Brexit, gatekeeping and the changing landscape - Michael Hodson, Director of Asset Management and Investment Banking

06 March 2019 Speech

Michael Hodson

Remarks delivered to PWC and Scottish Irish Finance Initiative event


Good afternoon ladies and gentlemen. I want to thank you for the invitation to speak at today’s event which has been kindly organised by PWC and the Scottish Irish Finance Initiative.

Today I will spend some time looking back and taking stock of where we currently are with Brexit. I will then discuss the importance of the Central Bank’s authorisation role before concluding with some insights on the future of the asset management sector.

Longstanding Links – Ireland and Scotland

But first, let me touch on the close relationship that exists between Ireland and Scotland.

Separated at the closest point by just 12 miles of water, we are closely connected in many ways and this stretches back to ancient times. This includes similarities in terms of population, stunning scenery, the Celtic culture and a friendship that regularly blossoms between the “Green Army” and “the “Tartan Army” at sporting events.

Something that not many people know about me is that I was in the scouts during my youth and the best trip I ever had was as an 18 year old, when my friend and I spent ten days walking 200km across Scotland visiting places such as Stirling and the highest village in Scotland called Wanlockhead. We had a great time, mainly because of the friendship and welcome we received from so many people we met along the way.

It is safe to say that the close ties between these two Celtic nations is stronger and warmer today than ever before. This is largely down to bilateral engagement at a political level and also due to the good work of the business community including the Scottish Irish Finance Initiative which fosters stronger links and synergies between the financial services sectors in both nations. I hope and believe that the longstanding links will continue regardless of what happens on 29th March, or whatever day Brexit happens on.

Brexit – planning and the current state of play

If I may now take a few moments to speak about Brexit planning and the current state of play.

Abraham Lincoln once said that “you cannot escape the responsibility of tomorrow by evading it today”. I think this is an appropriate reflection of the mind-set that both industry and regulatory authorities have had to embrace since the outcome of the Brexit referendum in June 2016.

In this regard, Brexit has remained a key priority for the Central Bank for nearly three years now. We have undertaken numerous initiatives both internally and with industry.

This has included:

  • Performing our gatekeeper role in a robust and efficient manner.
  • Active participation at an EU level to promote a consistent approach in the context of Brexit.
  • Conducting our own analysis of the impact of Brexit on the Irish economy;
  • Establishing an internal Brexit Taskforce to monitor and assess developments concerning Brexit.
  • Publishing a Brexit FAQ listing for firms that are considering relocating their operations to Ireland.
  • Hhosting a number of Brexit Roundtable events which provided industry representatives with an opportunity to engage with members of our senior management team on Brexit-related topics.
  • Providing keynote addresses on Brexit at 21 industry conferences and seminars, with Brexit also referenced in many more.

In addition to the above, we have been proactive in engaging with existing supervised firms across multiple sectors on their preparedness for Brexit. Specifically, in the context of the asset management sector, we have written to firms in the MiFID and fund service providers’ space and asked them to provide analysis of the impact of Brexit on their business models, operations, financial resources and regulatory structures.

This body of work has enabled us to identify which firms a Hard Brexit will impact the most and to determine common sectoral risks such as the continued access to a Central Securities Depository, staffing issues and the impact on revenue. Significantly, this exercise has also enabled supervisors to assess Brexit contingency planning on a firm by firm basis and to engage with them on how their contingency plans are being implemented. Now as we get closer to Brexit we are engaging with firms to ensure they are putting their plans in place and that they are operational to deal with what may come.

Moreover, at this point in time it still remains unclear if there will be a transitional period or if the 29th March will present a no-deal Brexit and a disorderly UK withdrawal from the EU.

On that note, I am sure that all of you here today can appreciate the cliff effects associated with a hard Brexit and the very real risks presented to the Irish financial services sector.

In recent months, we have seen a number of positive developments including the agreement of the MOUs which facilitates the continued cooperation between the UK and the European authorities. From an asset management viewpoint, having the MOUs in place tackles the risk that Irish AIFMs, UCITS management companies and Irish funds would no longer be able to delegate their portfolio management to UK investment managers in the event of a hard Brexit.

We have also seen the FCA open the window for notifications under their temporary permissions regime, which will allow EEA-based firms currently passporting into the UK to continue regulated business within the scope of their current permissions in the UK for a limited period.

Concerning the continued access to Central Security Depository (CSD) services, on 19th December 2018, the EU Commission published its decision to grant temporary equivalence to the UK’s legal and supervisory arrangements for CSDs for a period of two years, until 29th March 2021. This has recently been followed up by ESMA approving Euroclear UK and Ireland Limited as a third country CSD to provide services into the EU in the event of a no-deal Brexit.

While temporary equivalence is welcome and would alleviate the short-term cliff edge risk, it also means that an alternative long-term arrangement must be in place by the end of this period. To this end, Euronext Dublin has selected Euroclear Bank Belgium as their preferred long-term CSD provider. The Central Bank along with the Department of Finance continue to engage with key stakeholders to monitor the implementation of this long-term solution.

Furthermore, ESMA announced last month, that in the event of a no-deal Brexit, three UK Central Counterparties (CCPs) will be recognised to provide their services into the EU27. This will ensure that, under a no-deal Brexit scenario, there will be limited disruption in central clearing.

In summary, all of these efforts have been made to ensure that, post Brexit, the Irish financial system can continue to operate in the best interests of consumers and the wider economy. Many of the risks presented by Brexit have been mitigated or are now manageable and I think this is a positive reflection on the efforts of regulatory authorities across Europe and also you in industry.

However this does not mean that we can lose sight of the road ahead. The dust has not even begun to settle and therefore we still await a post-Brexit financial system. As a result, the Central Bank expects firms to be realistic and prepare for all plausible scenarios and ensure they have effective risk mitigation plans in place.

The Central Bank’s authorisation role

Turning to the Central Bank’s authorisation role.

Brexit has given rise to a meaningful uplift in applications for authorisation and also from firms seeking permissions to expand their existing business. Even at this late stage, we continue to progress a large number of applications with the aim of having a sizeable number authorised by 29th March.

As highlighted by the Central Bank’s Governor, Philip Lane, in a recent speech1, “it is imperative that any new firm authorised here meets the high standards that are expected of any entity authorised in the EU”. With that in mind, perhaps I can give you an insight as to why it is so important for the Central Bank to remain committed to a rigorous gatekeeper role.

To be brief, firms must be worth the authorisation badge or license of approval that they seek from us. I don’t say this lightly as protecting consumers, whether resident in Ireland or elsewhere in the EU27, is a core function of the European regulatory authorities.

To do this effectively, not least against the backdrop of Brexit, it is imperative that the same standards of authorisation are applied across each member state. This is necessary to avoid regulatory competition or a race to the bottom between member states.

What is stark in my mind is the constant drumbeat of substance. While I accept that the nature, scale and complexity of a firm’s business model and operations will always be an essential consideration, we in the Central Bank have no appetite for authorising or supervising firms that have the organisation being run elsewhere.

Throughout our engagement with industry, we have been clear on our authorisation expectations. In fact, you may be interested to hear that there have been cases where due to little or no evidence of substance, we have had to request firms to reconsider their application.

I do take the point that there can be a difference between substance on day one and substance on day two. Notwithstanding this, one cannot overlook the importance that we are authorising a business or line of business that will be run from Ireland. There is no possibility that we would ever consider authorising an entity which on day one is a letter box entity, even if this is planned to evolve and build out in substance over time. Quite simply, we expect the entity that we are authorising to stand on its own two feet and not be dependent on a sister entity in London for example.

If anyone disagrees with this viewpoint, then I would ask the following questions: firstly, how can you expect your EU27 business to grow and provide financial services to EU citizens; and secondly, what happens if a crisis scenario arises in the Irish entity?

As a regulatory authority, it is vital that we are able to supervise firms that we authorise and this means that firms need to be able to demonstrate that they are managing risks locally in Ireland and that Pre-Approval Controlled Function holders are dedicating sufficient time to discharging their responsibilities for the Irish regulated entity.

To expand on this, we have seen a number of applicants approach us with a dual-hatting proposal and in all cases it has been up to each firm to put forward its rationale as to how it is appropriate. It is important to remember that there are only so many hours in the day and in the working week, and that with a dual-hatted employee, there could be conflicts of interest and also the risk that insufficient time is being dedicated to the Irish entity. While in the case of dual-hatted senior roles, let me be clear when I say that it is the Central Bank’s expectation that they transition to full-time roles as the business grows.

In speaking about the Central Bank’s expectations on substance, I think it would be remiss of me not to refer to outsourcing.

As I prepared for this address, I considered why the Central Bank and other regulatory authorities spend so much time talking about and worrying about outsourcing, and as I did, one word came to mind and that was trust. If you bear with me, I will try and explain what I mean by this.

Trust is the cornerstone of how the financial services industry operates. Individuals entrust their savings or financial well-being, participants trust that the regulations and rules are appropriate, participants trust each other to deliver on their commitments.

However, we all know that this trust has been eroded over the years and we also know that even if we had a high level of trust we would still need rules and regulations to facilitate this trust.

Let’s think of this trust from an outsourcing perspective. When your client engages with you they trust you to carry out the activity expected of you. They have not entered into an arrangement of trust with the party who you have outsourced the activity to and this begs the question – how do you repay this trust? Do you pass on all the activities you should be doing to third parties or by ensuring that all the services your client entrusted to you are delivered?

You, as leaders in industry, know your business better than anybody else. As the old proverb goes - “only the wearer knows where the shoe pinches”. In this regard, you may say that outsourcing delivers efficiency and effectiveness, thereby reducing costs to the client, and yes in a lot of cases this is true but it should not lead to a business model that cannot deliver against the expectations of your clients.

Firms that engage in the outsourcing of tasks, must be conscious at all times that while you can outsource the task, you can never outsource the responsibility.

If I may bring this back to trust. When you outsource you trust the provider but your client expects more of you than just trusting, they expect you to ensure that trust is warranted on an ongoing basis. Therefore it is imperative that firms have strong controls in place around the governance and oversight of all outsourcing arrangements.

If we take this a step further, boards of directors and senior management need to ask the hard questions in order to mitigate and manage the operational risks that go hand in hand with outsourcing. Such questions could include the following:

  • Has the firm completed a thorough due diligence analysis on the outsourcing provider?
  • Does the firm have appropriate key performance indicators and monitoring tools in place with regards to the outsourced activity?
  • Does the firm have documented succession or remedial action plans in case there is a disruption or termination of service and are these subject to robust testing on an ongoing basis?

To sum up, all of us have an obligation to build, maintain and protect trust that is so important to the proper functioning of this industry; be careful that a drive to outsource more and more does not damage this trust.

As for us in the Central Bank, I firmly believe that we have been entrusted by society to protect their interests and one way we achieve this is to hold a mirror up to you in industry and challenge you on whether what you are doing is right, it might be cheaper but is it right? A continuous drive to outsource more and more to the extent that firms are doing very little of what was entrusted to them in my mind is something that should be guarded against.

The changing nature of the sector – supervision

Before I conclude, let me give you some insight on the changing nature of the asset management sector in Ireland.

The uplift in authorisation activity has seen a number of firms engage with us that operate business models that we already have significant experience in supervising. As a result, you can expect to see considerable growth in the number of firms operating within the MiFID sector and the fund service providers sector. Needless to say, our supervision strategies for these firms in 2019 and beyond will be driven by MiFID II, CP86 and the protection of client assets.

In addition, through new authorisations and the expansion of business by a number of existing authorised entities, we will see business models in the capital markets and investment banking space being undertaken here. From a supervisory outlook, the breadth and scale of activities undertaken by these entities means that the Central Bank, in conjunction with our colleagues in the Single Supervisory Mechanism, will be responsible for the supervision of new risks, most notably market conduct risk and wholesale credit risk.

As many of these entities operate a hub and spoke model, the impact that these firms will have on a pan-European scale will be quite extensive.

In terms of European engagement, this must continue in a post Brexit world as such participation underpins all of our regulatory efforts in ensuring supervisory convergence across the EU27.

Moreover, in my role as Director, I have participated on various ESMA committees and networks for some time now and it is welcome to see that the work of the Authority continues to evolve with industry – for example last year ESMA launched the Senior Supervisors Forum and the Enforcement Network.

In my view, being active at EU fora is essential in the face of an industry which continues to develop and grow.

As we continue to develop our policy and supervisory approaches, it is important that Ireland, as an exporter of financial services across the EU, is both a thought leader and a jurisdiction that is receptive to the views and concerns of our fellow EU27 colleagues.
We in the Central Bank are very much committed to playing our part in the further development of both of these areas.

The changing nature of the sector – technology

Furthermore, as the landscape continues to change, our role as supervisors must adapt with the times. A case in point is the technological advancements that are likely to have implications for both financial market participants and regulators alike.

In particular, I would highlight the following aspects of technological innovation that are important for us all to consider:

  1. The opening up of the financial services business – this could bring in new entrants to the market, including established and powerful players in non-financial sectors that are leveraging their brands and utilising their own technological innovations to segue into the financial services sector.
  2. The disruption technology may have on existing business models – for example we are seeing big data play a key role in redefining how firms interact with their customers. Additionally, technological innovations such as Distributed Ledger Technology, Crypto Assets and Algorithmic Trading are challenging the old ways of thinking and in doing so are driving industry towards new approaches, products and services.
  3. Cyber-security – with advances in technology, we are also presented with the risk of cyber-security. This risk is most palpable in the financial services sector because of the vast amount of money and data that these firms process each day. What’s more the cyber threat is constantly evolving with the frequency, sophistication and volume of attacks continuing to rise.
  4. Outsourcing – As technological innovation continues to unbundle pieces of the value chain and firms become increasingly reliant on outsourced services, effective oversight of these arrangements is becoming all the more fundamental to well-run firms.

To assist the Central Bank with our work in this area, in April last year, we established an Innovation Hub, which is a direct point of contact for innovative firms; and we also launched an industry engagement initiative. To date, this body of work has informed us of the risks, opportunities and challenges presented to industry.

Over the coming period, we will continue to engage with financial innovators. This will help ensure that we are able to supervise firms in an informed manner and in doing so, meet our regulatory mandate in the context of a changing financial services sector.


I will stop there and conclude with the following.

The uncertainty surrounding Brexit still remains but I am an optimist at heart and I hope that you will agree with me when I say that Brexit does not represent the end of the strong relationship between Ireland, Scotland and the wider UK.

We in the regulatory community and you in industry have worked hard to be prepared for Brexit and I remain confident that these preparations will stand us in good stead in the weeks ahead.

If I can though give my last thought to trust.

Trust is such a powerful word that sets out real high expectations. All of us who work in financial services, whatever our role, junior or senior, have a real responsibility to live up to these expectations. 

Thank you for your attention.


With thanks to Adrian O’Mahony, Lorcan Byrne, Scott Hanson and Simon Sloan for their assistance in preparing these remarks.

1 Lane, Philip R.: The Brexit Discontinuity (2019)