Thinking ahead

The Irish economy has faced some tough challenges in recent months against a backdrop of wider market volatility and financial uncertainty within the Eurozone. But positive progress is being made at a domestic level. While the national economy remains subdued, Ireland now appears to be on track for an export led recovery and its financial services sector can boast some increasingly encouraging statistics.

To put its financial position in some perspective, Ireland is currently the third most open economy in the world.[1] Its exports account for over 100% of GDP, while for the euro area exports account for an average 40% of GDP. In addition to this:

• Over 50% of the world’s leading financial services firms are represented in Ireland
• Ireland is the largest provider of cross-border life insurance in the EU
• Over USD 2trn of fund assets are administered in Ireland
• Eight of the top 10 global  technology companies are based in Ireland
• Eight of the top 10 global pharmaceutical companies are based in Ireland
• US investment in Ireland is greater than combined investment in the BRIC countries of Brazil, Russia, India and China

While the Irish government continues to work through the various challenges facing the domestic banking sector, the International Financial Services Centre (IFSC) has, in stark contrast, been identified as one of the key pillars of future growth for the Irish economy. The IFSC directly employs 32,700 people and contributes €1.4bn in corporation tax annually and a further €700m in payroll taxes, according to a report published in 2010 by the global consulting firm Accenture.[2]

New strategy
The Irish government recently published a new five year strategy [3] that “supports the future development of the IFSC as a source of future employment growth, subject to appropriate regulation.” As part of this initiative the government hopes the IFSC will create over 10,000 net new jobs during the next five years. The government does, however, acknowledge that this can only be achieved by continuing to provide an internationally competitive environment. It is therefore actively targeting existing high potential fund related growth sectors in addition to attracting new business opportunities.

The strategy paper identifies a programme of activity to develop the tax framework and regulatory environment; to co-ordinate international representation, engagement and marketing; to extend the range of international financial services activity and the integrated support for investment and growth and to target skills development and the sustained control of business costs.

The government strategy incorporates the following key drivers and measures designed to underpin the future growth of the financial services sector:

Transparent and competitive direct and indirect tax framework

• Resolute commitment to 12.5% corporate tax rate – the lowest headline rate within the OECD
• Continue to develop tax framework built on transparency rather than secrecy

 Regulation: Credible, responsible and proportionate

• Structural reforms have been implemented
• Increased capacity has been created
• Central Bank of Ireland continues to act as key contributor to the shape of European regulation as it impacts financial services
• Publication of corporate governance code for funds and management companies

 Development of new/expansion of existing business

• Ireland will prioritise its growth as a global provider of shared services
• Convergence of technology and financial services, establishment of a hub for innovative services for finance.
• Centre of excellence for green finance and carbon management – Green IFSC initiative, Green Tech fund management

Beyond this, implementation of the Solvency II Directive is driving structural change which could deliver new gains for Ireland in the insurance sector. Under Solvency II there is a clear advantage for pan European re-insurance operations to centralize their organisational structures in a single head office located within the EU to optimise capital and generate other risk, cost and administrative efficiencies. Against this backdrop, Ireland is keen to boost its own attractiveness in this area to attract new business.  

Asset management ambitions
Importantly, the Irish government is committed to the development of Ireland as a global and European asset management centre. The jurisdiction has already established itself as a leading global centre for the authorisation and servicing of funds and a representative centre for a plethora of securities servicing companies including RBC Dexia Investor Services. The expertise developed in this sphere during the last 20 years for regulating and advising on complex fund strategies also provides a competitive advantage. The recent implementation of UCITS IV and engagement in dialogue towards a potential fifth stage of UCITS evolution (UCITS V) also augur well for the local funds industry. In an effort to build on this success, the government says it is now seeking to “widen the industry footprint by actively targeting management companies, technology firms and clearing systems.”

Ireland has a small but growing base of global asset managers that manage money from Ireland. These companies include Pioneer Investments, which has its European headquarters in Dublin. Other global investment companies managing money from Dublin include State Street Global Advisors, F&C, Standard Life and Mediolanum Asset Management. Asset managers in Asia and the Middle East seeking to establish a European footprint are now being actively targeted, as are alternative managers looking to domicile products in Europe.

The government is now incentivising asset managers to locate research, development and innovation centres in Ireland. This will remain a focus throughout the next five years.

The Irish authorities are also seeking to leverage existing connectivity with global money managers. To this end they are encouraging institutional asset managers with an Irish platform to move greater “substance” to Ireland to benefit from the high quality regulatory and fiscal environment and low cost base on offer.

In terms of investment management product support, Ireland has already established a leading position in the authorisation and servicing of Exchange Traded Funds (ETFs), where success relies on technology and high value processing functions. The Government is seeking to leverage its position as a leading global technology centre coupled with expanding ETF expertise to develop Ireland as the European powerhouse for these products. There is currently €200bn worth of ETF assets domiciled in Ireland.

Ireland services 43% of global alternative investment fund assets and, during the last 20 years, a substantial wealth of regulatory, advisory and administrative expertise has been established to support this business. While the introduction of the Alternative Investment Fund Managers Directive (AIFMD) may create a risk of excluding business from EU markets it is anticipated that the Directive will also create an opportunity as an increasing number of alternative asset managers will seek to establish a European base for their international business.

Funds Industry outlook
Ireland is one of the leading international centres for the administration and domiciliation of internationally distributed investment funds. For the second year running it has been the fastest growing of the major funds centres in Europe.[4] With assets administered rising by 17.2 per cent, assets administered in Ireland currently exceed USD2trn. The jurisdiction also secured the accolade of “Best Offshore Centre” at the annual Global Investor Magazine 2011 awards.

The funds industry in Ireland is also an important employer. The sector currently employs 12,000 people and this is expected to increase by a further 1,000 during 2011. Fund domiciliation and administration is identified as a high potential growth sector and a number of new avenues are being explored to encourage its growth.

The moves include steps to examine the tax framework to explore options to provide for a fund that invests and holds assets in classes such as “green” investments, private equity investments, infrastructural investments, distressed debt investments and emerging markets in a way which ensures that there is no double taxation (an “Alternative Investment Company”).

Industry officials are also currently reviewing the fiscal and regulatory framework in Ireland to explore potential efficiencies in existing investment legislation and will make further recommendations on this.

In a renewed effort to broaden its global footprint the Irish Funds Industry Association (IFIA) recently announced that it is to open representative offices across the US and in the UK. According to the IFIA, staff at the offices will work to promote Ireland as the jurisdiction of choice for internationally distributed investment funds and assist asset managers looking for new product solutions and the expertise Ireland can offer.

Looking forward, the IFIA has also said it will seek to establish offices in other locations, leveraging the existing extensive international network established by the Industrial Development Authority (IDA) in Ireland.

The Irish Government has clearly set out its targets for IFSC growth in its new five year plan. With its new strategy the Government has a renewed mandate and is determined to drive the implementation of this plan to ensure that the IFSC achieves its potential in a changing and highly competitive global environment within the next five years.

Annette Stack
Director Sales & Relationship Management, RBC Dexia Investor Services Ireland Limited

[1] Wall Street Journal Index of economic Freedom 2010

[2] The IFSC – the international financial services sector in Ireland

[3] Strategy for the International Financial Services Industry in Ireland 2011-2016 – Department of the Taoiseach

[4] Based on statistical data from the EFAMA Quarterly Statistical Release, Quarter 4 2010

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