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Principles are important at the Financial Regulator Back  
Since its establishment in 2003, the Financial Regulator has expanded its consumer remit, while remaining committed to meeting the needs of the wholesale financial services sector. Con Horan talks to Fiona Reddan about the on-going challenges of dealing with the onslaught of regulations coming from Brussels, ensuring that the Irish industry remains competitive, and getting the Regulator’s ‘principles’ message across.
‘Principles’ is a topic very close to the heart of the directors and staff of the Financial Regulator. Since its establishment as the Irish Financial Services Regulatory Authority (IFSRA) in 2003, it has espoused a ‘principles’ based approach to regulation.

Although it has since changed its appellation to a more linguistic friendly, ‘Financial Regulator’, the core ethos of the regulatory has not changed, and its most recent Strategic Plan for 2007-2009 stated, ‘Our fundamental approach to supervision is that we are principles led’.

Charged with ensuring that this principles based approach is followed on a daily basis, is Con Horan, prudential director. He was appointed to this position from his role as head of banking supervision earlier this year, following the promotion of Patrick Neary to chief executive of the Regulator, in early February.
Horan has worked in regulation for 27 years, having commenced his career in the Central Bank in 1979. He worked in various supervision and management positions, and was head of the retail investment and insurance department. From Dublin, he is a chartered accountant and he is a member of the Committee of European Banking Supervisors (CEBS), and is joint chairman of the Implementation Forum for the Capital Requirements Directive (CRD).
As head of prudential supervision, Horan oversees the five regulatory divisions: 1) Banking Supervision; 2) Insurance; 3) Funds and Authorisations; 4) Investment Services; 5) Markets.

Moreover, he is a member of the executive board of the Regulator, and participates in regular meetings of the Committee of European Securities Regulators (CESR); the Committee of European Insurance and Occupational Pensions Supervisors; and the Committee of European Banking Supervisors.

The Markets in Financial Instruments Directive (MiFID), which is due to be implemented in 2007 is one of the current priorities at the Regulator. The Regulator recently held its second implementation forum on the Directive, which included representatives from the stockbroking community, the banks, the asset management firms and other interested parties. The presentation focused on where the Regulator saw the next 12 months going with MIFID, and what are the priorities.

‘One of the key points we’re making is that MIFID is about a common regulatory framework across 25 member states. So to some extent, and to a large extent maybe, we have to go with what’s happening in Europe. So you’ve an awful lot of detail for this particular directive contained in the Directive itself, the regulations supporting it and the ‘Level 2 Implementing Measures’, so there’s a huge amount of detail already there as to what MIFID requires from investment firms. And as I said to the audience, I think there’s no easy way around that other than putting a cold towel over your head and reading it and getting to know what’s in the Directive itself,’ says Horan about the meeting.

He is concerned that the Irish industry isn’t sufficiently aware of the implications of the Directive, and as such is hoping that they will become more involved. One area he is looking for contribution from the industry is to do with the Committee of European Securities Regulators’ (CESR) work programme.

CESR is charged with implementing the Level 2 measures, and has set out a work plan for the next year to deal with some of the other major issues that aren’t contained in the Directive, including a work stream on best execution, inducements, and outsourcing. Horan wants the industry to contribute to these particular debates.

‘We want the industry to comment, because the earlier you get into the process and put your own stamp on it, the end result will be more suitable to Irish industry then at the end of the day. We want to be very proactive and engaging with the industry, because they bring an awful lot of the technical knowledge, and we have a lot of the regulatory knowledge, and we’ll try and marry those together,’ he says.

Implementation of the Directive is scheduled for November 1st, 2007, with the Department of Finance on schedule to deliver the legislation by January 31st, 2007. So a priority for the Regulator at this point is to, ‘sit down and plan this out in terms of what are the priorities and how are we going to run in parallel with Europe as much as we possibly can. Clearly, you don’t want to come out and make decisions at domestic level and then you find that CESR has come out with something fundamentally different and then you have to backtrack and change. So it’s a matter of timing that,’ he says.

Although Ireland will follow CESR’s advice on the Directive, Horan doesn’t envisage the Irish legislation as being ‘super-equivalent’ with what is implemented across the EU Member States. One area where Ireland might have a slightly different view is with regards to the ‘Client Money Rules’.

Horan says, ‘We told the industry that we weren’t thinking of changing our ‘Client Money Rules’, but if MIFID doesn’t have the same protections afforded in it, we might just stick with our own in that area. I’m thinking a lot of firms might be happy with that as that’s the system they have in place already’.

Another work in progress at the Regulator is the Capital Requirements Directive (CRD), and the Regulator is working with the Irish Banking Federation on an implementation forum, which is something the Regulator likes to do.
‘That’s pretty much the way we’d like to do business, we want to engage with the industry. We realise that these are huge Directives with a lot of implications and the best way of doing it is sitting down with industry and understanding the problems. And that worked very well, I have to say, we worked very closely with the IBF who were joint chairs with ourselves at this implementation forum. And we worked our way through some very tricky issues, like model validation and that sort of area,’ says Horan.

The forum has ‘broken the back on a lot of the issues’ pertaining to the Directive, which will be implemented as of January 1st, 2007.

‘It’s been a big challenge,’ says Horan, ‘but we’ve got there. We’ve got a template as to what we require and obviously we have to now put it into practice and liase and interact with one another to see if it’s all hanging together’.
With both industry and regulator over-whelmed with the burden of regulation emanating from Brussels, Horan supports Internal Markets Commissioner Charlie McCreevy’s assertion that there is a need for a ‘regulatory pause’.
Horan says that the next phase, once the Directives are in place, is a) to ensure that they’re producing the benefits they were meant to produce; and b) that they are being implemented in a consistent manner across Europe.
He also highlights the importance of harmonisation of practices and approaches.

‘I think as MIFID beds itself down, a lot of the work will be just checking to make sure that we’re all doing things roughly the same way, that we’re all interpreting things in roughly the same manner. Now you won’t ever have 100 per cent consistency because there are other elements out there, be it the taxation systems or the legal systems in other jurisdictions. I mean, it’s just simply not possible to have an absolutely consistent approach but to the extent that you can, that’s clearly an objective in Europe’.

As to whether or not the creation of a ‘level playing field’ in the European financial services regulatory landscape diminishes Ireland’s competitive advantage, Horan is sanguine, pointing to the increased efficiencies of the regime.
‘In terms of the international banks operating from Ireland, there’s some benefit for them, as it makes things an awful lot simpler. They don’t have to have 25 codes of conduct, they don’t have to understand 25 different credential regimes, they don’t have 25 different reports. So from that perspective it makes life a little bit easier for them in terms of efficiency and effectiveness’.

However, he recognises the benefits of regulatory arbitrage when it comes to interpretation of Directives.
‘There will always be an element of interpretation in the legislation and we will be conscious of ensuring that we interpret it in a way that meets our fundamental obligations, in terms of consumer protection, but also we will always be conscious of the competitors of the Irish financial services industry, and I suppose we believe that we’ve exhibited that over the years, the ability to make calls in different areas that helps industry innovate and move forward’.
Earlier this year, the industry called for the creation of a ‘wholesale director’ dedicated to the international financial services industry to sit alongside Horan and consumer director Mary O’Dea. However, the regulator isn’t budging on this point. ‘The position of a wholesale director isn’t necessary at the moment’, Horan says, adding, ‘ we believe that the current regime works well,’ and he reiterated the Regulator’s recognition of the differences between the retail and wholesale sectors.

Moreover, Horan pointed to the recent review of the regulatory regime by the International Monetary Fund, who expressed the view that a wholesale director wasn’t required.

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