A too powerful voice ?

 

THE IMPORTANCE of the International Financial Services Centre (IFSC) to the economy is indisputable. Over a period of 25 years, it has become one of the leading hedge fund service centres in Europe, and many of the world’s most important financial institutions have a presence there. They employ an estimated 33,000 people; pay about €1 billion in corporate taxes each year, with a further €1 billion going to the exchequer in payroll taxes. Small wonder that the sector has a powerful voice at Government.

The Clearing House Group, composed of representatives of the financial services sector, along with top officials from government departments and agencies and the Central Bank, was given that task. But it has been so dominant in articulating the demands of the industry, to the detriment of most other considerations, that the Government is reviewing the nature of its involvement. The role of the group was contained in a five-year strategy plan, published last year, designed to grow the financial sector and create an additional 100,000 jobs. In return for such unprecedented access, the sector was to become a key driver of the economy.

A decline in Ireland’s sovereignty rating, along with reputational damage caused by domestic banks, inhibited the anticipated growth in employment. So have international developments. In spite of that, representations from the Clearing House Group have guided Government policy on such issues as an EU proposal for a financial transaction tax and a charge on derivatives trading. In addition, 21 changes were made in the last Finance Act to provide a variety of incentives for individuals working in the sector.

Such influence raises important questions. Certain companies were attracted to the IFSC at a time of “light touch” regulation. Their behaviour during the Celtic Tiger years damaged its reputation and this State. Since 2010, the Central Bank has established a more assertive regulatory regime, backed up by a credible threat of enforcement. But resistance to reform continues and the Clearing House Group is allowed to “review and monitor the cumulative effects of regulations and their broader impact”. In such situations, there is a tendency by any industry to engage in bullying, with warnings of job losses and closures if regulation or supervision becomes too intrusive.

Around the world, but particularly in the US and in Europe, pressure is growing to control the activities of banks and financial institutions. The EU Commission has proposed centralised supervision of the banking system in response to the euro crisis, with mixed results. Competition with the City of London – which opposes a financial transaction tax and tighter regulation – has helped shape attitudes here. There are longer-term considerations, as the five-year plan emphasises: “Ireland’s future is as a member of the EU and the euro . . . its reputation as a responsible off-shore tax jurisdiction is essential for success.” Paying attention to representations from the IFSC is acceptable. But policy formation is a matter for Government.

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