The Future of Financial Services: Transforming an Industry

The Financial Services industry in Ireland is capable of significant expansion in the next decade. The willingness of the Irish Government to invest in education, regulation and infrastructure will determine the extent to which the opportunity presented will be taken.

A strategic analysis of the sector in Ireland would identify several factors as influential in making such a bold statement.  The origins of the business in Ireland were structured around an initial goal of seizing a part of the market for cost-effective back-office services and developing related businesses from that. Over time, Ireland has developed a range of approaches to attract more and higher value elements of the industry, with some notable success in, for example, aircraft leasing and insurance.

The departure of the UK changes fundamentally the relationship between London and the European Union - but it will remain a significant relationship.  In the EU, London successfully negotiated a position that recognised its strength and importance.  This will change post-Brexit. However, London will remain one of the top financial services hubs in the world.  The EU has recognised this by providing, irrespective of political settlement, a framework for London to remain important in a European context. So, protocols exist which will allow continuation and safe transition of insurance business, continuation of securities settlement and facilitation of other business.  While this may be a defensive mechanism and conceived for the short term, the sector will innovate, and London will, in my estimation, remain very relevant in much European financial services business.

One side-effect of London leaving the EU is that a significantly increased number of larger banks, insurance companies and asset managers with decision making capability and European headquarters are basing themselves here in Ireland.  Undoubtedly, an initial driver in their choice of location is proximity - and language. Over time, the more substance and relevance that these offices can bring to their international organisations will determine the shape of the sector in Ireland.  This is a significant opportunity for Ireland.

The internationalisation of finance is not going to abate, despite the current concern that globalisation sentiment more generally is experiencing a kind of the reverse. Europe will, ultimately, achieve its goals of strengthening the role of Capital Markets (the ‘Capital Markets Union”) within the continent.  London, New York and elsewhere will continue to provide a platform for the international investor. Similarly, the trend towards digitalisation of platforms will continue, enhancing accessibility, transparency and speed of transactions. Again, Ireland has several advantages in this landscape.

Ireland already has a good position in relation to US business, given the many strong links and firms active in Ireland.  UK business is the next obvious adjunct to that. Japanese and Chinese business opportunities should also be fostered, and we should continue to strengthen our importance to European business. One notable feature of the period since the introduction of the Euro has been that Ireland has not greatly deepened its integration in the European economy, which was an expected benefit of the creation of a single currency.  Brexit creates an opportunity which will support progress on that front.

Lastly, climate change is the revolution of the next decade. All the major players in financial services are looking seriously at the opportunities and challenges that the issue will create. We already see both investment opportunities, given the enormous capital required to transform energy systems, and challenges - with damage from climate events and related insurance risk prominent.

In a nutshell, the potential here is that Ireland can be a gateway for investment in Europe - notably for US business, and post-Brexit UK business. It can also become a hub for European investment in the rest of the world. Given the history of developing robust technical approaches, an excellent technology eco-system and business-friendly government and legal frameworks, we could also imagine Ireland becoming a centre of excellence for “Green Finance”. 

If we accept this proposition, we will need to consider increased investment in the sector. At a macro level, we are already beginning to understand the additional demands that enlarged banking, insurance and asset management sectors will place on the country, and Dublin in particular. The IFS 2020 Strategy, published in 2015, recognises many streams of investment that will assist with meeting those demands. Notably, IDA and Enterprise Ireland policy is seeking to encourage investment in the Regions as well as the Dublin Strategic Development Zone. The plan also commits to using our diplomatic service to promote Ireland as a key Financial Services Centre and focusing on the education infrastructure to support the development of the industry. Critically, it also recognises that the link between the technology and financial services sectors is essential to sustained growth.

We need to redouble our investment if we are to grasp the opportunities facing the sector. This should focus on People, Infrastructure and Regulation.

I suggest that we focus on two areas in the People side. We should incentivise the best financial services experts to see Ireland as the most attractive base for them in Europe. This can be done in a variety of ways - through taxation incentives, certainly, as is usually suggested as we notably lag certain competitor countries in this regard - but I would favour a more holistic approach - issues like quality of life, accessibility to other markets and social and professional networks can all be enhanced in support of a location strategy. We can also strengthen the education element by developing Europe’s leading centre for the training of financial services experts. I would suggest that this would focus on increasing the funding for Universities to develop world standard programmes in Risk and Regulation, in Financial Services technology and Quantitative Finance and Actuarial Sciences. The key to real and sustainable financial innovation is in these areas, fostered by an academic and practitioner community that will develop real thought leadership in emerging areas such as “Green Finance”.

On the Infrastructure side, we need to increase the density of the sector in regional hubs, building on work already done in Limerick, Cork, Galway and Kilkenny. Why not create a true sectoral specialism in each, drawing on the expertise of companies in the area, working with local professionals and financial and educational institutions? This could be combined with an investment programme to deal with connectivity, both in terms of train and airport development and upgrading of broadband connectivity. Finally, the development of additional capacity in Dublin - ideally high rise and proximate to the existing financial services centre should be prioritised. Dublin needs the equivalent of a La Défense or Canary Wharf, again supported by better broadband and transport infrastructure.

Ireland now has a reputation as a robustly regulated regime, with a strong and balanced Regulator. At times over the past number of years the Regulator has been portrayed as being too rigid relative to competitor regimes. I tend to the view that we do not want to be seen in any way as lax in this regard - the most substantial players in the sector are not looking for a weak regulator, and we are not competing with those regimes that make that offer. We want to be compared with - and competing with - strong and business-friendly regimes such as the US and London, as well as our European peers.  Accordingly, I would argue that we should be investing in strengthening the Regulator at all levels to ensure that our Regulator can work proactively and confidently with the most innovative businesses and find a balance between prudential “non-negotiables” and appropriately managed business risk appetites. This must be accompanied by a change in approach by the Regulator, where its risk mandate permits real engagement with businesses in an appropriate forum to examine and determine new business approaches and innovations. The Regulator should also be actively plugged into the development of thought leadership in the sector, which would allow a safe space for the discussion and challenge of new thinking. Given Ireland’s strategic positioning as an important gateway for financial services, the creation of an internationally focused unit to provide to consider issues arising from the interaction of EU, US and UK regulation would also be supportive of an environment where firms wish to position significant business in Ireland.

We cannot bet on all aspects of such a large and diverse sector - and some of the above might be read as a wish-list which is bordering on the impossible. In my view, the biggest opportunity for Ireland to make progress in this space is to focus on being a good hub location for investment in and from Europe and to focus our development of real competitive advantage in the Green Finance space. With the right investment in infrastructure, technology and regulation, Ireland can become a leading voice in developing the right solutions from a financial and risk management perspective - Green Bonds, securitisation structures, investment and lending strategies, and insurance expertise - to support what is a global imperative. It will also, perhaps more than anything else, require a level of political support and courage. As we have seen in the past that kind of vision has led to decades of benefit for Ireland from the sector.

This article first appeared in Finance Dublin, June 2019