Banking crash makes State cautious in post-Brexit carve-up

Central Bank less willing to look for loopholes to attract financial firms to Dublin

The Lloyd’s building in London. The world’s specialist insurance market, has decided to plump for either Luxembourg or Brussels and not Dublin for its EU hub after Brexit. Photograph: Neil Hall/Reuters

The Lloyd’s building in London. The world’s specialist insurance market, has decided to plump for either Luxembourg or Brussels and not Dublin for its EU hub after Brexit. Photograph: Neil Hall/Reuters

 

The words regulatory arbitrage are enough to make most people’s eyes glaze over. But it has become a hugely important issue for Ireland in the context of attracting financial firms to Ireland from London post Brexit.

Reports on Tuesday suggested that Lloyd’s of London, the world’s specialist insurance market, had decided to plump for either Luxembourg or Brussels and not Dublin for its EU hub after Brexit.

According to Reuters, Brussels and Luxembourg showed more flexibility on capital, allowing Lloyd’s to use reinsurance to transfer a larger amount of capital needed for an EU subsidiary back to its London headquarters.

It was a similar story recently when American insurer AIG’s chose Luxembourg ahead of Dublin for the relocation of its EU headquarters.

This decision was extremely disappointing given that AIG has a well-established operation and brand in Ireland. It might have been considered low-hanging fruit by the Irish authorities.

Insurance Ireland issued a statement following the Lloyd’s reports saying that lessons needed to be learned from these decisions.

“To capitalise on Ireland’s advantages, and to maintain the strong growth trajectory of the sector here, Insurance Ireland is calling for a review process to inform Government and industry efforts to secure future opportunities,” its chief executive Kevin Thompson said.

Insurance Ireland has sought a meeting with the Government to scope out how “further collaboration” might convert expressions of interest into investment decisions.

Thompson told me that he wasn’t aware of any insurers planning to relocate here. “I have no visibility on what companies are coming here,” he said. “The only one I know of is Aviva [which is moving from being a branch of its UK parent to a subsidiary] and that is in the public domain.”

Ebb and flow

In the wake of AIG’s decision, Eoghan Murphy, the Minister for Financial Services, told me that there would be an ebb and flow to these decisions, and, without naming names, signalled that a couple of big financial players would move operations here.

Earlier this month, Murphy lodged his concerns with the European Commission about the conduct of other jurisdictions in the race to lure post-Brexit business away from London. He told the Commission that rivals were engaging in regulatory arbitrage.

“We are hearing from various sources that companies are being offered certain incentives, that they are offering a back door to the single market, without the requirement to have capital to back up their entities in the European Union, ” Murphy told Reuters.

Luxembourg accused Ireland of being sore losers. And there will be little sympathy in other EU capitals for our position given how we have used tax incentives in the past to win foreign direct investments from the United States.

Last week Danièle Nouy, who is chair of the Single Supervisory Mechanism’s supervisory board, told Irish MEP Brian Hayes that there were loopholes in the current rules that allowed national regulators to make certain offers to financial firms as they seek to win jobs for their own countries.

So Luxembourg isn’t doing anything illegal. It’s simply maximising the rules for its own advantage.

On Tuesday, Philip Lane, the Central Bank of Ireland’s governor, made it clear that Ireland would not be going down that route.

In a speech to the Barclays European Financial Capital Summit, he said it was important that a “stringent approach” to prudential supervision was required to deal with the fallout from Brexit.

Strategies

“As financial firms work out strategies to manage the implication of Brexit, it is important for the policy community to ensure that regulatory arbitrage does not play a material role,” he said. “This applies in relation to locational choices and also in relation to options in terms of organisational structures.”

It’s a position echoed in public by the European Central Bank and the SSM, which regulates euro zone banks. They’ve made it clear that they don’t want brass-plate operations being set up post Brexit.

Late last year Reuters ran a story claiming that the Central Bank had signalled to several large investment banks that it would be reluctant to host large trading operations here in the wake of Brexit.

It quoted a source saying Ireland wanted insurers, asset managers and back office functions but not big balance sheet risk.

This is understandable in the context of the banking crash here from late 2008 onwards, which highlighted failures in our light-touch regulatory regime. But it also risks losing jobs and investment for Ireland.

Either way, with Central Bank operating independently of the executive, there’s not an awful lot the Government can do about it.

Twitter: @CiaranHancock1

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