OPINION:The media has stoked hysteria about an alleged lack of financial regulation in Ireland. In reality, Ireland is heavily regulated, writes DAVID DILLON
IN TIMES of stress, objective discourse is often in short supply. This is certainly the case when considering the reaction to the problems now being faced in the banking and financial services industry.
Public indignation has manifested itself in what can only be described as an assault by the media in Ireland, and to a certain extent internationally, on the Irish financial services industry and the state of regulation which applies to it.
Since the crisis began the press has indiscriminately denounced the financial sector.
The articles have been to a great extent characterised by prejudice and almost a sense of glee at the declaration of “open season” on a sector against which increasing resentment has been building for some time.
There was and is, predictably, no distinction made between any aspect or sector of the financial industry. The entire industry is systematically associated with every transgression.
However, the time has come to say enough is enough. The front cover of the mid-March edition of Business and Finance magazine carried a cartoon of a leprechaun with a pot of gold and the hackneyed caption “financial wild west” and references to tax haven and soft regulation.
In the heyday of British imperialism, the Punch caricatures of the Irish as gombeen men were arguably more objective.
This stoking up of mass hysteria is irresponsible and divisive. The financial press has a role to play in shaping the regulatory landscape for the next 20 years. The politicians are unable to make responsible and sensible decisions against the backdrop of the public baying for blood.
Articles in a number of publications endeavour to support a proposition in relation to regulation in Ireland as if banking, capital markets, fund administration, insurance, reinsurance, domestic and international were part of one indistinguishable collective. The articles indiscriminately refer to and associate scandals occurring within one sector with all other sectors, even though the applicable regulation might be entirely different.
The financial press has made its own contribution to the debacle which now engulfs us. The press was just as blind to the mistakes made and in many cases was critical of executives who were not achieving the returns of their peers.
Without any serious analysis, the media has come to the wrong consensus that Ireland is under-regulated and operates on a similar basis to the so-called tax havens. Anybody with any knowledge of global regulation knows this to be completely untrue.
Granted, in relation to the lending policies of the major banks, the Financial Regulator fell into exactly the same trap as all the major western regulators and in the euphoria of buoyant markets failed to spot the weaknesses of the models adopted by those banks.
The credit crunch has exposed the weaknesses in nearly every major market. These problems arose from a serious error in judgment and, perhaps, from a sense of complacency which comes with the comfort of safety in numbers. In other words the Irish economic model was based on fuelling a credit boom that mirrored most of our trading partners in Europe and the US.
However, it is simply wrong to depict Ireland as a lawless, unregulated, financial centre. The irony is that Ireland has led the way in the regulation of many international financial products.
In the US, which in certain areas is one of the least regulated countries in the world, regulation is sometimes adopted not on the basis of strategic policy but often due to a knee-jerk reaction.
Most people are probably depressed by the excesses of the bonus culture in the US but the introduction of an almost sectarian tax will certainly undermine the US as a financial jurisdiction. Arguably, a more sensible policy would be to assign a higher capital requirement and risk weighting to institutions whose remuneration policy is too heavily based upon a short-term bonus culture. The Sarbanes Oxley reforms as a regulatory piece of legislation were another reactionary act which arguably achieved very little. Most abuses will be caught by proper application of existing rules. The media represents Ireland as some kind of regulatory wasteland where market participants can do as they like with impunity. Here one needs to draw a distinction between the domestic industry and the international.
Let us be clear for once and for all, the international industry in Ireland is one of the most regulated in the world.
For example, hedge funds which conjure up for many images of demons and wizards are subject to detailed rules in relation to custody, administration and disclosure. The US Securities and Exchange Commission themselves will admit that in the US there is no regulation of hedge funds whatsoever.
The media in Ireland has been giving air time to sensationalist claims that hedge funds can be set up in 24 hours.
Such a statement shows a complete ignorance of the structures and regulation that are applicable in Ireland. The truth is that hedge funds in Ireland are subject to very prudent requirements. Only after all the requirements as set out in the regulator’s notices have been complied with and certified by service providers and lawyers, will the regulator authorise the fund.
In defence of the domestic industry including banking, Ireland diligently implements all EU directives and, therefore, the regulatory framework in Ireland is at least as good as elsewhere in the EU. If the regulator has been embarrassed by being over-trusting and complacent, remember nearly all other jurisdictions have their own issues and while they certainly could have done better, no matter how good your detection systems are, it is not easy to detect those determined to commit fraud.
If you look at the developments on tax havens as reported in the Financial Times over the last few weeks, where there is an objective analysis of tax havens, Ireland is nowhere mentioned because it embraces the highest standards.
Bank secrecy laws, which in themselves are important, are not in any way a barrier to prosecution of tax evasion as is the case for many other jurisdictions including Switzerland and Luxembourg.
However, the media would give you the impression that the Irish standards are beyond the pale. It took 20 years to build the reputation of the IFSC but the media is doing a good job of tearing it down in a matter of weeks. There is a global financial crisis raging and irresponsible comment to sell copy is just not good enough. The industry is entitled to expect that issues will be properly researched, including active engagement with those people who work in the industry.
It is noteworthy that the debate on both sides of the spectrum is divisive. This manifests itself in a number of ways, the first of which I have already mentioned, namely the media demonising everything that moves with no attempt to distinguish between different elements and aspects of the industry. In the Financial Times recently there was reference to the gloating of the German and French faction who say we told you so in relation to the English and US approach to free markets.
There is no doubt that a stable regulatory environment is essential to facilitate responsible growth of the industry, but to think that a newly created global regulator will invariably make the right choice in relation to the proper direction of the industry is a fallacy. For one thing policy would probably be determined by whichever faction gets the upper hand, which is potentially more dangerous than what we are experiencing now.
A final plea might be for some balance between the two arguments. There is a hard core within the industry who would welcome a consensus on effective and sensible regulation which screens out the incompetent and the ill-intentioned.
Historically regulatory policy in relation to banking and financial services is about as volatile as the markets themselves and is often determined by factionism.
Remember it is difficult to find anybody who does not have an agenda and when it comes to financial markets, protectionism, however disguised, is always lurking in the background.
David Dillon is senior partner at Dillon Eustace solicitors, Dublin. On June 15th, they will host a symposium on the state of financial regulation in Ireland at the Royal College of Physicians in Dublin between 9.30am and 11.30am. Panellists will include Fine Gael finance spokesman Richard Bruton, Dan O’Brien of the Economist Intelligence Unit, Andrew Bates and David Dillon of Dillon Eustace, Chris Hilditch of Schlute Roth and Zabel and William Slattery of State Street International. Admission is free; further details from Margaret.fished@dilloneustace.ie