Brexit and other current issues in financial services regulation - Gerry Cross, Director of Policy and Risk

02 October 2017 Speech

Central Bank of Ireland

Remarks made at International Financial Services Regional Forum (South-East)


Good morning ladies and gentlemen.

Thank you Minister D’Arcy for the invitation to this event and opportunity to address the forum. It is a pleasure to do so. And even more so in light of the Central Bank’s aim of increasing our engagements outside of Dublin.

In my remarks this morning, I would like to consider one or two current issues in financial services regulation. Brexit is of course an important context for this. But it is not the only one. Some of these issues would be important regardless of the UK decision to leave the EU.

I will first say a little bit about the impact of, and preparations for, Brexit. Then I would like to consider the question of innovation. Finally, I will provide an update on current European developments.

Impact of Brexit

It has been well documented that Brexit exposes the Irish economy to downside risks, both in the short and medium/long term1. The overall impact is contingent on the nature of the future relationship between the United Kingdom and European Union. The possibilities range from an EEA-type relationship, at one end of the spectrum, where the impact would likely be more limited to a World Trade Organisation based relationship at the other, where the impact would be likely to be much more significant. And in between a range of other possibilities.

The Central Bank estimates that in the event of no post-Brexit trade agreement being reached, after ten years Ireland’s Gross Domestic Product might be around three per cent lower than when compared to a no-Brexit scenario2.

In terms of financial service and markets, Brexit imposes important challenges. Important amongst these is the question of how European financial services and markets will respond to a move of the global financial centre that is the City of London from being within the Union to being outside it. This is clearly a question of importance for both Europe and the UK and their respective economies.

Here in Ireland, financial firms who sell services to the UK market will need to ensure that they have considered the implications for their business models of a loss of passporting rights on the UK’s exit.

In this regard it is important to note that we are now just 18 months away from the end of the Article 50 period. This means that there is a real risk that 18 months from now there will be a hard Brexit. While we should be hopeful that the negotiations will lead to something different than that, a hard Brexit with the loss of passporting rights between the UK and the EU-27 is a material risk well within the planning horizon. Ensuring that regulated firms are planning effectively for this risk remains a key continuing focus for the Central Bank. We expect firms who have material UK-related business to have well-developed plans in place for dealing with the risks of a hard Brexit occurring in early 2019. This should include a clear focus on any implications for their customers and clients.

In terms of the relocation of the EU activities of UK-based firms, a great deal has been said and done in this area over recent months. Work related to this aspect has been and continues to be an important focus of the Central Bank and its staff during this period. As has been said many times, our approach is based on a good combination of transparency, rigour and pragmatism and is strongly embedded in the work of European authorities – about which I will say more shortly. It has been said a number of times, and it remains the case, that Ireland can expect to achieve a meaningful share of such relocating business.

It is interesting to note, as outlined in the IFS 2020 Action Plan for 2017, that there are now over 400 companies employing approximately 40,000 people directly in the financial services sector in Ireland. With one third of those employed operating in companies outside the greater Dublin area.

My colleague Michael Hodson speaking at the Cork Chamber of Commerce last week gave the example of national distribution of operations of companies providing administration services to investment funds. Michael noted that there are sixteen such firms with operations in Cork, Kildare, Kilkenny, Limerick, Louth, Waterford and Wexford Between them, these firms employ around 3,000 staff. At the same time, these firms employ close to 4,000 in Dublin. It is interesting to note that many such firms originally took up location in the Dublin area before developing presences elsewhere in Ireland.

The payment and e-money sector is also interesting in this regard. There are 13 payment institutions and 2 e-money institutions authorised by the Central Bank operating in Ireland. Of these, five are located outside Dublin.

It is clearly good news when the benefits of Ireland’s reputation as a location for financial services firms and activities are felt in different parts of the country.


I would like to spend a little time discussing now the question of innovation in financial services and how the Central Bank approaches this issue. In the short time available to me, rather than try to put forward the A-Z of the matter, let me rather set out a few relevant considerations.

A good starting point is the fact that European and Irish financial systems are market-based systems. They are designed to support the economy and economic activity, and to serve savers and investors, through the activities of financial firms who, while closely regulated, are profit making businesses. In any such system healthy competition is necessary and important. And where there is to be competition there must be innovation.

So my starting point is that as a regulator of the financial system – and as a Central Bank concerned with the optimal functioning of the economy and the interests of consumers – we are positively disposed towards innovation. We are pleased when we see an environment where new ideas, new techniques, new technology are continually emerging to challenge the existing situation.

In terms of our processes, it is important that we strike a good balance. On the one hand of course we must ensure that we achieve our mandate of ensuring that consumers are appropriately protected and that the system is safe. At the same time we need to avoid a one-size-fits-all approach to authorising new firms and activities. We need to make sure that our system is appropriately reflective of and responsive to the needs of firms of different shapes and sizes and carrying on different activities.

It is with this in mind that the Central Bank publishes every six months a Regulatory Service Standards Performance Report. (The most recent of these was published in June this year.) in this we set out clearly what applicants should expect in terms of turnaround times for authorisations sought. The target periods range from 24 hours for QIAIFs, to 20 days for UCITS, to 90 days for the assessment of payment firms, to 3-6 months for credit institutions. And you will see from the published report the degree to which we achieve those targets. Clarity and transparency in this regard make a real contribution to the successful functioning of our gatekeeper role.

At the heart of innovation of course is having a culture of continuous improvement and being open and responsive to feedback and suggestions for improvements. This is a culture we seek to have. For example, in the context of our authorisation process for payment and e-money institutions, two years ago, in response to suggestions as to how the process could be made more manageable for applicants, without jeopardising our objectives, we revised the process. We did this by introducing a revised structure to the process with clear timelines around the different stages of engagement and application. The feedback we received about these changes have been positive.

A further challenge for us is to position ourselves effectively and well concerning the innovation landscape. We need to have as good a picture as possible of the developments that are underway or likely to be coming to the fore. By doing so we are able to respond appropriately and to allocate our resources effectively. A good deal of this we are able to ascertain through our supervisory activities with regulated firms. But other parts of it, particularly where it is not currently regulated, we need to approach more creatively. In order to ensure that both of these modalities are being effectively pursued we have set up within the Central Bank a cross-bank Fintech Group which is looking at technological innovation across the range of sectors and activities and seeking to ensure that we have a holistic view of those developments and considering how we are responding to them.

We also need to achieve a good balance in our approach to assessing innovative developments and determining an appropriate response. Innovation is a good thing. But not all innovations are good. And not all good innovations are done well. We need to deliver a balanced approach which on the one hand protects consumers from innovations which would not be in their interest, or which would not be suitable for them. And we need to ensure that the way in which those innovations are implemented is such that consumers are not put at inappropriate risk.

And of course innovation brings risk, as is to be expected. We will want to be satisfied that such risks are well managed and that if they crystallise that any failure can be dealt with in an orderly manner.

One recent example of how we seek to achieve our mandate in this context is the Discussion paper that is currently open on the Consumer Protection Code and the Digitalisation of Financial Services. The Discussion Paper considers how the protections under the Code are working to ensure consumers are being protected in an increasingly digital financial services environment. The Discussion Paper launches a consultation period open until October 27 seeking views from interested parties on how consumers are or should be protected in an increasingly digital financial services environment. In particular, the Central Bank is seeking views on: whether consumers are adequately protected under existing consumer protection rules contained in the Code; if the Code needs to be enhanced in specific areas; and whether there are impediments in the Code to firms adopting technologies that may be beneficial to consumers.

European Developments in the context of Brexit

Let me turn now to Europe more broadly, and some of the recent developments that we are seeing there.

All three of the ESAs and the SSM have been and continue to be very active in relation to Brexit. They have been considering both issues arising from the relocation of activities in a Brexit context as well as risk associated with the possibility of a hard Brexit in 2019. This work is both welcome and valuable.

The SSM, ESMA and EIOPA have all issued important guidance or opinions. EBA can be expected to follow suit shortly. These set out principles aimed at fostering consistency in the authorisation and supervision of entities, activities and functions proposing to relocate from the United Kingdom. Because of the importance of achieving convergence in this area, the Central Bank has been proactively engaged in, and is strongly supportive of, this work of the European authorities.

It is very important that in dealing with the many challenging questions that arise in the context of relocating firms, divergent approaches do not emerge amongst different supervisory authorities across Europe. If they do, then there is a risk that these differences will begin to drive firms’ behaviours and decisions. As Governor Lane said as early as early as about a year ago, banks’ decisions in the context of Brexit should not be driven by regulatory differences but by important matters such as business model, employee and work force concerns, cultural fit, communications, etc.

The Central Bank is conducting a review of ESMA’s three sector specific opinions. While this review is not complete we are finding that our approach is in general terms very consistent with what is in those opinions. This is not surprising as some of the key issues are ones to which we have given a significant amount of close consideration over the recent period, even before Brexit emerged.

For example, Ireland is a global centre for the funds industry. We have given a great deal of detailed thought to the appropriate approach to be adopted to location, outsourcing, delegation and effective supervision in the funds industry. We have developed very detailed guidance and some additional rules to ensure that the funds industry in Ireland can develop orderly relations with service providers across the globe which serve their investors well. In view of the quality and intensity of the work we have done on these issues, it is not surprising to us to find that our conclusions turn out to be in Iine with best practices as seen by ESMA.

In a number of specific cases, small amendments may be required to Central Bank authorisation processes arising from the Brexit opinions of ESMA. If any material process changes were to be needed this would be done in a transparent manner with the Central Bank seeking feedback on any proposed changes.

To support its Opinion, ESMA has established a ‘Supervisory Coordination Network’. This is a new development. In this forum national competent authorities are called on to present the key features and aspects of relocation related applications and how they propose to deal with those. This provides strong support to the consistent implementation of the Opinions across different EU jurisdictions. The Central Bank has welcomed this development. We are active participants in the forum and have found that it provides for an effective exchange between supervisors and ESMA. We are confident that it will contribute to the achievement of consistent outcomes.

One question that has arisen in the context of relocation, is whether the ECB/SSM should have supervisory jurisdiction in relation to large investment banks - sometimes referred to as broker-dealers - which although investment firms in legal nature, can have bank-like significance for the financial system. At the Central Bank we take the view that given the similarities between such entities and banks, and given the potential systemic effects of their failure, there is considerable merit in the idea that the ECB/SSM should be given responsibility for their supervision. There would of course be a number of legal, technical and conceptual challenges to be overcome if this were to be the outcome sought.

Of course all of this takes place in a very dynamic context. We have seen only very recently the European Commission’s new proposals for revising the governance and responsibilities of the ESAs. The Central Bank remains closely engaged in and responsive to such continuing changes, or proposed changes, in the landscape. As you would expect we are currently closely examining the Commission’s proposals to see what they would mean for the functioning of financial markets and services.


Let me conclude there.

Hopefully my remarks will have been helpful in contributing to an understanding of the current context.

Thank you for your time and attention this morning. 


1 Remarks by Sharon Donnery, Deputy Governor (Central Banking) at Chatham House, 23 March 2017; and Opening statement - Gabriel Fagan, Chief Economist, at the Seanad Committee on Brexit, 4 May 2017.

2 Section 3.1, 2017: I Macro-Financial Review