Opportunity and trust: Europe’s capital market and the Irish funds sector - Speech by Governor Makhlouf at Irish Funds Annual Global Funds Conference

Good morning.

Thank you for the invitation to speak here today.

The success of Ireland’s funds sector is well known.  Europe’s second-largest fund domicile and a top-three global player, Ireland now hosts €5.6 trillion in investment fund assets and serves investors around the world.

This success is a credit to the industry – the firms and the people in this room –  and has been built on the strong foundations of our regulatory framework, allowing the sector to grow, to adapt, and to demonstrate resilience in the face of significant external shocks in recent years. I will return to that.

But first, I want to take a step back, to frame today’s remarks around a question that matters both for this room and beyond: what Europe needs from its capital markets, and what it will take to deliver it.

Europe’s Capital Market Opportunity

Deeper capital markets matter for growth, for resilience and for households.

They matter for growth because the innovative firms that Europe needs to boost productivity are often better financed by risk capital than by bank lending alone.¹

They matter for resilience, because risk is spread across borders, firms and sectors and because diversity of funding sources itself enhances the resilience of our economy.

And they matter for households.  With the right investor protections, broader participation in markets can support households’ long-term financial resilience. Only around a fifth of euro area household wealth is held in financial assets.

In a recent speech to the European financial sector, I argued that capital follows real economic activity.  Europe does not lack savings. But capital seeks the best risk-adjusted returns, and too often it finds them elsewhere.  

Completing the Single Market and strengthening Europe’s growth is how we change that: creating investment opportunities through fostering a productive and innovative economy.

It is also about ensuring our regulatory frameworks are not getting in the way of these opportunities, be it through fragmentation, calibration or regulation that doesn’t enable our capital markets to evolve and grow sustainably.

I have spoken before about the need for Europe to meet its moment. To remain open while bolstering its resilience.  To complete the single market, our greatest asset, as well as to focus resolutely on deepening and developing our Savings and Investment Union.

And as different proposals – in particular but not only related to Market Integration and Supervision – are being considered I think it is important for Europe that we are focused on ensuring we are both removing barriers and enabling opportunities.

Because put simply capital goes where the opportunity is.

And, as we seek to deliver on these aims – of a more investable economy, and a more effective and efficient regulatory framework – we must also remember this fundamental point: trust is the crucial underpinning of our economy and our financial system.

And so while capital follows opportunity, it also flows to and stays where there is trust.

Taking the opportunities – technology and participation

I want to talk today about both trust and opportunities for the Irish financial sector.

The opportunities for this industry, and the trust on which they depend.

The first opportunity is technology. Distributed ledger technology, tokenisation, and associated innovations have the potential to transform our monetary and financial system.

This very much includes your sector, and aspects of how funds are structured, operated, and distributed.

Tokenisation of fund units could deliver efficiencies in settlement, improve transparency, and broaden access to investment products.  These are worthwhile objectives, and I welcome innovation that delivers benefits to investors and market functioning.

But technology in and of itself will not deliver those benefits and tokenising one aspect of the system is not enough: to unlock the true potential of this technology the whole eco-system must involve, which includes tokenising both assets and money, as well as changing practices and not just the tech behind them.

This is why central banks have such an important role here too. Tokenised markets need to be underpinned by a safe settlement asset in tokenised form. Which is why the Eurosystem has just enabled transactions on DLT platforms to settle in central bank money.²

Here in Ireland, we published a discussion paper earlier this year, to inform our thinking across the whole of our mandate.  And across a number of sectors, including your own, our authorisation regulation and supervision work increasingly relates to this technology.

But for innovation to live up to its opportunity, it must be done well, with appropriate safeguards. Put simply it must be trusted.

This means robust risk management that scales with the size of your business. New technologies can sometimes mean new vulnerabilities, in cybersecurity, in operational complexity, in custody and legal certainty, and in the adequacy of existing governance frameworks to oversee upgraded processes. And so, as with all innovation, firms pursuing tokenisation must demonstrate a thorough understanding of the risks as well as the opportunities.

The second opportunity is retail participation.  Europe’s Savings and Investments Union aims to draw more of its citizens’ savings into markets, through simpler products.  And this industry is well placed to provide these opportunities.  As more European households enter markets – perhaps through funds domiciled here – both the opportunity and responsibility will only rise.

Retail participation can be supported through well-designed and appropriate products, clear information, a strong regulatory framework and increasing levels of financial awareness, understanding and literacy. This is clearly in the long-run benefit of both our citizens and the economy, and so it is important we get it right.

Trust and deeper capital markets

Which brings me to trust.  Maintaining that trust is a task for central banks, regulators and for the financial sector itself.

Delivering this requires a financial system that is well-run, that has resilient fundamentals and that works in both good times and bad.

I want to highlight three aspects of this: resilience to shocks, resilient operations and resilient governance.

First, resilience to shocks.  Recent years have tested the funds sector: the exceptional liquidity pressures that accompanied the onset of the COVID-19 pandemic, the rapid repricing of assets in the wake of monetary policy shifts, the disruptions arising from geopolitical conflict.  

In each case, the sector navigated these challenges with a degree of stability that reflects well on the operational and risk management frameworks in place.

But I caution against complacency. Each of these episodes also revealed vulnerabilities we must learn from, in relation to liquidity management, valuation practices, and contingency planning.  And many of these also saw significant policy responses from policymakers and regulators to help absorb the shock.

This is why, along with peer regulators we have focused on learning these lessons, and strengthening the overall resilience of this sector,³ including measures to strengthen liquidity management practices in the funds sector earlier this year as well as our recent consultation on liquidity in money market funds.

Second, resilient operations which is at the forefront of supervisory attention globally.  Business continuity plans are the minimum requirement.  Regulators need to be confident that firms have embedded operational resilience into their day-to-day decision-making and their governance.  In short, they are looking to see if operational resilience is part of a firm’s culture.

Firms must be capable of delivering critical business services to investors and counterparties even under stress.  It is about understanding your dependencies on people, technology, and third-party service providers and having credible plans for when those dependencies fail.

The Central Bank has been very clear on our expectations in this area.⁴ What our cross-industry reviews have found is encouraging in parts, but uneven across the sector. Some firms have taken a genuinely strategic approach to operational resilience. Others remain too narrowly focused on compliance with minimum requirements. The next disruption will not wait for your operational resilience framework to mature; and given the rapid developments we are seeing in technological capabilities, it may be sooner than you think.

I want to draw particular attention to concentration risk in third-party service providers. The asset management industry, like much of the financial sector, has become increasingly reliant on a relatively small number of critical technology and infrastructure providers.

Efficient perhaps, but it also creates systemic vulnerabilities. If a single cloud provider or a single data management platform experiences a significant outage, the ripple effects across the industry could be profound and, as retail participation grows, across households too. We expect you to have exit strategies, to test them, and to ensure that your boards and senior management understand the dependencies that underpin your operations.

Together, digital resilience and operational resilience ensure that the firms entrusted with managing investors’ assets can do so reliably, continuously, and with integrity.

Third, resilient governance.  Governance is fundamental to delivering both resilience and trust in the financial sector.  And I know this sector recognises the importance of governance in asset management, and in many ways Ireland has led the way in the strength of its governance frameworks in this sector.

Specifically on delegation, which the Central Bank supports, it is an important feature of the European asset management model and allows Europe and Ireland to serve as a global platform for funds, connecting investors in one region with investment expertise in another.  

But credible delegation must also mean genuine substance: real decision-making capacity, effective oversight of delegates, and senior management with the authority and the expertise to challenge and, where necessary, override the decisions of delegates. This is something we review regularly,⁵ and we will consult on changes to governance of fund management companies early next year.

Getting substance right is essential to ensuring the funds sector continues to be resilient and well-run.  It is also essential to continuing to deliver trust. Which has been such an important part of the success story of the Irish industry, becoming a global brand, a standard of quality and regulatory rigour that is recognised and trusted worldwide.

Such trust comes with the responsibility to maintain it. We embrace this responsibility, and work hard to ensure we have a regulatory and supervisory framework that enables the sector to be well-run, resilient and indeed trusted. And I know you also recognise the importance of a strong regulatory framework for a strong financial services sector.

Conclusion

To conclude, I began with a simple proposition: capital goes where the opportunity is, and it stays where it is trusted.

Creating opportunity is Europe’s task. It means strengthening our economy and realising its potential by completing the Single Market and building capital markets deep enough to retain European savings and attract investment from abroad.

Maintaining trust is a task we all share.  

For the financial services industry, that means the highest standards of investor protection, of governance, and of risk management, not because a regulator demands it but because it is good for business.  

For the Central Bank and its role as policymaker, gatekeeper, regulator and supervisor, it means being forward-looking, connected, proportionate, predictable, transparent and agile.  It means evolving our frameworks, continued investment in our supervisory capacity, undertaking thematic reviews that probe not just compliance but culture and conduct and, importantly, continuing to take enforcement action where necessary.

Working with you, we want to see this industry grow sustainably, credibly, and in the service of investors and the wider economy, helping European citizens and businesses benefit from one Single Market in goods, in services and in capital. 

I suggest we share a common purpose: a trustworthy industry, well-governed, and resilient, not just for today but prepared for whatever tomorrow may bring.