Call on fund industry to facilitate overhaul

THE COUNTRY must overhaul the funds industry regime in Ireland to protect more than 1.3 million investors ahead of significant changes, the Central Bank’s deputy governor Matthew Elderfield has said.

Mr Elderfield said the changes were going to be driven from Europe and that the Central Bank’s strategy was “to get in early, trying to influence European developments while they are still at a formative stage”.

Speaking to an Irish Funds Industry Association conference, Mr Elderfield said the need for engaging with EU authorities was “immediate and pressing”.

Ireland will have a “big responsibility” to deal with complicated issues such as banking union, the resolution of banks and changes in the funds industry when it holds the EU presidency in the first half of next year, he said.

Taoiseach Enda Kenny told the conference that the Government was “acutely aware” that regulatory changes in Europe would pose challenges to the funds industry but that it would work closely with it to ensure Ireland was best represented in negotiations on the changes in Europe.

Mr Elderfield said that while protecting investors in funds was important for the reputation of the IFSC, international regulators were concerned about the risk posed by money market funds in particular, which are part of so-called shadow banking sectors.

Investor runs on these funds, which hold short-term debt to give their owners access to liquidity, disrupted the flow of funds to the real economy and required “dramatic interventions by public financial authorities”, said Mr Elderfield.

“The Central Bank believes that regulatory reform should focus on the need to reduce the probability of investor runs, to curb implicit support from sponsors and to reduce the need for support from the taxpayer,” he said.

Substantial reform of money market funds can be achieved through measures such as “capital buffers, dilution levies for exiting investors and tighter liquidity measures”, Mr Elderfield said.

He told members of the funds industry to “engage in the debate and be prepared to adapt”.

The implementation of a new directive governing hedge funds and private equity funds was an opportunity to rethink the regulation of “non-Ucits” funds.

The Irish regulator will “carefully re-examine the case for domestic standards which exceed EU requirements in terms of establishing that they are in the public interest”, said Mr Elderfield.

“We are prepared to retain additional domestic standards if we believe the public-interest case is met.”

He said applications to the regulator for the authorisation of funds can be “uneven and incomplete”, while “highly inventive and over-exuberant lawyers” can test the boundaries of “an acceptable interpretation of European law”.

Funds may be different from other financial services sectors but it is still “vitally important” to get regulation right to protect investors with €1.2 trillion worth of funds being managed in Ireland in an industry employing 12,000.

“This will improve the regulation of Ireland as an international financial services sector,” Mr Elderfield added.