The Government will soon decide whether to implement the recommendations of the Implementation Advisory Group (IAG) on the establishment of a Single Regulatory Authority (SRA) for the financial services sector.

The McDowell Report, published last May, recommended that the proposed new SRA should be established separately from the Central Bank of Ireland.

This is a radical recommendation that has important implications for the future of the financial services sector.

It is imperative that the Government makes the right decision on the new regulatory regime. The most important role of financial regulation is the maintenance of systemic stability - the stability of the overall financial system. It should also enhance institutional and market efficiency, ease the process of innovation, and protect the consumer. Any proposed changes to supervisory and regulatory structures should be given careful scrutiny. But the entire review process has been unsatisfactory, and the McDowell Report does not provide a basis for good policy decisions.

The Implementation Advisory Group's work has been compromised from the start. Its terms of reference were too narrow. Having already decided "in principle" that there would be a SRA, the Government precluded the committee from considering the merits of alternative models.

The review process was subject to unnecessary haste. The invitation for public submissions appeared in the press on November 9th, 1998. This allowed only a few weeks for preparation by the deadline of December 14th .

The process lacked transparency. Public discussion was stifled by rendering submissions to the IAG subject to the costs and delays associated with freedom of information (FOI) legislation.

The McDowell Report does not provide sufficient justification for the implementation of its recommendations. The report does not articulate the objectives of its proposed reforms, and it does not attempt to explain how its recommendations would improve on the current system. The report's rationale for establishing the SRA outside the Central Bank is weak. The main reason given is that the Bank's governor is insufficiently accountable to the Dail. Accountability is the flipside of independence. There is increasing recognition in Europe and around the world that decisions made by financial regulators should be independent of political influence. This issue is inadequately addressed in the report.

It makes scant reference to international practice. More seriously, it makes little reference to the growing need for European co-ordination of financial sector supervisory and regulatory activities.

Although the committee received 64 submissions, it did not refer directly to any of them. Nor did the report refer to a single piece of work on optimal financial regulation - a subject on which there is an extensive body of quality research.

Symptomatic of the weakness of the report is that its only reference to other work is in the section on accountability of regulators. Reference is made to a speech by Mr David Byrne (the former Attorney General), at UCD on November 12th, 1998. However, the report quotes very selectively from Mr Byrne's speech, which as well as referring to the need for accountability also championed the cause of the independent of regulators and recognised the EU trend in this direction.

The relationship between the executive and the regulatory agencies is much more complex than is implied by the McDowell Report.

Although the former Attorney General advises that the executive must exercise care in surrendering control, it must be remembered that our EU membership necessitates that the executive relinquish control in central banking in order to promote independence. It is ironic that while the conditions in place allowing for the removal of the Director of Telecommunications Regulation is very similar to those necessary for the removal of the Governor of the Central Bank, the latter has been deemed to constitute lack of accountability, but not the former. Is this consistent regulatory policy?

It is to be hoped that the ongoing process of regulatory reform will be conducted with more consideration for the complexities of the issues involved than has been the case the date, with greater transparency, and with more wide-ranging consultation.

Elaine Hutson is Lecturer in Finance and Colm Kearney is Professor of Finance at Dublin City University Business School