More stringent enforcement could pay off

Target-specific enforcement and industry involvement in developing regulatory policy will maintain competitiveness and integrity of Irish financial market, writes Paul Ryan

The Irish financial services industry has been losing patience with the Irish Financial Services Regulatory Authority. The financial regulator is producing more and more regulation for the sector to absorb. However, it is mainly a channel for instructions handed down by the European Commission and the industry needs to have faith that the end result will benefit consumers and industry practitioners alike.

It is difficult to be all things to all people and the financial regulator has to perform a balancing act. Ensuring the integrity of the market on the one hand, and the competitiveness of industry on the other, is challenging.

Financial services regulation in Ireland has historically been principles-based rather than rules based. Traditionally this fostered the development of a symbiotic relationship between industry and its overseer, the financial regulator, regarding application of regulation.

An environment of constructive communication was developed with various cross-sectoral parties and provided for a certain amount of give and take.

The sands underpinning this flexible relationship have been shifting of late. The sheer weight of legislation emanating from Europe has caused the financial services industry, embodied by the International Financial Services Centre (IFSC), to creak under the strain of a sustained period of regulatory implementation. There is concern that the load may be inhibiting the ability of the Irish sector to remain competitive in an expanding global market place.

Given that regulatory policy is set by the commission, the financial regulator has, to a degree, had its hands tied with respect to the high rate of legislative change experienced over recent years.

The Financial Services Action Plan 2001-2005 (FSAP), designed to reduce barriers to an integrated financial market, resulted in the implementation of a number of major pieces of legislation. These have in turn increased the regulatory burden on financial service providers.

The high cost of compliance with the Market Abuse Directive; the European Taxation of Savings Directive; the International Accounting Standards; the UCITS III regime; and the Markets in Financial Instruments Directive, among others, is still being felt by industry.

The frustration within the industry at large is understandable, but there is no gain without pain, and the hope of the commission is that the regulatory framework being developed will in time result in an integrated financial services market.

Yet, even with the increased level of regulation experienced over the past five years, there have been claims as recently as last week that Ireland is viewed in some quarters as a "rogue market" or the "wild west of European finance"

David Dillon, senior partner at Dillon Eustace Solicitors and chairman of the IFSC investment funds working group (a sub-committee of the Taoiseach's Clearing House committee), has argued that Ireland is a well regulated regime. But he has also suggested that some regulatory initiatives can introduce blanket regulation and that this is inappropriate for certain activities.

A shift away from this blanket regulation toward even stronger and more target-specific enforcement procedures, to be aided by increased industry involvement in the development of regulatory policy, might produce more dividends. This is consistent with "impact analysis testing" now being championed in many quarters. In its White Paper, entitled Financial Services Policy 2005-2010, the commission would appear to be directly addressing this point.

The commission has indicated a no less ambitious agenda than that under the FSAP, designed to achieve the dynamic consolidation of financial services towards an "integrated, open, inclusive, competitive and economically efficient" financial marketplace.

The benefits to be achieved from an integrated financial market include: potential increases in capital inflows as the EU becomes more attractive for inward investment; greater competition generating lower prices with improved quality of services to end consumers; opportunities for companies to avail of economies of scale created by the internal market; and the potential for the public sector to avail of lower financing costs.

The commission has undertaken to aid the development and continuation of an open and integrated financial services market (in line with industry feedback on its original Green Paper), with the implementation of a more transparent consultation process for the development and implementation of new regulation.

Thus, an ex-ante impact assessment document will accompany all new commission proposals, while an ex-post evaluation of implemented measures will offer the opportunity for objective analysis of the efficacy of the regulatory regime.

In line with European policy, the financial regulator's Strategic Plan for 2006 provides that a complete review of its strategic direction to date will be carried out during 2006 to identify changes required for the coming years ahead.

The financial regulator has thus demonstrated its willingness to adapt to change in the face of a dynamic financial environment and its commitment to a greater level of consultation. This should be welcomed by the industry at large.

Development of a framework for effective cross-sectoral dialogue harks back to the early days of the IFSC, where communication was easier among a smaller number of participants.

In providing industry with the opportunity to help shape regulatory policy, both the commission and the financial regulator have provided Ireland with the tools to resolve regulatory issues intelligently and yet maintain a strong and effective regulatory regime, without fear of being deemed a loose jurisdiction.

Both the financial regulator and the industry have it within their respective spheres to ensure the integrity of the market place and the competitiveness of financial service providers.

Paul Ryan is a director in the Regulatory & Compliance Department of Dillon Eustace Solicitors.