'Finance Dublin', the monthly newsletter about the IFSC, and the newly launched jobs website

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