01.02.2021

Irish Regulatory Landscape

As you may be aware, APR recently opened a Dublin office. While APR has served the Irish market since 2012, setting up a base in a new country comes with new challenges. One of the first of these encountered by the newly hired Dublin team was that all our introductory training on regulation focuses on the UK, with little mention of the Irish market.

So, we decided to correct this! As APR Dublin’s first article, we will be treating you to a comparison of the regulatory systems for financial services between the UK and Ireland (I know, we are spoiling you really). In addition, we will quickly discuss how this has impacted APR’s expansion efforts, and whether more companies should consider making the move, particularly as the UK and EU’s post-Brexit future become clearer. So, without further ado, let us begin!

As part of APR’s induction training, Roger delivers a session on UK regulation. This mentions how regulation is designed to ensure the financial services sector remains strong and drives the economy forward. Five key institutions are responsible: the most notable of which being the FCA and the PRA. They all have different focuses, but work towards the same goal: ensuring companies are resistant to financial shocks, promoting good practices and protecting consumers.

Ireland’s regulatory history

On the 1^st May 2003, Ireland established the Financial Regulator (FR). Before this, there was no one body to carry out regulatory duties; instead, it was handled by various parts of the government. This new body was a distinct element of the Central Bank of Ireland (CBI), and had a clearly defined role.^[1]Unfortunately, if you have read any news about Ireland in the past fifteen years, you are probably aware that it failed, quite spectacularly. And that is likely understating it.

We will not describe every failure here, as their Wikipedia article has a Controversy section that is 17,665 characters long (good bedtime reading though!). Also, this only lists the mistakes that are known, of course. Their poor practices lead to a massive crash of the Irish economy, and the banks needed enormous bailouts – one of these, Anglo Irish Bank, received a rescue package that cost €5,500 for every man, woman and child in the state.^[2] The FR’s CEO stated “the banks were best placed to know what they were doing, and the FR trusted and relied on their stress tests”^[3]… does this reflect the relationship one would think a regulator should have with banks? Should the regulator not have their own independent checks and tests? It didn’t take long after the 2008 crisis for the FR to be wound down, their board structure replaced and its reunification with the CBI – interestingly, after this overhaul Ireland still only had one regulatory body, with the CBI taking this role, unlike the approach taken by other countries such as the UK.

As the Irish government guaranteed the debt of their 6 major banks, this led to a massive strain on the taxpayer. Even with the assistance of the European Troika, the economy is still feeling the effects of this today; after all, in the two years following 2008 the government pumped 46 billion euros into the banks, equivalent to 30% of Ireland’s GDP.^[4] For this reason, the public remains suspicious of the financial services sector, blaming them for much of the misfortune of the crisis. To this end, it is now more important than ever that Ireland has a robust regulatory system. The FR’s ex-CEO said he was unable to hire enough skilled staff due to budgetary constraints; it is doubtful a budget increase here would have cost as much as the bailouts.

Particularly in the Eurozone, a unified framework for regulation was a necessity, to prevent more member states needing a bailout in future. So, the European Central Bank (ECB) created the Single Supervisory Mechanism, where they are the prudential regulator of the larger banks in each Eurozone country, including Ireland, where 5 banks are under this regime.^[5] This is similar to the PRA’s duties in the UK. The ECB and CBI work together on a risk-based approach, assessing solvency and carrying out in-depth onsite inspections. However, other financial sector components remain a national competence – one of these gaining attention in Ireland right now is the insurance sector, which is being investigated by the CBI for differential pricing practices.

The Central Bank of Ireland

So, as Ireland’s sole regulatory body in the wake of the worst financial crisis ever (well, until COVID came along), the CBI now had to step up. And, with how the Irish economy has progressed since 2008, it appears they are on the right path. They have a very robust authorisation procedure, where key requirements for a role are clearly outlined, including professional qualifications. This did not seem as important to the CEO who took over when the FR was overhauled; he said he didn’t agree with people working in financial services needing qualifications as he had “never taken a professional exam”.^[6] Good thing he didn’t say that with any actuarial students in the room!

In terms of policy, they operate a continuous process: Identify, Formulate, Select, Implement and Evaluate.^[7] This is very similar to the Actuarial Control Cycle if you can think back (or forward!) to your CP1 studies. Interestingly, Irish policies undergo an EU peer review every four years, to ensure they are aligned. Could we see the UK’s regulatory policies drift away from the EU standard post-Brexit? It is an interesting question, but perhaps to save headaches on cross Irish-UK work they will remain broadly similar. Hopefully the same happens with daylight savings!

The CBI’s fees and levies system tries to eliminate any burden on the taxpayer, by having companies fund their own regulation. As for enforcement actions, the CBI has several powers to ensure regulatory compliance. On a firm, they can bestow a caution, suspend their authorisation to carry out financial services work, or issue a fine: up to €10m or 10% of the firm’s turnover. On an individual they can deliver the same reprimands; however, the max fine here is €1m.^[8] In 2019, the total amount of fines delivered by the CBI was €30m, including a large €21m fine for Permanent TSB for its part in the tracker mortgage scandal. 99 Irish families^[9] lost their homes as banks allowed them to swap to a fixed rate during the 2008 crisis, then did not allow them to swap back to their tracker rate based on the ECB interest rate afterwards. The CBI successfully protected consumers in this case, although as fines are still being delivered, the lag time on these enforcement actions is quite considerable.

A quick comparison

We have touched on how the UK and Ireland compared in previous sections, but how about a more general comparison? The UK has 5 regulatory bodies while Ireland has only 1 – interestingly, both approaches were spurred on by 2008. The UK decided that regulation is more effective if a group of institutions are each responsible for a constituent part of it, while Ireland decided a unified approach from a single body is the best way forward. Both have their positives and negatives, but most importantly both have proved to be effective.

In the UK, the PRA regulates 1,500 firms and the more consumer focused FCA is responsible for 56,000 (the PRA handles the larger businesses). The CBI regulates more than 10,000 firms, with the ECB supervising 5 banks under the SSM. A similar structure exists here, but the Irish market is much smaller. This is also evident in the fine amounts – in 2019, the FCA fines totalled to £392m^[10] (including £100m for Standard Chartered Bank and £76m for an individual), but the CBI total fines were €30m – to put that in perspective, a UK individual was fined over the double the amount imposed on the entire Irish financial services sector!

So, if the rumours are true about Dublin being the post-Brexit EU hub for financial services, there is a lot of room for growth. The CBI itself offers a very in-depth Brexit FAQ article on its website^[11], featuring answers to pretty much any question a UK company could have about moving to Ireland. Dublin offers a highly skilled, English-speaking workforce that could be a benefit to any UK company – hopefully, the quality of this article, written by two Irish staff members, is a perfect illustration of that!

The process in action

For APR, while the process has brought many benefits (such as expanding our reach and capacity), it has not been without its snags. To establish yourself as an Irish company, you must have a physical office location within the Republic of Ireland. With the current COVID situation, we ran into some delays here. Two thirds of Ireland’s financial services workers are based in Dublin^[12], so it is worth considering whether you want to base your business in the capital or elsewhere, depending on your objectives. Also, we had to obtain a lot of legal assistance in making sure we complied with the various regulations mentioned above, which wouldn’t be the case if you chose to open a new office in another UK city. After reading the previous sections, you should be aware just how important regulation is in Ireland, particularly for businesses that deal with the public’s money such as banks.

Of course, APR is not the only UK company who has taken this move in recent years. Barclays and Bank of America Merill Lynch have moved substantial operations to Dublin, with the latter of particular interest as they qualify for ECB supervision under the SSM. This goes beyond financial services; some law firms such as Pinsent Masons have made the move, as Ireland’s legal system is based on common law rather than civil law so most experience is transferable. Despite this, not everyone is thinking about diversification. At the end of 2019, London still held $136b of Wall Street’s five biggest firms’ capital, while the EU only held $45b ^[13].

Conclusion

Hopefully, this article has given you a brief high-level comparison of the Irish and UK regulatory frameworks. The intersection of regulation between countries is an ever more pressing issue as firms become more globally linked. We hope that this article is a good example of how some of this pertains to us as a company and as individuals. Therefore, it should be evident how important it is to keep up to date with what your obligations may be when you take on a certain piece of work. Additionally, if you are a business that is considering a move to Ireland, we hope you see APR’s one small step as perhaps the potential leap which could be made by a wider range of companies when they are open to embracing the differences and opportunities of working across more than one country.