“Central Bank is committed to transparency and clarity in its authorisation processes and performance standards”, Director of Policy & Risk, Gerry Cross

Director of Policy and Risk Gerry Cross speaking at Deloitte Ireland Brexit Briefing

“Brexit and Financial Services”

Introduction

The outcome of the UK referendum on continued membership of the European Union, poses a number of challenges for Ireland and the Central Bank.

These challenges include the likely unfavourable impact on the Irish economy.  As a result, the Central Bank has reduced our national growth forecast by 20 basis points for 2016 and 60 for 2017.  Though of course quantification in this context of uncertainty is difficult.

The post-referendum period is uncertain – and it looks likely to continue to be for an extended period

We do not know what the future arrangements between the UK and the EU will be, nor how the unique interests of Ireland will be safeguarded.  This increases the uncertainty about the UK economy's future outside the EU, and its knock on effects on the Irish economy.

Against this background, let me talk this evening about the implications of Brexit for the Central Bank’s regulatory and supervisory mandate.

And let me express my thanks to Deloitte for arranging this event this evening and inviting me to speak.

Regulatory perspective

From a regulatory and supervisory perspective our primary work, both in the period leading up to the referendum and immediately thereafter, has been to ensure that regulated firms have addressed and planned appropriately for any negative impacts.

At the Central Bank we had been thinking about and planning for a possible “leave” vote for a lengthy period in advance of the referendum.  While, like others, we would not have said that we expected the outcome that resulted, we were well prepared for it.

As part of our preparations we had engaged extensively with regulated firms, seeking to ensure that they also were well prepared for the possibility of a negative outcome.  It remains a key part of our strategy to continue to engage with financial firms to ensure that they consider and adapt to the potential implications for their business models and revenue streams.

Some key factors

When we come to think about the possible implications of the referendum outcome for the structure and location of firms providing financial services and products on a transnational basis in Europe, it is important to bear in mind a number of factors that have already been set out by Governor Lane.  These are important, and worth repeating.

Firstly, what determines where financial firms choose to locate themselves includes a wide array of factors.  These include the track-records of different financial centres; political stability, national legal and tax environments; language and cultural factors; infrastructure; quality of life attractiveness; etc.

Secondly, as the EU has a strongly harmonised approach to financial regulation, regulatory competition should not be a determining factor in where firms chose to seek authorisation.  For banking, the ECB has now taken on sole responsibility for the granting of all banking licences in the Eurozone.  For other sectors, rules and application processes are harmonised by EU law, and further unified by supervisory convergence work driven by ESMA and EIOPA.

Thirdly, the Central Bank’s approach to authorisation is firmly embedded in the overall European System of Financial Supervision (ESFS).  In determining an application for authorisation we follow clear, published rules and processes derived from EU law, and are guided by our mandate to protect consumers.  We are mindful of the fiduciary role of financial actors, and the need to safeguard deposits, premiums, or client assets from loss stemming from incompetence, misgovernance or outright failure.

The Central Bank’s general approach

Following the UK referendum, there is the potential for a material increase in the number of applications for authorisation by the Central Bank due to the possible loss of passporting rights of UK-authorised entities.

In terms of the overall positioning of the Central Bank in respect of such a development if I had to sum it up in a short phrase I would say that we stand ready to do our job; we are open for engagement.

The Central Bank is a highly professional organisation, strongly committed to the fulfilment of our mandate.  This includes deciding on applications for authorisation and conducting assertive, risk-based, supervision of authorised firms.  We interpret this mandate as requiring us to carry out our tasks effectively, efficiently, and on the basis of high quality outcomes.  We have appetite to do so and to meet, within the limit of our capacities, any challenges that come our way in this regard.

Looked at another way, in an open market economy it is important that people and companies have the right – legal and practical - to take up new economic activities.  The only restrictions on this right should be the ones imposed by legislation in order to protect the common good.  This is the role that the Central Bank plays in carrying out its licensing and supervisory role: implementing its legislatively prescribed mandate to take the necessary steps to ensure prudential soundness and protect consumers. 

The need for a substantive presence

There is another point that I wish to make here however.  It is this: where we are asked to consider the authorisation of a firm in Ireland, we will want to be satisfied that we are authorising a business or line of business that will be run from Ireland and which we will be effectively supervising.  We will expect there to be substantive presence.

What does this mean in practice?  Well it is difficult to describe this in the abstract because a lot will always depend on the individual circumstances.  But let me try to put some flesh on the idea.

We will in general want to see that the Board and the management of the entity are located here such that that the business is run from here.  We will want to be satisfied that the mind and will of the entity are located here; that the decision-making happens here.

I think one thing that we will want to be very clearly satisfied about is that the risks that are associated with the business of the entity are governed, remunerated, managed and mitigated in and by that entity.  That obviously flows through to the staffing that we would expect to see.

It would not make much business sense to place a disconnected head in Ireland while the operations are run and the business is conducted elsewhere.  Irish firms are allowed to make use of outsourcing and insourcing, up to a point.  This is a part of many business models.  But we will expect to see this done well, in line with the current practice that has been allowed by the Central Bank, and in agreement with international principles and standards.

Authorisation process

The Central Bank has a strong commitment to transparency and clarity in respect of its authorisation processes and performance standards.

I refer you in particular to our six monthly Regulatory Service Standards Performance Report which sets out both the standards to which we are committed in terms of dealing with authorisation applications in the different sectors and our performance against those standards.

Of course the approach differs depending upon the type of firm.  For example, in certain areas, such as funds licensing, the turnaround time is a matter of days. In other areas the timing prescribed by EU law is a matter of months, once the application is complete.  And then there is a whole spectrum in between.  Actual time will depend on the type of business for which a license is being sought and the extent to which the authorisation procedure can be considered more or less standardised, more or less complex.

What is key is that applicants have a very clear idea from this as to what they can expect and the length of the authorisation process.

Of course the length of this process is set from the date of submission of a complete appliication.  Getting to a complete application can in itself be a challenging exercise for firms.  In addition to initial exchanges of the type of which we are seeing at the moment, the Central Bank is open to meeting and engaging with firms in advance of the completed application.  This can be particularly helpful in more complex cases.  Of course, we will expect firms to be well-prepared for such pre-application exchanges.

Capacity

We are also asked whether the Central Bank is in a position to cope with a large influx of applications over what might be a relatively short period of time.  And then to carry out the oversight activities that will be required.

The Central Bank is committed to meet these challenges.  Our workforce planning for next year, which is currently being finalised, reflects the additional resources needed to deal with applications that will come our way.

As Governor Lane has indicated, if due to an expanded universe of regulated and supervised firms further resources are necessary, the Central Bank will staff-up as necessary.

The Central Bank faces significant competition for the types of skilled resource that are necessary to effectively regulate and supervise financial services firms. The type of people that we need to hire are the same type of people that regulated firms are seeking to hire.  This is a real challenge for us.  The potential for a new swathe of financial services firms entering the regulated market in Ireland could increase that challenge further.

Already authorised by FCA / PRA

We are asked from time to time whether the fact that a firm is already licensed by the UK authorities or has had a model approved by them should not mean that they can be fast-tracked by the Central Bank.

Strictly speaking a firm set up in one country can only be authorised in that country.  One question is whether a UK firm can set up an Irish firm and subsequently transfer business from one to the other.  As I mentioned, any Irish regulated firm needs to be managed and run from Ireland.

The Central Bank takes its responsibilities in this regard very seriously, as it should.  If we are asked to state that an entity wishing to carry on a regulated activity is soundly run and resourced and does not pose undue risks either to the Irish economy and citizens or those of the European Union, then we will want to be satisfied ourselves that it complies with the appropriate standards.

This is not a process that can be short-circuited simply because the entity may previously have been authorised elsewhere.  Moreover, in order to carry out our ongoing oversight effectively, it is very important to have carried out a good quality authorisation process so that we have a good understanding of the business and the risks and how they are managed.  In this context in particular if we were to somehow forego a proper authorisation process we would be storing up all sorts of potential difficulties for the future.

All this being said, a group with an entity that has been authorised and is currently supervised by the FCA / PRA and/or that has had model approval, is in a good position to understand what is expected in processes such as these and should be in a position to quite quickly get a complete application together. (Though it must be understood of course that we do not have a support of innovation mandate such as the FCA has.)  We stand ready to facilitate that process in pre authorisation engagement.

Conclusion

Let me finish here.

My key messages in summary are that when it comes to applications for licenses in Ireland, the Central Bank stands ready to meet the challenges that may arise. We will do so on the basis of an active, open stance, ready to engage, but in line with our duty to protect consumers, and in keeping with EU rules, international standards, and our published processes.