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Saturday, 20th April 2024 |
| ‘Cluster effect’ is key to IFSC’s success |
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| The greatest competitive advantage of the IFSC is the skills and drive of the employees and management of individual service providers, and the professional accounting and legal firms which has created a competitive dynamic which will be a major determinant of our competitive position going forward says Willie Slattery. |
The IFSC was established, as I recall it, in the Finance Act of 1988 having been in the election manifesto of Fianna Fail, which had won the 1987 general election. The Government also decided that the Central Bank should supervise companies, which were approved to locate in the IFSC.
At the time the Central Bank was the statutory supervisory authority for banks but was not responsible for supervising any other type of financial institution. I was working as a senior policy analyst in the banking supervision department and was asked to look at how the bank should approach the supervision of IFSC companies and subsequently became responsible for the supervision of these firms. There was no time to formulate a fully articulated policy or legislative basis of a comprehensive supervisory regime for the financial sector as a whole. The first element of such a policy was not put in the place until the enactment of the Investment Intermediaries Act of 1995.
What was decided was that the statutory basis for the Central Bank’s supervision of the IFSC should be based on conditions imposed on the licence issued by the Department of Finance under the Finance Acts granting companies the right to avail of the 10 per cent tax rate applicable to IFSC companies. This was a decidedly shaky foundation on which to base a regulatory regime but it worked. It provided a basis on which decisions could be made about whether or not to admit companies to the IFSC based on a regulatory judgement through the Central Bank’s membership of the Certification Information Advisory Committee (CIAC) of the IFSC, and once admitted companies generally fully accepted the authority of the Central Bank as regards ongoing supervision.
One of the most remarkable successes of the IFSC has been the funds administration industry in which I work today. Before the coming into force of the UCITS regulations in 1989 Ireland had only a few unit trusts so there was no domestic base on which to build an industry.
What are the reasons for the success of our industry? The most important reason is that there was then, and still is, an enormous market demand for collective investment structures based on a flexible high quality regulatory environment, which evolves to meet market needs. The Central Bank’s regulatory regime was able to meet this need. At the time the IFSC was established, Luxembourg, which was the only jurisdiction in Europe filling this need, had gained a reputation for poor service caused by being unable to cope with its growth. The Irish environment across all elements was more user friendly. Another important factor in my view was the empathy with Ireland, which some senior people in some of the first companies to make a decision to locate here had. Bill Dooley of AIG, Mary Maguire of Chase and Peter Walsh of Barings are some of the people who come to mind in this regard. These initial pioneers were very important reference points for other institutions. Finally, the greatest competitive advantage was the skills and drive of the employees and management of individual service providers, and the professional accounting and legal firms. This created a competitive dynamic and cluster effect in Ireland which taken together is probably not present in our industry in any other jurisdiction including the onshore jurisdictions.
This competitive dynamic will, in my view, be a major determinant of our competitive position going forward. The securities services industry, widely defined, is an enormous, high skill, industry and Ireland has an opportunity to become a specialist centre for this activity building off the existing skill base.
The cluster effect would be considerably enhanced should any of the big securities depositories decide to locate a subsidiary or discrete piece of business here. Companies like Euroclear, Clearstream, Crest, SWIFT or software businesses, which support the industry, would add significantly to the overall skill base. The IDA should be encouraged to increase the cluster effect through targeted marketing of these firms in the financial services area.
Since my return to Ireland in January to work again in this industry, I have been struck by the growth in the hedge fund administration industry. This growth has arisen because specialist hedge fund service providers have decided to service much of their offshore business from Ireland due to the existing fund administration skill base and the general attraction of Ireland as a location for foreign direct investment. The hedge fund industry has not been without critics because of its unregulated and opaque nature and some high profile scandals. However, what cannot be denied is the rapid growth of the industry as it has increasingly attracted assets from traditional investors. The focus of the industry on absolute returns and its risk diversification characteristics are clearly attractive at a time when major equity indices are off 30 per cent from their peaks. The emergence of Ireland as a location for hedge fund administration is, in my view, a major boost for the whole fund administration industry, not only because it is a growth sector but because much of the innovation in fund management is being led by hedge funds. The administration challenges presented by this sector enhance the skills and systems of each provider and the Irish industry as a whole.
It is also noteworthy that Ireland has become a major location for hedge fund administration despite the fact that only a small proportion of offshore hedge funds are domiciled here. As the industry matures I believe that this gives us a tremendous opportunity to be the onshore domicile of choice for hedge funds. Such a development would underpin the attraction of Ireland as an administration centre as it faces significant competitive issues particularly the emergence of the US as an administration location following the repeal of the 10 commandments. This will only happen however if the Central Bank works closely with the industry to establish conditions which will attract hedge funds to domicile in Ireland, while retaining a high standard of regulation. As always this is a fine balance but I believe the Central Bank’s current approach must evolve in a number of aspects in order to achieve that objective.
There will be other challenges and opportunities, which will emerge in the future. Costs are growing in Ireland much more rapidly than competitor jurisdictions and this will become an increasingly important issue going forward. The implementation of UCITS directives in a manner, which enhances the competitiveness of Ireland as a location, will also be a challenge as well as an opportunity.
Whatever emerges in the future, we must never forget the importance of continuing to foster those elements of our infrastructure which have led to our success to date:
• A competitive service environment based on a large number of freely competing providers brought about by an open attitude to competition and new entrants.
• A strong but flexible regulatory environment.
• The support of the IDA and other government authorities, particularly as regards the facilitation of the up to date legislative environment, which is so important for our particular industry.
If we get our competitive package right, the growth in our industry will continue to surprise even those of us who are closest to it. |
Willie Slattery is chief executive of Deutsche International (Ireland) Limited.
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| Article appeared in the June 2002 issue.
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