DUBLIN (Reuters) - Ireland’s Deputy Central Bank Governor with responsibility for prudential regulation, Ed Sibley, spoke to Reuters on the status of financial services firms flocking to Ireland over Brexit, how prepared the country’s varied financial system is for its near neighbor’s EU departure and the bank’s mortgage lending rules.
The following are highlights from the interview.
“I’ve said before that the numbers around applications and authorizations are not the best guide of activity or the level of business that’s coming to Ireland, so we can have a license extension which we’ve seen in the case of the likes of Barclays or Bank of America, which would be very material in terms of size of operations and then we can have a small asset manager or payments institution which can have very low levels of staff here.”
“We’re well over 100 authorizations or authorizations in principle where we’ve said you’re authorized in principle subject to certain conditions so for instance putting capital in and then they will be authorized.”
“We still have a number of applications that are in train, many will be completed before Oct. 31, some won’t. You can imagine those that are with us now, typically ones that have come relatively late — and there have been some late comers — or potentially haven’t necessarily met our standards to start with. We’re doing our best to get through them without compromising what is a very important role from a gatekeeping perspective. Being pragmatic but making sure that what we’re seeing in terms of governance, staffing and controls are commensurate with the risks in the business on day one but then possibly build out thereafter in terms of what’s coming in the future.”
“I guess it would depend on the particular circumstance of the firm. Some of the firms that are operating in Ireland have services say from the UK into Ireland, if they’re not authorized, they’re not authorized and we would expect them not to be taking authorized business. Some of them are seeking authorization to continue to do business in other parts of the EU, the similar rule would apply unless they have contingency plans which some do.”
“I have some sympathy for those smaller firms that maybe wanted to wait and see and were hoping for the best. Very few of the firms would have undertaken this kind of expense and the challenge around seeking new authorizations, the friction within their business that has been created because of Brexit. None of them would have sought this out for business reasons. If you’re a smaller firm that doesn’t have the deeper pockets, you can understand the motivation for holding off and holding off and waiting but they are regulated financial services firms so I have some sympathy but I don’t think it’s okay.”
“Clearly as things has developed and the probability of a no-deal exit has undoubtedly increased, it becomes a bit more real and they need to take action but the vast, vast majority of firms that have engaged with us have engaged in a constructive, professional way and are either through or will get through over the next month or two. The larger entities are pretty much all through, with maybe one or two exceptions. We are still seeing some of the asset management, payment institutions that are not there yet and we’ve written to some who are likely not to make it in terms of the 31st of October.”
“I’m confident that the work that we’ve done to make sure that the governance, oversight, controls that are in place for those firms that are being newly authorized or changing their business in some way because of Brexit have sufficient resources. If they are firms with small numbers of people here, it’s because they are small firms, it’s not because we are compromising what we think is necessary from a risk perspective.”
“If you think about the very big number of asset managers and investment firms that we have in Ireland supporting the funds industry, a lot of those firms are pretty small and would have a fairly thin layer of executive management, with non-execs and maybe quite a lot of outsourcing associated with that so actual full time equivalents (employees) within those firms are actually quite low. As we have gone through these authorizations, there are some practices that we have seen at the point of authorization that have maybe grown up in Ireland over a number of years that we are actually asking ourselves, do we think that is appropriate? So the use of services companies very extensively in some institutions, outsourcing in the asset management industry and so on. We continue to learn and indeed we have seen some new business models too, and we’ve had to think about our approach to them.”
“I don’t know if we’ve absolutely formally defined it (what a letterbox entity is), but I would see that as a firm that has no substance here. It might have a balance sheet here but it doesn’t have any physical presence here. I’m confident that we have been very clear from the start that we wouldn’t accept that, we don’t accept it today in terms of the firms we’ve had pre any Brexit authorizations and we haven’t accepted it through the authorization process. You do get into discussions about what is enough. There aren’t any firms that have been authorized with no presence here but what is enough to demonstrate they have enough resources, enough capability? It’s not just numbers, it’s capability, it’s experience and inevitably there is some judgment in that. Sometimes we’ve had firms come in undercooked and we’ve said we can’t see how you can run that from here, particularly when you’re talking about a European operation. There’s a bit of back and forth, ultimately that delays the application and we see that the numbers come up.”
“Generally speaking I think we’ve done a good job, lots of people have worked really hard within the bank to make sure that we do a good job working with firms as they go through authorization. What we’ve tried to do publicly and privately is to be very clear and transparent about what we expect and what firms can expect of us, and we have sought to deliver in light of that. I think we can take a high degree of pride in the efforts of the staff of the central bank but that’s not to say that there haven’t been tensions along the way because some of this is quite judgmental and we will form a judgment that maybe the firm doesn’t agree with but we’re happy to have the back and forth, we’re not rigid about it, and if there are alternative ways the firm can demonstrate the risks can be managed then we’re very happy to hear them. What we’ve also tried to do is make sure that we’re operating in line with good European norms and we’re also influencing them and I think that has stood us in pretty good stead.”
IRELAND’S INTERNATIONAL FINANCIAL SECTOR BREXIT PREPAREDNESS
“If I look at it at a system-wide or macro level, I’m satisfied that the system as a whole is robust enough, the preparation has been done in the aggregate. While a UK departure on Oct. 31 without a deal would be very challenging, we’re not going to have an immediate crisis in the financial services system. That’s not to say that every firm in every instance is 100% prepared for it, we simply can’t give that insurance. We will continue to push the regulated firms to make sure they have prepared. The way I look at it is given the kind of macro, political, societal impacts of Brexit on Ireland, it’s really important that the financial services system a) isn’t adding to the woes and b) continues to be there to support the business and the people who will require support after Oct. 31. So from a system wide level, the shock will be significant enough but manageable.”
“I think there will be issues from a consumer level, particularly the availability of some products in insurance, the handful of bank customers who still have mortgages from UK banks in Ireland. Those types of issues may crystallize, which would be very difficult for those consumers and we’re trying our best to mitigate them but it’s not a wide financial stability as I see it. If I have an insurance policy from a UK provider who hasn’t made arrangements post-Brexit, while insurers will continue to pay out under the (government’s Brexit) Omnibus Bill, they can’t write new policies if they are not authorized to do so in the EU. So what we are seeing is that supply of insurance to certain sectors or in certain niche products has already reduced a bit because if I’m an insurer operating in the UK and I’m providing a bit of service into the UK, the costs associated with seeking an authorization relative to the business I’m doing there hasn’t really stacked up. You see the anecdotes reported in the press in the leisure and childcare industries, some of that is a wider cost of insurance but some I think is partly Brexit-related.
“There are borrowers that have a home in Ireland that have mortgages with a UK bank that if the UK leaves without a deal, won’t necessarily be authorized to service those mortgages. It’s a very small number and we’re working very hard to push the firms to continue to services those mortgages. These are pretty large UK institutions that may have other EU entities here in Ireland or elsewhere so there is a potential solution to transfer their small books to another part of the group and that would be our first preference. If they don’t, then ultimately they would probably have to refinance.”
“I think they’ve done a lot of work, not only in terms of their own operations but also in fairness to them, they’ve been thinking about their customers too so from an operational perspective I’d be pretty confident they’ll be ready. In terms of wider resilience, this is the work of the last decade so from a business model perspective, from a funding perspective, from a governance, control, risk management perspective, they’re in a very different place to where they were 10 years ago. I wouldn’t be concerned that we will have an overnight problem. The challenge will be that the domestic banks are focused very much on the domestic economy and the potential macro shocks for Ireland, we’re going to see them play through into the domestic banking system. Now, we’ve seen the EBA stress tests and other work that we’ve done that isn’t necessarily public, that we think they are resilient enough to survive that so it isn’t going to cause a massive financial stability problem. But it will be difficult for them, it will be damaging for the economy.”
“On the UK exposure (of Irish banks), I have to be careful because we are primarily talking about one bank that has the most significant exposures but there has been a lot of work done in the UK, they have pretty stringent capital requirements, subsidiaries in the UK are well funded, well capitalized. It’s an exposure and who knows how that is going to play out but I don’t think it’s an existential problem.”
MARKET DISLOCATION IF NO DEAL BREXIT NOT CORRECTLY PRICED IN
“I think it’s becoming a bit more priced in, the most obvious place to see that is the exchange rate and maybe you can see that partly in Irish bank share prices so I think the market is more alive to it or more pessimistic perhaps is a better way of putting it. Again, it comes back to that resilience point and thinking back to the different parts of the financial system here and how prepared are they for some dislocation in terms of capital markets, ability to access wholesale funding, redemptions in the funds industry, what particular funds are exposed to the UK and how liquid are they. It’s those type of issues that we’re think about and engaging with the firms on to make sure they are well prepared for that eventuality.”
“There are some complexities in terms of what are we responsible for in terms of equivalents and what are the European authorities responsible for, including ESMA and also the Commission. We will continue to keep these things under review, the UK will never be more equivalent, assuming it goes, than on Nov. 1. Now we can expect, I think, some degree of divergence over time and we will try and be pragmatic, subject to the things that are within our gift.”
“(Outsourcing) is an area that we have continued to look at, the EBA (European Banking Authority) has just recently or is about to publish some further guidelines on outsourcing. It’s very prevalent, there is very strong business rational in many cases for significant levels of outsourcing but you cannot outsource the risk and firms need to be able to demonstrate that they can manage those risks and take responsibility for the risks, albeit some processes are being outsourced. It is something that we continue to go through, we have seen some proposals that have come through that are already in existence here that we are challenging at the point of authorization and from a level playing field perspective, we have to make sure that we are doing that for existing firms too.
“We continue to look at (fund firms which have established a management company in Ireland) and we published our expectations in relation to management companies in relation to CP86 (Consultation on Fund Management Company Effectiveness). We are doing some work this year in terms of what that actually looks like on the ground and that brings in outsourcing, substance. It’s actually been helpful to see the new firms come in, we’ve been very clear in terms of what we expect from them. We’re applying that same lens through ongoing supervision including the ongoing review of how CP86 has been implemented.”
IRISH GOVERNMENT’S PAY RESTRICTIONS ON DOMESTIC BANKS
“We’re only talking about three banks here that are subject to the pay cap and ultimately this is a call for the political system. I think it’s perfectly plausible at the senior level to get good people to run a retail bank for under 500,000 euros (annual salary). The question for the shareholder (government) is are they going to maximize shareholder value by doing that but I do think that’s a different question and evidentially it remains plausible that you can get someone to run those banks at a senior level. Does that mean they can’t go and earn more money elsewhere, well that’s obviously not true either so there is a risk that they will continue to lose staff at senior levels and we’ve seen that with quite a number. So maybe turnover will be higher as a result but I think it’s manageable at that senior level.”
“Where I think there are perhaps more acute challenges are in certain parts of those banks and where there has been a degree of controversy or actually misreporting, if I’m honest, of what we’ve said is effectively having no ability to pay variable remuneration might not be the best thing. A lot of things have changed since the crisis around how variable remuneration is paid, if they are well designed in terms of thinking about the culture, risk management, then variable remuneration can actually be a positive in terms of how a firm is run. Without it, that potentially might cause some problems in risk management functions or IT or other areas where the (jobs) market is hotter and I have some sympathy with that argument. I think the two things - the 500,000 euro cap and variable remuneration - get conflated and I think it’s important to distinguish between the two. But it is ultimately a political issue.”
ON POTENTIAL FOR TWEAKS TO THE CENTRAL BANK’S MORTGAGE RULES
“I think there is a broader question around housing in Ireland and some fundamental problems there that actually date back to before the crisis and the coming off a cliff in terms of home completions. That again comes into political policies and is a bigger issue in terms of what we see with higher rents and challenges for some getting on the housing ladder.”
“My own perspective on it is that I would need to see the evidence that putting more credit into the system is going to do anything other than push up what people are paying for the same house or flat. It would simply bid up prices, where it’s actually a supply problem rather than a demand problem. We have the exemptions there that do talk to a little bit of what the Taoiseach (Prime Minister) talked about in terms of those that may not have the full deposit or meet the criteria from a loan-to-income perspective. I think there has to be a pretty high evidence bar in order for us to make change at this stage and I genuinely haven’t seen any evidence that would suggest to me that a supply side problem is going to be solved with putting more credit in to boost the demand side.”
Reporting by Padraic Halpin; Editing by Catherine Evans