Competitiveness must be priority

Comment: From the simple things, such as paying bills, to the longer term items, such as buying your own home, the Irish financial sector plays a key part in the everyday life of every citizen.

Everyone, therefore, should take a keen interest in the annual report of the Irish Financial Services Regulatory Authority published yesterday. This document profiles the work of the financial regulator in 2005 and provides the signpost to the direction in which regulation for this important sector is evolving.

The regulator has a difficult job, with multiple mandates and multiple stakeholders, including consumers, regulated firms, Government, the Oireachtas and media.

There is no shortage of opinion on what the regulator should be doing, but in reality much of the comment relates to three priorities: soundness of the financial system, consumer protection and competitiveness.

Realising these priorities is, however, a challenge and the regulator has some distance to go in achieving this goal - particularly in relation to competitiveness.

Understandably, given recent history in the retail financial sector, the regulator prioritised the consumer protection agenda. In the long term, it is in the interests of all market participants to have better informed consumers.

Well-informed consumers underpin a healthy dynamic that supports competition and drives innovation in new products and services. The regulator has been, correctly, at the forefront in developing public awareness of financial products and services.

However, the regulator has been much more circumspect on the role it should play in supporting the competitiveness of the financial sector in Ireland.

It is far from clear whether this reluctance is driven by ambivalence, a concern about how this role will be perceived elsewhere, or something else. This reluctance is curious given that competition and competitiveness are two sides of the same coin - each contributes to a better functioning market.

Whatever the reason for this reluctance, there needs to be a change. For a country of its size, Ireland is fortunate to have a diverse financial sector. This diversity has delivered enormous benefits in terms of employment and tax contribution. It is in all of our interests to support and nurture this sector, not through protectionism, as some other jurisdictions seek to do, but through fostering competition and competitiveness.

Supporting the competitiveness of the financial sector in Ireland should be an inherent aspect of the regulator's work. The best guarantee of a strong financial system and consumer welfare comes with a market attuned to international best practice and one which is competitive and commercially successful. To build such a market, it is vital that we have a regulatory environment which does not put us at competitive disadvantage to our European and international rivals.

This is a sophisticated approach and is not easily communicated through populist headlines or phone-in radio talkshows. However, it is crucial that we break away from the redundant consumer versus industry debate. Leadership is required to make this paradigm shift happen.

The regulator needs to demonstrate leadership in influencing the debate to reflect the realities of one of Europe's most diverse and competitive financial centres. It needs to become an enthusiastic supporter of the competitiveness agenda and to make it central to its strategic plan for 2007-2009.

The regulator should prioritise four key issues in its new plan.

First, 80 per cent of the firms regulated are SMEs. This imposes an obligation to demonstrate care and sensitivity in the introduction of new regulation. The regulator should adopt regulatory impact analysis in relation to its activities.

Such analysis is an important safeguard against unnecessary regulation. To be effective it must be integrated into the process of developing regulation, complement rather than replace consultation and set clear targets by which the success of regulations can be measured in the future. It is not a rubber stamp for decisions already made.

Second, and very importantly, the regulator must address its skills and expertise gap. The recently launched industry panel survey highlighted this issue as a concern amongst regulated entities - only 18 per cent agreed that the regulator staff have sufficient knowledge to understand the business of individual regulated firms.

Increasing the level of practical knowledge within the regulator of commercial issues would greatly enhance its effectiveness. Moreover, it is vitally important to Ireland's credibility as a financial centre that the regulator is at the cutting edge of understanding global marketplace developments.

For this reason, it should be a priority to open up middle and senior management positions to external appointment and secondment.

Third, the regulator needs to provide clarity on what is meant by having "principles-based" regulation. We need to know what the principles are. If the principles are not clear we will descend into a spider's web of very particular and difficult to navigate rules with a specific shelf-life. This would stifle innovation and competition.

Finally, it is essential that the regulator's budgetary processes deliver accountability. Greater efforts need to be made to identify and observe value for money benchmarks.

The regulator must, of course, continue its work on consumer issues but it must also deliver a new strategy that prioritises, in tandem, the soundness of the financial system, consumer protection and competitiveness.

Aileen O'Donoghue is director of Financial Services Ireland