| Numerous opportunities exist for international sector to develop further says new report |
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| Last February the IDA appointed Deloitte to conduct a review of Ireland’s international financial services sector and to identify possible threats and opportunities for the sector going forward. Paul Reck summarises the final report, which was published in December, and which highlights five main opportunities for growth. |
OOver the last 15 years Ireland has been exceptionally successful in attracting international financial services companies to locate here. The list of international companies with operations here is a ‘who’s who’ of the international financial services sector – Citigroup, JP Morgan Chase, ABN AMRO, ING Group, MBNA, Merrill Lynch, State Street, Unicredito and AIG to name but a few.
These companies have been attracted to Ireland for a variety of reasons, including an attractive fiscal and regulatory environment; availability of highly skilled educated workforce; favourable relative cost structure; robust telecoms infrastructure; political stability; and by effective marketing.
Few would disagree that the global financial services industry is undergoing major change at present. Business models are changing because of advances in technology, advances in telecommunications and the impact of globalisation. The European market is gradually becoming more integrated partially driven by EU initiatives such as the Financial Services Action Plan (FSAP).
Furthermore, Ireland’s attractiveness as a location for international financial services has also undergone major changes over the past five years or so. The corporate fiscal environment is still very favourable although other jurisdictions have emulated Ireland in this respect. The availability of skilled labour is even greater now having been supplemented by returning emigrants from the US and the UK in particular. The telecoms infrastructure has also improved considerably. Notwithstanding these positive developments there are other factors that are less positive. Although Ireland still has cost advantages over many international centres, it is no longer considered to be a low cost location. The cost of skilled labour and property has increased relative to other markets in recent years. In addition other countries/regions have ‘upped their games’ considerably in terms of marketing the attractiveness of locating there.
Consequently, IDA Ireland initiated in 2004 an exercise to revisit and update national strategy and policy for attracting inward investment from international financial services companies. In connection with this exercise IDA Ireland engaged Deloitte to obtain world class advice on global trends and new business models in the international financial services sector and their impact on the potential for further development of the sector in Ireland.
In this article I have outlined the Deloitte views on the key potential opportunities identified during the review.
The opportunities were identified across all sectors, as illustrated below, although our expectations around the time scales for when they will develop into maturity ranges from the next twelve months to the next five plus years.
The opportunities (some of which are a collection of related ideas) are as follows:
1. Major centre for specialist debt/financing products/structures and securitisation
2. Centre for managing global/regional banking products
3. Centre of excellence for funds servicing
4. Building scale in asset management
5. Positioning Ireland as the pan European location for insurance products and in particular mass risk/retail insurance products
Software development and management of global platforms for financial services activity create further opportunities across all the sectors.
1. Major centre for specialist debt/financing products/structures and securitisation: Opportunity overview
The first opportunity is about Ireland establishing itself as a world renowned centre for specialist debt/financing products and structures including, but not limited to, securitisation. We know from global financial services trends that securitisation and specialist debt funding is a growth sector. However no single one centre has emerged with a ‘total package’ offering.
The vision is of Ireland as a centre that would be a primary location for issuance of debt in all its forms. It could be bonds from securitisation vehicles, commercial paper, medium term note programmes, etc. from corporate treasury vehicles, Irish Covered Bonds and other complex wholesale debt instruments from banks generally and repo financing from investment banking vehicles.
There is a real opportunity here for a world class centre. We are at a stage in our development where we can grasp this opportunity and make it our own. There is a great enthusiasm, desire and belief in the industry that this is a tangible vision.
2. Centre for managing global/regional banking products: Opportunity overview
One of the most significant trends in financial services at present is what is known as ‘offshoring’. Quite simply offshoring is the relocation of activities to lower cost locations. Offshoring is fundamentally changing the way financial institutions do business, creating a global division of labour that demands new operating models, new business structures and new management skills.
This ‘first wave’ is gaining momentum as high volume back office, lower level customer contact and IT applications development activities are being offshored to low cost locations, principally India. However, our interviews and research programme indicate that the restructuring/relocation of front/middle office activity, although relatively immature and underdeveloped, is coming increasingly into focus as major financial institutions (particularly investment banks) are beginning to focus on cost optimisation – improving their core processes to create a sustainable competitive advantage by building global operating capabilities.
During our review we considered how Ireland could be positioned as an integral part of the global operating model for large financial institutions and hence become a beneficiary of this trend.
Although not the lowest cost location, Ireland has significant competitive advantages in other areas:
• Political stability
• Deeper pool of financial services managerial expertise
• Cultural compatibility with the US/UK
• A closer time zone to the US than the Pacific Rim and Eastern Europe
• Low corporation tax
Consequentially we believe there is a potential opportunity to establish Ireland as a world class centre for managing complex corporate and investment banking products.
3. Centre of excellence for funds servicing: Opportunity overview
Ireland is already a centre for excellence for funds servicing and administration. The challenge is to maintain that position and reputation and to grow and protect market share.
The funds industry is ever changing with innovation happening daily.
Ireland should be an environment for product innovation and bringing products into existence quickly. We need to be ‘first to market’ with new products and alert to new market developments and trends such as the recent demand in the market for pension products.
The action on funds is about sharpening our competitive edge. We have shown over the years that we can respond to market needs but sustained effort is needed to maintain our position.
4. Building scale in asset management: Opportunity overview
The management of assets (investment or asset management) is arguably the most profitable and high value end of the value chain.
Asset management activities (investment research and strategy, portfolio modelling, asset allocation, investment decisions, execution dealing and performance attribution) are still relatively underdeveloped in Ireland.
There is an enormous reluctance by large traditional asset managers to move away from the major centres such as London and New York and no natural draw to attract them from the vast liquid markets and financial services communities in those locations.
Nevertheless, the trends indicate that there are opportunities to attract new people to new locations. The early wins are more likely to be small niche players.
With a clear focus and targeting of the sector, a major investment bank stated that it could see an investment team relocating here in the future.
5. Positioning Ireland as the pan European location for insurance products and in particular mass risk/retail insurance products: Opportunity overview
Insurance is a major sector breaking down into life and non-life sectors. Within non-life large risks and mass risks at the consumer level are quite different markets.
Ireland is the leading provider of cross border life assurance but much of this is investment product closer to the funds sector. In the non-life sector large risks operate efficiently in Europe. Our focus therefore is on the mass risks in the non-life sector and ‘life’ products for the consumer sector.
We believe the vision for the future is to position Ireland as a pan-European hub for insurance. Ireland should hold itself out as accommodating all insurance business models including:
• A holding company for European acquisitions
• A head office for branching into Europe
• A location for direct writing captives and other pan European business as it emerges
• A location for third party administration to support all of the above models as Ireland emerges as a hub for insurance in Europe.
• A hub for insurance is a realistic goal but given the fragmentation of the industry in Europe it may take some time to realise.
Conclusion
The IFSC regime will officially end on 31 December 2005. Following the success of the IFSC, Ireland is well positioned to meet the challenges of a changing global financial services environment. With a series of focused actions Ireland can maintain and develop its position as a financial centre for the future. |
Paul Reck is a partner in Deloitte.
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| Article appeared in the February 2005 issue.
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