Regulation levy used to prop up Central Bank pension plan

Financial regulation is an expensive business. Just ask the banks, insurance companies and investment funds that were told in August by the Central Bank of Ireland that their levy for 2015 would be about 40 per cent higher than last year.

This is not to fund the cost of hiring an army of specialist supervisory staff charged with keeping the hundreds of regulated entities in check to ensure that the mistakes of the recent past are not repeated. Instead, the extra money is required to help fund the gold-plated defined benefit pension scheme enjoyed by its 1,364 staff.

This scheme, which is still open to new entrants, went from a surplus of €51 million in 2010 to a deficit of €286 million by the end of last year.

At present, the cost of regulation is paid for 50-50 by the industry and the State, through the Central Bank.

Foot bill

Patrick Honohan

, the soon-to-retire governor, wants the industry to foot the entire bill and a consultation process is currently in train on the matter. In the meantime, the industry and the State will have to pick up the bill for this year in equal measure.

There are two obvious consequences of the increase in the levy. This is a cost of business and any rise in the levy will inevitably be passed on to customers by banks, insurers and investment funds. It could even put some small operators out of business.

In 2014, the insurance sector paid €14.7 million for 283 insurance groups, some 57 banks paid €16.6 million, 373 securities and investment firms handed over €9.1 million, while 1,207 investment funds paid €3 million.

This amounted to €43.4 million. Apply a 40 per cent increase and the figure rises to €60.86 million.

That’s an increase for the industry of €17 million. We can only assume that the State will face a similar bill given the levy is paid on a 50-50 basis.

In a statement, the Central Bank told this columnist the cost of regulation had grown over recent years, particularly due to its increased regulatory mandate. Employee costs are the most significant component, it added.

“Staff costs include the pension provision costs and those pension costs have increased in the 2015 budget,” the Central Bank said.

Pension scheme

“The costs of the bank’s pension scheme are accounted for in accordance with the prevailing Financial Reporting Standards (FRS17), which leads to higher provision charges in the current low bond yield environment.”

The industry response, which has been flagged to governor Honohan, is that some of the €1.7 billion in profit that the Central Bank paid to the exchequer in 2014 should have been applied to dealing with pension issues rather than stiffing the industry with the bill.

The industry bodies have argued that the volatility of the pension scheme has nothing to do with the cost of regulation. It is simply an obligation of the Central Bank as an employer.

In addition, the liabilities predate and extend beyond the 12-month period in question and the industry groups are rightly asking for details of measures taken by the Central Bank to mitigate these costs.

The irony is that most of the entities regulated by the Central Bank have themselves axed their defined benefit pension schemes on cost grounds. AIB and Permanent TSB both scrapped their schemes in the aftermath of the 2008 crash.

Another potential side effect of an increase in the levy is that it might deter some investors from locating in the IFSC or expanding their operations here.

Fierce competition

Growing employment in the international fintech sector is a key plank in the Government’s jobs strategy and Dublin faces fierce competition from other financial hubs for this investment.

Minister of State Simon Harris has responsibility for the IFSC and this issue was raised with him yesterday by the Banking & Payments Federation Ireland as part of a "courtesy meeting" following the opening of its new office in Frankfurt.

A spokesman for Harris said he had “noted” the BPFI’s concerns and would feed them into the wider consultation in the department of finance on the future funding of the levy.

It would be something of an own goal if we missed out on investment and jobs due as a result of costs associated with propping up the regulator’s generous pension scheme.

Twitter: @CiaranHancock1