| Outlook good for the funds industry in Ireland |
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| Paul McGowan identifies trends in the funds sector that suggest it will maintain its attractiveness for employment opportunites. |
The funds industry in Dublin has enjoyed exponential growth now for over a decade. Dublin is fortunate in that it commenced development of the industry at a time of unprecedented global growth in the stock markets and in the mutual funds industry. Following the recent downturn in the US economy and its knock on effects on international business, as seen in the slowdown of the IT sector in Ireland, the economic environment is now much tougher and questions may now be asked as to where next for Dublin.
As with any other industry, the funds industry is exposed to the international market and the downturn internationally has hit ‘long only’ funds heavily in 2001 with significant falls in the net asset values under administration. The fee income of many IFSC service providers has been hit at the same time as the underlying cost level in financial services in Ireland, and Dublin in particular, has been rising at between 15 p.c. and 20 p.c. per annum.
However, unlike many other industries the funds industry is one that is highly adaptable. Demographic information indicates the core underlying requirement for savings products in Europe is one that is only going to increase and accordingly there is, and continues to be, opportunities for growth and development for such products. The poor performance in 2001 of long funds has acted as an impetus to hedge fund promoters with a large number of new promoters now coming to Dublin for the first time. The hedge fund market had been seen as a high risk option for investors and thus was not widely distributed in Europe, particularly at an institutional level. That perception now appears largely to be changed with many of the larger promoters looking at launching hedge funds as part of their product suite. The advent of a Central Bank notice governing hedge funds puts Ireland in a unique position of being able to offer the only regulated hedge fund product in the market at this time, which may be important in distributing the product through Europe, given the historic perception of hedge funds.
Similarly, the changing rules in the pension market may create opportunities for fund service providers to commence providing services to new clients and to further diversify their product ranges. The current downturn in the global economy shows clearly that service providers need to have more than one product range to ensure that downturns in specific sectors do not adversely affect business in a significant way.
While the funds industry internationally should prove to be robust, the issue for Dublin is to ensure that we continue to grow our share of that market. There are three issues here that will impact critically upon this; (a) the overall cost base, (b) the effectiveness of the IT platform with its knock-on effects on customer service and (c) the efficiency of the regulatory regime.
Paradoxically the slowdown in the Irish economy may prove to be a boom to financial services companies as the turnover in staff with the corresponding ratcheting up of labour costs that was a feature of life for the last number of years should hopefully slow down as job security becomes more important than short term increases in remuneration. This in itself will lead to efficiencies and cost reductions in companies as the experience level increases and continuity improves. However, given the higher costs of business in Dublin versus the rest of the country the trend among the larger providers to relocate parts of the back office services to other parts of the country is likely to continue in particular as corporation tax rates converge to 12.5 per cent.
The IT platforms used in the funds business will need to continue to be developed as straight through processing and web based services become more of a base requirement than an additional add on. More effective use of IT should drive costs out of the industry while improving the quality of service provided. The quality of service is likely to prove to be a major competitive factor in Dublin’s fight for new business. This may be particularly important in the hedge fund area as domiciles such as the Cayman become more acceptable internationally. Thus while the administration of such funds can still be carried out in Dublin, the risk of the provision of services being transferred to another jurisdiction is much greater.
The area that is critically important is the efficiency of the regulator, particularly as we move into the new regulatory regime. For Dublin to be competitive, the regulator must be able to deal with prospectuses for the launch of new funds in a timely and productive manner. Undue delays in the process does result in promoters going to other jurisdictions. Given the ongoing growth in the industry, the volumes now require new ways of thinking in dealing with the level of paperwork required for regulatory review. Fortunately we do have a regulator who appears to understand the issues and has engaged with the industry in seeking solutions.
Another potential issue for Ireland is the probable issuing of UCITS II by the EU Parliament later this year. This particular document raises more questions than it answers and is unlikely to be very helpful in the promotion of the single market and could in theory result in further disputes with some European jurisdictions in relation to the launching of Irish domiciled funds. This unfortunately is an area that will have to be watched to see how it develops.
I think we are likely to see some further consolidation in the business in the coming couple of years as financial service organisations worldwide continue to merge and as existing players look at their suite of products and trim those that are least profitable. Similarly the changing face of the markets and the increase in costs will put continuing pressure on firms to stay competitive.
Overall I believe the outlook for the funds business in Ireland is a positive one with good opportunities for innovative companies to continue to grow and develop their business. Despite the downturn in general in the world’s economy, the funds industry should still be a good place to be. |
Paul McGowan is a taxation partner with KPMG and former chairman of DFIA.
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| Article appeared in the September 2001 issue.
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