Opinion/James Grennan: Now that the Central Bank and Financial Services Authority of Ireland Act 2003 has been brought into operation, Ireland stands on the threshold of an important new departure in financial services regulation.
The establishment of the Irish Financial Services Regulatory Authority (IFSRA) is a welcome development. In the modern world, the distinctions between many banking, insurance and investment products have become blurred and consolidation in the financial services industry has meant that services groups frequently contain banks, insurers and investment business firms. For example the three major banking groups in Ireland are all financial conglomerates incorporating firms involved in banking, insurance, asset management and the like.
It makes little sense for financial services activities within a group to be regulated by separate regulators when a failure of one of these operations within a group could have serious implications for the group as a whole.
Financial conglomerates can best be supervised by a single regulator capable of supervising the group as a whole. This is now recognised internationally with single financial regulators in Britain, Germany, the Netherlands, Austria and in other financial centres such as Singapore. Switzerland tabled plans to set up a single regulator in February and France is also considering this option.
IFSRA echoes an international trend towards a more holistic approach to financial services regulation. Since announcing the financial services regulator, the Government, and both the chairman and chief executive of IFSRA have put considerable emphasis on protecting the consumer. Two forms of consumer protection are addressed by the IFSRA legislation.
The first is prudential regulation designed to ensure the solvency of financial services organisations.
The creation of IFSRA will not change the fundamental basis of regulation of the different types of financial services operations. Their regulation is governed by EU directives that cannot be amended unilaterally by Ireland.
However, it will mean that the single regulator will have responsibility for supervising most financial services operations in Ireland. This should significantly reduce the chances of systemic failure and improve the regulation of financial services groups.
The IFSRA legislation also establishes an appeals tribunal which should reduce the cost IFSRA would otherwise face of regulated bodies appealing its decisions to the courts. This will help to streamline prudential regulation.
The second form of consumer protection is safeguarding the interests of the consumer buying financial products. Experience in Britain shows the regulator can play an important role in acting as a watchdog for the consumer.
The structures created by the IFSRA legislation are an important and welcome step forward in the regulation of the financial services sector. However, equally important as the structure is the way in which regulation will be conducted by IFSRA.
The financial services sector has made a significant contribution to the development of the Irish economy in the last decade. This is particularly so in the case of the internationally traded services sector, most significantly, companies operating under the umbrella of the IFSC.
One of the features that has made Ireland an attractive location for financial services providers has been strict but pragmatic and responsible regulation. It is essential that this continue.
The starting point is that the new regulator must maintain excellent standards of regulation.
Pragmatic regulation is only possible if IFSRA's staff are thoroughly trained and well versed in the letter and spirit of the governing legislation and in the principles underlying regulation.
In this context, the provision in the IFSRA legislation allowing IFSRA to impose levies on the industry makes sense. It is important, however, that any levies imposed are proportionate, do not put undue strain on the financial services sector and do not damage Ireland's competitiveness in attracting financial services industries and producing cost-effective financial products.
At the same time, to encourage the continued development of Ireland as a financial services centre, IFSRA must avoid becoming an inward looking regulator engaged in regulation for the sake of regulation.
It has been a mark of the experience, expertise and confidence of the various financial services regulators to date that they have been flexible and responsive to the needs of a fast changing financial services industry.
While maintaining strict regulation, they have been accessible to the regulated firms, willing to accommodate concerns and to apply regulation in a pragmatic fashion. This willingness of regulators to work with the financial services industry to reach mutually acceptable solutions to regulatory problems is one of the important intangible factors that has allowed Ireland to develop a sophisticated and competitive financial services industry supporting significant numbers of well paid jobs.
While commentators have differed on the detail of the structures of IFSRA, the creation of a single regulator is a sensible development and can only improve the supervision of the financial services industry. What cannot be provided for in legislation or structures, however, is the manner in which IFSRA will regulate the sector.
That rests with its board and executives and will determine the development of this important sector of the economy in the years to come.
James Grennan is a partner in the commercial department of A & L Goodbody, head of the insurance law unit, and one of the partners on the legal team that advised the Department of Finance on the drafting of heads of the IFSRA Bill
