Inside The World Of Business
Another coded admission of failure from Government
THE REMOVAL of the Central Bank’s statutory responsibility to promote the development of the financial services industry is another coded admission of failure by the Government. Such a role, in the words of the Department of Finance earlier this week, is “inconsistent with the enhanced regulatory focus” of the reconfigured Central Bank Commission.
In other words, in order to re-establish a sound financial system, we must put to bed once and for all the idea that we can pimp out the International Financial Services Centre (IFSC) to passing global financial institutions on the basis that our regulatory regime is light to the point of invisibility, while simultaneously maintaining to the domestic audience the idea that financial institutions are being properly and thoroughly monitored.
Whenever it was asked whether its much-feted principles-based regulation was potentially asking for trouble, the Financial Regulator would often cite the need to keep regulation appealing enough to attract large employers to the IFSC.
Once upon a time, this role was frequently and repeatedly stressed in public statements by the regulator. Take this extract from the first speech by former regulator Patrick Neary after he was appointed to the position, given to a Finance Dublin conference in March 2006: “A strong, credible and supportive regulatory regime is of paramount importance to the reputation of Ireland as a location of choice for financial service providers. I believe the growth and performance of the financial sector here and, in particular, the internationalisation of Irish financial services has been the major success story of the Irish economy over the last number of years.” It is clear now that the Government was blinded by this success, with the result that regulatory standards suffered. Neary may have used the word “strong”, but the key word was really “supportive”.
Tragically, while there were those who had misgivings about the regulator’s closeness to the industry, the fears mostly revolved around the idea that consumer protection would suffer, with customers fleeced by unspotted overcharging and the like. Instead, the banks took it upon themselves to engage in ruinous self-sabotage, which this week’s Central Bank Reform Bill kindly acknowledges.
A false sense of security?
One of the many imponderables thrown up by the events of last Tuesday is how it was possible for Anglo Irish Bank to so grossly underestimate the size of the discount that would be applied to the first batch of its loans being transferred into the National Asset Management Agency (Nama).
Given the common parent of both organisations – the Minister for Finance – it seems on the face of it implausible that Nama did not let Anglo know that the discount of around 28 per cent being publicly floated by chief executive Michael Aynsley was well wide of the mark.
The explanation – in so far as there is one – for what happened is that Nama had not completed its deliberations until Monday and thus was not in position to put Mr Aynsley and the Minister right on the issue any earlier.
But does this really stack up? It would imply that despite its months of work, Nama was as recently as a week ago thinking in terms of a 30 per cent discount on Anglo loans. Otherwise they would presumably have had a quiet word in the Government’s ear at that point. This implies that information came to light late in the process which forced a dramatic rethink – and the increase in the haircut from 30 per cent to 50 per cent. It seems unlikely.
One explanation is that Anglo was lulled into a false sense of security, given its State ownership, and interpreted Nama’s lack of back channel comment as confirmation that its estimate was in the ballpark. Instead, it found itself treated in exactly the same manner as all the other banks, who received no special guidance.
Bookies’ different view
The debate over how to extend betting tax to internet gambling rumbled into the Oireachtas arts, sport and tourism committee yesterday. The racehorse and greyhound industries want the 1 per cent turnover tax imposed on bets placed in bookies’ shops extended online, and the cash raised used to support their industries.
Bookmakers have a different view. The homegrown operators warn that their online operations will be driven offshore if they are taxed, as they are competing with players who are not taxed. However, both Paddy Power and Betfair indicated one possible way forward – licensing online operators. Both proposals were different, but the broad principle is the same: come up with an acceptable licensing system, and you will encourage investment, which will in turn generate revenue and jobs.
It does not take a radical leap of the imagination to realise that matching a transparent licensing system with low corporate taxes could make the Republic very attractive to global players in this market.
Also, these businesses are as much about technology as betting, and they carry out research and development (RD) into new games, betting products, software and risk-management systems. Our RD tax breaks should presumably be icing on the cake to them.
Ring-fencing the licence fees, and possibly some of the other taxes raised, and using the cash to support horse and dog racing and, if at all possible, other sports, could provide a way out of the current impasse, assuming that the Government is prepared to legislate for it.
But it had better move fast, as the UK is looking at a new licensing regime for the sector – presumably because two big players, Ladbrokes and William Hill, moved their internet operations offshore last year.
Today
The Credit Review Office, headed up by former National Irish Bank director John Trethowan, will be formally launched. The office will review decisions by the banks covered by the Government guarantee, to refuse, reduce or withdraw credit facilities to businesses.
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