Financial services are important to the Irish economy. The sector is a big employer. Over 105,000 people work in the domestic and international financial services sector, just over 4.2% of total employment, and it has contributed €19.3 billion to the Irish economy in 2019, i.e. 5.5% of total GDP. It was on a growth trajectory before Brexit (see Fig 1).
One of the key ingredients to the sector’s success has been the International Financial Services Centre, established in 1987 in the former Custom House Docks in the heart of Dublin. The IFSC was conceived as a regeneration project, blending commercial and residential development, and has been largely successful on both counts. This has been key to Ireland’s huge growth in international financial services, which employed just 100 people when Taoiseach (Prime Minister) Charles Haughey backed the ambitious plans 35 years ago.
The IFSC is still a centerpiece of the industry, although many businesses are now based elsewhere in Dublin. New offices are springing up all around the city centre, north and south of the iconic River Liffey which runs through its heart.
Brexit seems to be giving a new boost to the sector, strongly encouraged by the current government, says Minister of State for Financial Services, Seán Fleming: “The international financial sector is doing exceptionally well. Employment has grown by over 2,000 over the past year,” taking it to over 50,000. He is quick to point out that this is not just a Dublin success story: “ People traditionally thought it was just Dublin, but a third of employment in the wider financial services sector is now based outside of Dublin.”
Ireland has showcased its credentials in the European Union and financial services, the minister said, citing the country’s openness as a great strength. On a recent visit to a large financial services company in Dublin, he was told that it employed people from 66 different countries. “We have a very diverse workforce and that’s another strength. We get a great diversity of thought,” Fleming said.
Raise your game
One challenge that Ireland has turned from a potential weakness into a strength is regulation. Over the years it has been plagued with failures, particularly in the insurance sector, which has damaged Ireland’s reputation. A key part of the government’s ambitious financial services action plan has been to ensure its regulatory regime has upped its game to ensure such failures are firmly relegated to the past.
This was essential if Ireland was to take advantage of the potential opportunities it saw following the UK’s departure from the EU. Any regulatory slippage would have seriously undermined its case with UK businesses looking for a home in the EU from which to serve European customers.
The years of collapse, with high-profile names such as Quinn and Setanta, have left their mark, agrees Moyagh Murdock, chief executive of trade body Insurance Ireland. “There was significant volatility and a race to the bottom over those years, compounded by weak regulation. We have moved away from that and now have very robust, best-in-class regulation. a change of culture because the regulator and the consumer are now very well protected,” she said.
The answer, says the minister, has been to set the regulatory bar deliberately high. “We are not a country of iron plates. People must have boots on the ground. It’s tougher because it’s better, but we think it’s sustainable,” Fleming continued.
It’s a message you hear repeated everywhere you go in Dublin. “Strong regulation is very important for trust,” says Paul Sweetman, director of Financial Services Ireland, the industry’s leading lobby group.
“The Regulator [the Central Bank of Ireland] and the government was clear that there would be no truck with brass plating. Companies were very clear about what they were being told and when they went through the process they knew it had been difficult,” says Michael D’Arcy, chief executive of the Irish Association of Investment Managers, who saw the number of its members to grow from 13 companies before Brexit to 21 today. Dublin is now home to 17 of the world’s top 20 asset managers.
Arguments for strict regulation have trickled down to international companies looking to establish a European presence. Stephen Cross, CEO of the European branch of American multinational insurance broker McGill and Partners, says this has been a major factor in their search for the right European base in 2020. “Our approach has always been to go to a domicile which had a very good reputation and a strong regulatory body.
Other options promised an easier route to authorisation, but they were unattractive: “We didn’t want to choose lower standards and then have to start over”, a reference to the determination of the European Occupational Pensions Authority insurance (EIOPA) that everyone should be leveled to the same standards.
Building on the momentum of post-Brexit opportunity remains a priority, says the minister: “At first some of the new permissions were defensive, but now people are saying it’s a platform for growth.”
We want people to know that if you are looking for talent and skills, you will find them in Ireland
The marriage of growth in international financial services with Ireland’s well-established reputation in the technology sector is where he sees exciting opportunities: “The big change has been in Fintech. Fintech has really caught on.
Sweetman says the entire industry shares that goal. Brexit has created “a very strong opportunity for Ireland with international financial services. The sector has grown and attracted new capital and foreign direct investment. We have a very strong technology sector and a very successful international financial services sector. At the International Financial Services Center, we have world-leading companies in both sectors side by side. The potential for collaboration is unmatched elsewhere.
“We’ve been punching above our weight in the tech industry for a few years. In the Fintech world, we are on the verge of exponential growth,” Sweetman continued. Sustainable finance is another area in which Ireland believes it can carve out a specialist niche. “We want companies to house their leading international capabilities in sustainable finance here. This will help Ireland meet its own climate action targets and it will attract inward investment to become an international hub for sustainable corporate finance business,” Sweetman told World Finance.
Ensuring that the talent and skills are there to support this growth will require a delicate balance between securing a pool of well-qualified young people and bringing in the right people from outside. The talent and skills are in place, Sweetman says, but “we know we have to develop that pipeline. The challenge is to show how we have cultivated these talents and skills and turned them into a competitive advantage. We’ve done it in the tech sector where they’ve combined local talent with bringing in the skills we need.
He continued: “It makes sense that you have a mix of local talent and international talent. It’s more successful. We want people to know that if you’re looking for talents and skills, you’ll find them here. In technology “Ireland has started to present itself as a place to advance your career,” says Sweetman.
The challenges ahead
Like everywhere, Ireland is emerging from work restrictions during the pandemic. Those who have opted to work from home are slowly returning to their offices, but at a slower pace than in the UK, as evidenced by the empty offices and quiet cafes in Dublin’s business districts. Generally, people only work one or two days in the offices and there is no great pressure on them to come back sooner.
Ukraine now inevitably casts a cloud over the sector. Alongside major investors and financial institutions around the world, Ireland-based asset managers are closely monitoring the development of the crisis in Ukraine and the response of western liberal democracies.
Sanctions are the obvious concern: “No one wants to be caught making a mistake on sanctions, because the potential reputational damage is huge,” D’Arcy told World Finance.
Asset management will likely feel relatively little direct impact from the sanctions. According to the Irish Department of Finance and the IAIM, between 0.3% and 0.5% of assets under management in Ireland are backed by Russia. “Of that, only a small percentage gets sanctioned,” D’Arcy says.
The biggest challenge to the growth of the broader financial services sector as a result of the war in Ukraine will be the huge impact on aircraft leasing, another sector that figures prominently in Ireland’s success story: 14 of 15 main aircraft lessors are based there. . According to the trade body Aircraft Leasing Ireland, 60% of aircraft leased worldwide are owned by leasing companies based in Ireland. EU sanctions have forced leasing companies to cancel all their contracts with Russian airlines, covering more than 500 planes worth more than $12 billion.
The ALI says its members had “limited success” in recovering their planes from Russia before the sanctions crackdown. Now most have been appropriated by Russian airlines and leasing companies are turning to their insurers. Most market experts predict that these claims could take several years to settle. It will be a drag on a sector that has grown rapidly and made a significant contribution to the growth of the Irish financial services sector, but not fatal.
Despite the odd frown on Ukraine, post-Brexit Irish eyes are definitely smiling and full of optimism. The FSI’s goal of making Ireland one of the world’s top 20 financial centers by 2025 is still within reach.