Transcript of Deputy Governor Derville Rowland’s Q&A interview at EY Funds Business Breakfast

21 December 2022 Interview

Derville Rowland

Q&A interview with Deputy Governor Derville Rowland and Lisa Kealy, Partner, at EY’s Business Breakfast on 6 December 2022

Transcript edited lightly for length and clarity purposes

Lisa Kealy: So, Happy Christmas. We are allowed say it now. We are in December and Christmas FM is on and wonderful to have you, Derville, really wonderful to have you. So, Derville, as we all know, is Deputy Governor of the Central Bank.

Derville Rowland: I also want to say Happy Christmas to you and to all the audience. It is the end of a very long and busy year, particularly I think in the funds sector. So, I am quite sure everybody is looking forward to a well-deserved break over the holidays.

Lisa Kealy: And I think that is very well said. You know, a very long and let’s use the word uncertain because it is the theme of our conference. It has been a very long year and let’s pause on certain of the events, Derville. Our event is exploring opportunities in uncertain times and if we reflect back over the last year, as you say, man alive, it has been a long one, Derville. And it has been very uncertain with new words entering our vocabulary – double digit inflation, multiple interest rate hikes, higher cost of living, higher cost of funding, energy crisis, market volatility. And then on the geopolitical side if we look at the UK, we have seen that certain policy decisions are very unforgiving. The US is talking about a recession, and we are all living with the devastating war in Ukraine. And I think with all of that going on we know as individuals how we react. These events make us feel differently. They make us behave differently and they make us, as individuals, make different decisions. I know Derville when you look through the Central Bank’s eyes, again, you are reacting to what is going on in the environment. So, just really interested in your view of risk, your policy agenda in light of everything that is going on, Derville, and maybe to ask given all of the uncertainty, are you becoming more comfortable with being uncomfortable? So, what are your thoughts?

Derville Rowland: There is a lot in that, and it is really true, the risk environment has changed really considerably from the way we were analysing it 18 months ago. We have domestically - if we just look at Ireland first - we are in a global context with much higher risk, high inflation and you are seeing interest rate rises, the ECB discharging their mandate to seek to address that inflation issue, but that transmits into lots of other risks. And if you look at that, what we have is a poly-risk environment. We had the illegal invasion of Ukraine by Russia. We had the impact then on energy pricing and we have cost-of-living challenges domestically and internationally. So, Ireland is positioned to still grow in the forthcoming period, but it is in that wider international challenging context. I think what we now see is we can expect the unexpected and we can expect it more frequently. The big lesson that we have learned is that we expected seismic events maybe once in a decade, but we are actually seeing that increase in frequency and there is an overlay of risks. So, actually, it drives up resilience, risk management, crisis management right up the agenda for all of us. We have a very big forward-looking agenda in terms of resilience, risk management - data underpins all of that – (and) we have a big focus then on macroprudential policy in the funds sector. And I know that you will have heard a little bit about that previously from me and my colleagues when we are talking about managing the risk effectively. It is not a national concern; it is an international concern. We are really supportive of the funds industry. We absolutely recognise they bring huge benefits to economy, they strengthen the diversification of risk, and they offer great opportunities for investors to strengthen their portfolio investments... But they have grown significantly and that underscores their importance, so (the area is) really top of the agenda for the Financial Stability Board in terms of work already done on structural vulnerabilities, and liquidity management tools have been a big international focus. There is a European focus too as you know with the review of AIFMD. And of course, it is important to say because we are such a large funds jurisdiction, we are very involved in all of this work in IOSCO, in the FSB and of course in ESMA and internationally. And it is really important we have a voice in the shape of the policy frameworks and looking at the issues as well as the solutions to those. So I guess that means we are busy but of course that only reflects the business of the funds sector too.

Lisa Kealy: You are touching on the European agenda as well, Derville, and I know that you are integrally involved in that. The reality in a post-Brexit world is an awful lot of the financial risk is now outside the EU27. That is very important and there are lots of conversations about open strategic autonomy and that is the big topic at the moment with the focus on strengthening the EU, making sure we are competitive, but then making sure we are consistent in our regulatory focus. You know, really interested in your view, the Central Bank’s view, what is your current focus Derville in that debate? Where do you see it landing? If you had that magic, wonderful crystal ball and you were to look five years down the line - would you see the role of the NCA versus the European Regulator change and evolve over that period of time?

Derville Rowland: So you put your finger right on the pulse of the issue. We want to look at regulatory consistency in Europe because, actually, unhelpful competition and regulatory competition has no role in a high-quality regulatory system. We want to see thriving financial services that support economies now and into the future. That is the purpose of regulation actually, to safeguard stability, protect consumers and investors and we have to do that in a balanced and informed way and of course that involves taking risk. With the respect to the recent market turmoil events with LDI funds, that is a really good example where we engaged openly and transparently with our colleagues in the UK, because it affected obviously the UK and there were some (affected) funds located here. We also reached out to ESMA because we are part of ESMA, and it is really important to problem-solve together. Other jurisdictions in the EU were also affected. So, actually part of our approach was to proactively reach out to get an alignment of approach that is good for regulation. It is actually very good for the funds involved too. And I think you will see a very aligned position from the UK, from Ireland and other jurisdictions supported by ESMA. And that represents what I think was our trademark approach where we want to be open and transparent, and we recognise actually working with the UK and other third countries as closely as possible remains a really important approach. Now, in terms of our role in ESMA, it is true we take that very seriously because we are a national competent authority, and it is our responsibility to regulate in Ireland, but we don’t do that alone. The European model of supervision involves ESMA as the European Regulator and we are part of ESMA. We sit on the management board and that has strategic oversight responsibilities of the direction of ESMA and its work programme direction. So, it is important that we have a voice there in shaping the agenda. We sit on the Supervisory Board. I chair the IMSC. We participate globally and we try to knit a consistent agenda and positions together. My view, for what it is worth, is that you will see further change in Europe in terms of expectations around funds, informed by open strategic autonomy considerations. Where that will land, I can’t predict. It is really important that we have a very high-quality, well-informed debate and I think that the role of NCAs and ESMA will continue to be strong but there is a very important role for NCAs with respect to their own industries to regulate. But remember we are working in an EU27 context. We are mostly working in EU frameworks. There needs to be convergence - we are a big supporter of that. The key focus area for ESMA is to drive convergence. In the end, it is a good thing for global and pan-European businesses. So, I see us continuing to be a strong voice in ESMA.

Lisa Kealy: You have mentioned the AIFMD review. You have mentioned sustainable finance. You have mentioned leverage and liquidities, so we might pick up on a couple of these topics. So, let’s start off with the AIFMD review - substance delegation. In many ways, you in the Central Bank took a lead there when it came to CP86. I am interested in your view, Derville, do you believe your drive on substance has largely been heard and are we close to having that addressed at a country level in Ireland? Then as you look at the AIFMD review, as you look at the individual accountability framework, how is that going to dovetail with CP86. So, what next and where are we in that agenda?

Derville Rowland: So, it is a big agenda, and it is going to remain so for quite some time. It is important to start with CP86. If we step back, it was actually about looking at the funds regime and effectiveness of fund management companies. Of course, substance was part of that, but only one part of that and the whole framework was about looking at governance, organisational effectiveness and importantly effective oversight. And I think it is a good news story that we found. We did a lot of work as I am sure all of you and the audience will recall. We did a lot of work to test this, and we were very satisfied that, implemented well, the framework operated in Ireland delivers well on expectations and that is a really good starting point. We also saw some firms had indeed achieved the right level of oversight, skills, experience and substance, while others had work to do but it was a positive set of findings for us because we felt we were on the right path. Moving forward, firms did an awful lot of work to address the deficits. You will recall there were industry letters and we said we would follow up and we did a follow-up survey in 2022, and the results will be released shortly. But it also true to say that delegation remains an area of focus and delegation and substance are closely intertwined, and I think that will remain the case in Europe as a whole, now and into the future.

Now, the AIFMD review has not completed yet. So, I can’t exactly say with certainty where it will land, but if it follows the pathway that we expect, we can see more reporting of delegation and oversight approaches in the funds area together, I think, with other changes that will apply more broadly. But that will mean then that that enhanced reporting and maybe particularly to third countries will be a particular focus in ESMA. And they will build templates and approaches to acquire quite granular detail about that to inform their view. They also will do further work and analysis on that. And then, what you can expect is that that will inform reports back to the Commission and you can probably expect further developments in this area.

I am just going to touch on the individual accountability regime. But I am going to keep it relatively high level and say actually this is about trust. This is about good governance and trust, and I am sure again the audience will remember that this approach is going to be introduced on a phased rollout basis. But I really don’t think any good business has anything to worry about. I genuinely say that. It is about what well-run businesses do all the time, day in, day out with good professionals working in them. There is no magic or complexity in this. I think of (the requirements) as back to basics which is about acting with due skill care and diligence, acting with honesty and integrity and acting in the interests of consumers or investors.

Lisa Kealy: So, a great alignment with many corporates value statements. You know, just in terms of doing them the right thing. So, really interesting and the back-to-basics, Derville. Maybe picking up on that, doing the right thing. We have got sustainable finance. We are just out of COP27 where it is quite clear the urgency to transition to carbon neutrality has never been greater. We are acutely aware of the role that our industry has to play, the wider financial services industry, but also the asset management industry. We are also aware of the challenge. When you mentioned data earlier, Derville, we are aware of the challenge for financial services around data. The quality of the data, the risk of data overload. How best for us, collectively, to navigate that challenge, Derville?

Derville Rowland: So, I actually think we are all on a journey with data and our ability to harness it in our businesses more broadly, and then there is a particular discussion around sustainability because it is new and we need to get it right. But I actually think you need to role model what you are saying for businesses and industry. I will start by saying I recognise that, in the funds industry, a huge amount of resource and personnel have gone in to harnessing technology and data to better run the businesses and better serve the needs of their customers…

On sustainability, what we actually see - which is quite interesting - is (that) most of the funds already in existence today are described as Article 6 funds. And our gatekeeper function can see the trends that are changing. And we see a lot more but it is still small, funds that are being described as Article 9 funds. But we expect that to continue over time and the high-quality data to inform that, is absolutely essential. So, we think actually this is a real opportunity for good businesses to thrive.

Lisa Kealy: So, let’s think about opportunities then. We are nearly at the end of 2022, and I am sure as you look out you have your thoughts on your agenda and focus for 2023. So, what can we expect? What is the biggest opportunity for our industry? What will be your big focus areas and is there any advice, Derville, you would give as we close out 2022 and look to 2023 for our wider asset management industry.

Derville Rowland: So I would say the biggest opportunity in business terms is the green agenda. I think resilience - so that our funds are there now and into the future with a high degree of ability to manage crises as they arise - is an area of focus for us and for businesses who want to be there in the long term. It won’t surprise you to hear me say that a continued area of focus for us will be liquidity, leverage, and us playing our part internationally in shaping the regulatory frameworks and agenda. It is important given the size of the sector in Ireland that we play that role. It is important that the Irish domiciled sector can withstand shocks so that we are here to serve the needs of investors into the future. I think you will see us focusing on depositories next year, because again we are part of a peer review from ESMA on that. And the IMF work that we were involved in will lead us to map the ETF ecosystem in Ireland. That is some of the work that we will be doing. (We will also focus on) enhancing our own gatekeeper role. It is important that that is efficient and effective and, of course, key for us is … having an open and engaged dialogue with industry, so we can hear from them and as we move forward our policies are better informed by the issues from their perspective and the concerns that they have too.