As globalisation advances and regulatory oversight plays an increasing role in the funds industry, Mark Hedderman of Custom House explains how a jurisdiction like Ireland can continue to compete.
When we consider the factors that contribute to the success of a financial services jurisdiction, we observe that, while they have certainly evolved and become more complex, at the very heart, they remain the same. Government policies, costs and market regulations can be identified as the main influences behind the evolution of this sector of the industry. Each of these has their role to play and their degree of relative influence has ebbed and flowed over time.
Ireland emerged early mainly as a result of its ability to provide services at a scalable level, with a skilled workforce at a relatively lower cost. The role of government was primarily to create favourable tax conditions, which in turn encouraged firms to avail of this lower-cost environment and all the while the regulatory environment was comparably lighter than it is today. All of this combined to deliver the birth of Ireland as a globally recognised financial services jurisdiction.
The lowering cost of and access to technology, along with globalisation, meant that it was possible for this model to be replicated more or less anywhere and, as such, the geography of financial services has been evolving ever since.
The situation for Ireland today presents a different mix of the three main influences identified as critical to success. Competing on cost alone has been great, compromised by the ability to replicate the original model globally. The government’s ability to determine a more favourable tax environment is the topic of widespread political discussion and not something one would feel comfortable developing a long-term strategy around.
Ironically, one area where political interference at an EU level can benefit Ireland is that of the regulatory framework, which has been imposed post the Alternative Investments Fund Managers Directive (AIFMD). AIFMD requires that, if an Alternative Investment Fund (Aif) is domiciled in or wishes to market its shares in the EU, it must be fully regulated and authorised. As a member of the EU with a fully regulated and authorised investment fund regime and a longstanding financial services hub, Ireland offers a solution that is fully compliant with these requirements.
One way to utilise this advantage that is not immediately apparent is to look east and beyond traditional sources of wealth and investment. Right now there is a huge increase in the number of Chinese managers currently incorporating offshore funds. An opportunity for Ireland is to look at this growth and promote itself as a customised solution for access to the EU. The Chinese community is in the early stages of their exposure to alternative investment funds and currently their focus is on providing solutions to the domestic demand to create new offshore products. As these managers mature and look to bring their services to a global market, positioning Ireland now as the preferred solution to EU access is one way to remain competitive when traditional methods are not currently available to us. The irony is, of course, that the attraction of the lighter regulatory environment of the past is replaced with an attraction based upon increased regulation today.
Mark Hedderman is CEO of Custom House
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