‘FINANCIAL REGULATION - THINKING ABOUT THE FUTURE ’
Address by Mr. Michael Noonan TD- Minister for Finance
27 April 2012
Ladies and Gentlemen.
I want to begin by thanking the Governor and his team at the Central Bank for organising this high level conference.
I do not need to remind my distinguished audience here this morning that the timing of this conference is very opportune in the context of the significant package of EU and International Financial Regulatory developments that are presently on the table.
This conference brings together Irish stakeholders in the same room and gives you the opportunity to interact with the top European Regulatory officials and the European Supervisory Authorities.
I am aware that this Conference is part of a wider programme of Central Bank engagement with stakeholders on EU and International Financial Regulatory development policy topics.
The rationale behind that level of engagement is the benefit all round from timely and authoritative information and analysis from the financial services industry. In so doing the intention would be that industry will be better geared to respond quickly and effectively to consultations and proposals.
I will concentrate my address on current and future EU and International regulatory developments and will seek to give you an appreciation of this Government’s priorities in this area which will be a significant element of our Presidency beginning on 1 January next year.
I want to begin by taking stock of our International Financial Services Industry and the contribution that it can make towards our economic recovery.
The Financial Services Industry
The international financial services industry in Ireland has achieved significant success as a gateway to the EU financial services market.
As most of you will be aware, the Taoiseach launched a new Strategy for the International Financial Services Industry in Ireland 2011-2016 for the further development of the sector last July. The strategy contains ambitious jobs targets – 10,000 new jobs over 5 years.
The industry already employs 33,000 people throughout Ireland and contributes over €1 billion to the Exchequer in corporation and payroll taxes.
Exports of international financial services accounted for 13% of total exports in 2011 or 27% of services exports.
That Strategy identifies the key foundations for future success as:
·a tax framework which is competitive and internationally respected, and
·a regulatory regime which supports responsible business operations and ensures effective oversight and control.
In order to support the job creation goals contained in the new Strategy, Finance Act 2012 included thirteen sections and twenty one individual measures to enhance the competitiveness of the sector. Those measures focus on:
·reducing double taxation,
·simplifying the tax treatment of complex financial transactions and
·easing the administrative burden for business
These measures demonstrate the commitment of the Government to supporting industry and making it even easier to do business in Ireland.
Taken together with the Special Assignee Relief Programme and Foreign Earnings Deduction, the measures represent a significant package which will support the competitiveness of the industry and help create jobs.
The Economic Outlook
Speaking about jobs, there are a few things that I wish to put on the record in relation to the general economic outlook.
The Irish economy returned to growth in 2011, the first time since 2007, with GDP increasing by 0.7 per cent.
In quarterly terms, data for the last quarter in 2011 showed that GDP fell 0.2 per cent relative to the third quarter, a slightly disappointing but not surprising performance given developments in the external environment, particularly the intensification of the euro crisis.
This year’s Budget was based on real GDP growth of 1.3 per cent this year – a forecast in line with the consensus at the time. Since then, however, the indications are that growth will be a bit weaker, and most analysts have been revising downwards their forecasts over the past few months.
The Maastricht returns published this week give the first official outturns for the general Government deficit and debt position in 2011. These returns highlight that the underlying deficit, excluding the capital injections into the banks, came in lower than expected at 9.4%. This compares very well to the target of 10.6% under the EU - IMF programme and the budget day estimate of 10.1%.
The return of the underlying deficit to single figures is a positive development and reflects the very strong progress that has been made in restoring order to our public finances. This progress has been due to the very significant adjustments that the Irish people have taken over the past number of years.
The public finances are moving in the right direction. The tax base is growing and expenditure consolidation is on target.
Unemployment is without doubt the single greatest challenge facing the Government, and addressing it is at the heart of all of the main policies and initiatives being implemented by Government.
Moving towards a balanced budgetary position is a necessary pre-condition for restoring the economy to sustainable growth and job creation and to securing our objective of re-entering the international bond markets. The fiscal rules contained in the Stability Treaty are important in this regard
Regulation of Financial Services in Ireland
Before I turn to the EU Regulatory Package I should remind you that the Government has introduced a range of reforms of financial regulatory structures in Ireland to underpin a much more effective and efficient financial regulatory regime.
The Central Bank Reform Act 2010 gave effect to significant structural changes in the operation of financial regulation in Ireland. The Act brought about new structures with new and revised powers of supervision and enforcement for the Central Bank.
Critical to that new structural environment was the need to ensure that the domestic regulatory framework for financial services would contribute to the maintenance of the stability of the financial system as well as effective and efficient supervision of the financial institutions, thereby safeguarding the interests of consumers and investors.
Following on from the Central Bank Reform Act, 2010, the Central Bank (Supervision and Enforcement) Bill 2011 was published in July 2011. That Bill enhances the Central Bank’s regulatory powers, drawing on the lessons of the recent past in Ireland and abroad, and strengthens the ability of the Central Bank to impose and supervise compliance with regulatory requirements and to undertake timely prudential interventions. The development and implementation of new measures under the Central Bank (Supervision and Enforcement) Bill has been the subject of full consultation and there will be a further consultation process on new proposals to be brought forward at Committee Stage of the Bill
Of course there is always the need to strike the appropriate balance between under and over regulation. The choice between regulation and business success is not a black and white one. Our future as an international financial centre depends on having a credible, responsible and internationally respected regulatory regime. It requires balance, proportionality and judgment. In fact one of the drivers of growth identified in the new Strategy for the International Financial Services Centre is a credible, responsible and proportionate regulatory regime.
The Irish Presidency and Financial Services
As you know, the EU’s overriding priority is to foster a sustainable and job-rich economic recovery. Only by restoring growth can the employment difficulties be tackled. To succeed there must be active engagement and partnership between the EU institutions – the European Parliament, the Commission and the Council – and directly with Member States.
In drawing up the priorities for our Presidency, my Department will seek to balance the need to respond to urgent new needs that become apparent as a result of the crisis and the on-going need to work on structural issues where policy-makers look beyond the immediate and help shape the choices that can deliver a sustainable recovery leading to growth and higher levels of employment.
Some of the proposals which I will mention are of particular importance and should command greater priority – in particular proposals which can have a swift impact on growth and jobs and make a real contribution to recovery.
It is intended that our Presidency will give a real energy and attention to these proposals but to have the desired impact on the ground, they also need to be given priority by the European Parliament, and the Commission. The collective capacity of the institutions to show that they share a common understanding of where action is most urgent can send a powerful message about the resolution to tackle the issues and work to restore growth.
Priorities in Financial Services
It is expected that our Presidency will continue to emphasise the importance of completing the regulatory reform of the financial sector.
As you know substantial progress in the regulatory reform of the financial sector remains a priority for the Danish and indeed the Cypriot Presidencies in 2012. The Danish Presidency continues to be heavily engaged in concluding a number of dossiers and making further progress on a number of others, including the Capital Requirements Directive, the Market and Financial Instruments Directive as well as new Regulations to regulate excessive reliance on Credit Rating Agencies. We continue to wish our Danish colleagues success in that regard.
It is expected that our Presidency tasks will include the completion of outstanding work from the Danish and Cypriot Presidencies. We would also hope to progress the final element of the G20 framework on financial services reform, the proposal to regulate Central Securities Depositaries. There will also be a focus on progressing the proposals on the bank resolution framework, about which I will say more later. Those proposals will provide a legal framework to ensure that institutions in difficulties can be allowed to fail without risk to financial stability while avoiding costs to taxpayers. The Commission are expected to publish proposals shortly.
In the area of better investor protection, a revision of the rules governing collective investment schemes will aim to enhance investor protection and strengthen the internal market. This is also at the heart of an initiative on pre-contractual disclosures on complex investment products and insurance mediation.
The EU Commission’s proposal for an EU-wide bank resolution framework is expected to be published over the next few months. The Commission’s various communications and consultations provide a good indication of the likely content of its legislative proposal. The Commission characterises the overriding objective of the framework as ensuring that institutions in difficulties can be allowed to fail without risk to financial stability while avoiding costs to taxpayers.
The framework would facilitate a spectrum of appropriate actions by authorities including preparatory and preventative measures involving reinforced supervision and recovery plans for major institutions as well as powers to allow supervisors to require institutions to adopt measure to ensure a resolution would be viable. Also likely to be included are early intervention mechanisms which would include supervisory powers, implementing recovery plans and appointing a special manager. Resolution tools would include sale of business, bridge bank and asset separation tools.
The Commission also envisions a coordination framework for cross-border institutions involving resolution colleges comprised of supervisors and resolution authorities and the establishment of national funds to support bank resolution with a coordinated approach to such funds at the EU level.
As far as Ireland is concerned we look forward to a positive engagement with the Commission and other members states on the proposal.
Ireland can make an informed contribution to the proposals for a Crisis Resolution Mechanism. The Central Bank and Credit Institutions (Resolution) Act 2011 provides the necessary framework to enable the Irish authorities to use a variety of tools to address and resolve financial institutions that find themselves in distress. As we reform and rebuild our supervisory structure it is important that the Central Bank of Ireland as the resolution authority can avail of such resolution powers as part of the post-financial crisis supervisory infrastructure.
Improving Consumer Protection
Effective retail investor protection in the distribution of retail financial products is vital at a time when private investors are increasingly required to turn to private pension products and other long term investment products to assist them in their provision for retirement. A loss of confidence in such products could exacerbate the pressures associated with an ageing population. My understanding is that the EU Commission will, in the near future, bring forward proposals to provide for the regulation of ‘Packaged Retail Investment Products’. The purpose of the proposals is to ensure that the current rather fragmented regulatory framework delivers a proper level of investor protection across the full suite of retail investment products. I welcome this move by the Commission. My officials, along with officials from the Central Bank, will ensure that Ireland’s interest is reflected in these proposals.
To conclude I want to wish you well in your deliberations today and hope you can profit from a face to face engagement with the key policy makers in this area.
Hopefully other European Regulators and European officials will be impressed by our engagement and the participation of our stakeholders in the European legislative process.