Irish financial centre may reverse losses by becoming a hub for bad bank and insurers, writes FIONA REDDAN.

WITH GLOBAL financial markets in turmoil, the Irish Financial Services Centre (IFSC) is hurting. Last year, asset values plunged by 20 per cent, while fund listings on the Irish Stock Exchange are at a standstill. In the first quarter of this year, just 12 new funds were listed on the exchange, compared to 102 for the same period in 2007.

Having established itself as the world leader for hedge fund servicing, Irish-based servicers are also taking a blow as the global industry shrinks by one-third. The banking sector is also in turmoil, and in the year to April 2009, assets of international banks in Ireland fell by more than one-quarter.

Dublin has positioned itself as a major centre for securitisation, but the role of this financial technique in the subprime crisis has cast its future in doubt. Last year, global issuance slumped by 79 per cent.

Efforts to upskill the industry or to “move up the value chain” are also taking a hit, as a new training programme, Finuas, dedicated to the international financial services sector, has had its budget more than halved to just €1 million.

While Ireland’s low corporate tax rate still looks secure, its attractiveness as a financial centre has diminished because companies are not making profits: what good is a low-tax but high-cost location at a time like this?

Last year, profitability among IFSC companies was hit hard, falling by €1.2 billion on 2007, as funds companies were affected by a drop-off in fees due to falling fund values and the weak dollar.

This reduction in profitability has had a direct knock-on effect on the IFSC’s contribution to the economy. Despite low tax rates, the IFSC was a major contributor to the Government’s coffers. However, with profits down, corporate tax revenues have also fallen, dropping by almost 30 per cent from their peak of €1.2 billion in 2006, down to €0.85 billion in 2008. However, the IFSC’s contribution to the overall corporate tax take has remained steady, at about 17 per cent.

Even more damaging to its future health has been the degree to which its reputation has been called into question by problems at German banks Sachsen LB and Depfa Bank, and the regulatory approach – or the lack thereof – that the Financial Regulator has adopted to the sector. Coming on the back of reports that Ireland is the “wild west of European finance”, the latest attacks on the integrity of the IFSC may do more lasting damage.

Germany has never been a supporter of the IFSC, and while it continues to question regulatory oversight in Ireland, it is the UK which is emerging as its most vehement critic. Lord Oakeshott, a British treasury spokesman and managing director of investment management company OLIM, described Dublin as a “Liechtenstein on the Liffey”, claiming it “aggressively chases footloose financiers and less scrupulous British companies to move to Dublin to dodge tax”.

Such opinions might also hinder the development of future business areas. One possible opportunity for the IFSC lies in the area of so-called bad banks. Like the National Asset Management Agency (Nama), troubled banks around the world are looking to set up vehicles to hive off and manage impaired assets. Already, German bank WestLB has used Dublin to move €23 billion worth of problem loans and toxic assets off its balance sheet.

Pat Farrell, chief executive of the Irish Banking Federation, sees this as a very viable business opportunity for IFSC-based companies which have built up expertise in managing assets, and emphasises that the banks aren’t “bad”, they just have impaired assets. A key attraction of Ireland for locating these assets is that while they may be distressed at present, banks will look to hold them to maturity, at which point Ireland’s low corporate tax will come into play.

However, there are concerns about the reputational damage establishing Dublin as a global “bad bank” capital might have, particularly in Germany. Indeed, Kieran Donoghue, head of international financial services at the IDA, asserts that marketing Ireland as a location for such banks is not on the IDA’s agenda, and he would be concerned about the signal it might send out.

With Ireland’s regulatory robustness repeatedly called into question, there is also a fear that the Financial Regulator will respond by looking to overregulate the sector, as its principles-based approach to regulation comes increasingly under fire. Such an overreaching, onerous approach would have disastrous consequences for the IFSC says William Slattery, country head of State Street International. “If we are not open for business because of self-imposed restrictions and a lack of internal confidence, then we’ll be shut down and out of business in 10 years,” he remarks.

Another issue, which harks back to the early days of the IFSC, is selling Ireland as a location when its domestic economy is in trouble. Donoghue says that the IDA now has to spend the first 10 minutes of every meeting it holds with international investors giving an overview of the Government’s efforts to stabilise the economy.

Against this background, the industry is placing extra emphasis on protecting its reputation. Back in February, representatives from over 50 financial services companies, advisory firms and service providers gathered at a workshop in Dublin Castle to consider what happens next for the sector. One idea that gained traction at the meeting is to appoint an individual to promote the financial industry, a sort of commissioner for international financial services.

With Charlie McCreevy due to finish his term in Brussels as European commissioner for internal markets this month, Farrell thinks he could be a candidate for the job. “There is a group of people, such as Charlie McCreevy, Alan Dukes, Dick Spring and John Bruton, who are eminently suitable for this position, who have the requisite international stature,” he says.

Pointing to the example of London’s mayor, who champions the city’s financial services sector, Farrell says that the role of commissioner would be complementary to that of agencies such as the IDA and would promote the IFSC at home and abroad.

Discussions are taking place at a public-sector level with regards to the role, and if appointed, the commissioner may oversee an industry which has shrunk in size, but which still has potential.

Evidence that the IFSC is still pulling its weight is seen in the latest Global Financial Services Index, in which Dublin moved up the rankings of financial centres to join the top 10, alongside London and New York.

And there are signs of some green shoots. Already, the decrease in fund values has halted, with a decline of just 2 per cent reported for the first quarter of this year, while a recovery in hedge funds, which have lost one-third of their value, may be on the way.

One sector where companies are making decisions is insurance. While the use of Ireland as an attractive headquartering centre for tax reasons is perceived as a negative by many outside the industry, it is still bringing businesses to Ireland. Bermuda firm Arch, recently set up its European hub in Dublin, Arch Reinsurance Europe Underwriting, while Aviva Life Reinsurance has just been authorised by the Financial Regulator to set up a global life reinsurance business in Dublin.

Meanwhile, established players such as HSBC Reinsurance are expanding and, while the contribution from the IFSC to the economy in terms of corporation tax is likely to remain below its peak for some time, it has remained a steady contributor of exports. Something else in the IFSC’s favour is that it is rapidly regaining competitiveness, with falling labour and rental costs, which should make hiring and retaining staff much easier once the markets recover.

But the industry feels that the Government needs to adopt a more proactive and supportive approach. “At a time like this, you need to be bold and imaginative,” says Farrell, while Slattery criticises the swingeing taxes introduced in the last Budget, which he says, have “destroyed the incentive to work”.

“In one Budget, on one day, our competitiveness was massively adversely impacted,” he says.