Although Irelandâ€™s financial services industry believes that regulation of the industry is necessary and is of benefit to the industry as a whole, industry practitioners are less positive about other aspects of the regulatory regime, according to a new industry survey.
The survey was commissioned by the Financial Services Consultative Industry Panel (FSCIP), was published on July 11th, and was conducted amongst 1,116 industry participants. It is intended that the research will form a critical part of the FSCIPâ€™s input into the Financial Regulatorâ€™s Strategic Plan 2007 â€‘ 2009.
The research also highlighted that the industry feels there should be more emphasis on innovation and competitiveness and a less burdensome regulatory regime, which seems to be impacting particularly heavily on small companies. Moreover, 43 per cent of respondents did not feel that the Financial Regulator fully understands their businesses, while 68 per cent remarked that they were not familiar with the FSCIP.
Burden of regulation
According to 55 per cent of respondents, â€˜strong regulation is for the benefit of the financial services industry as a wholeâ€™. According to one funds industry player, â€˜regulation is the lifeblood of what we do. We exist because weâ€™re a regulatory industryâ€™.
However, 49 per cent argued that â€˜the current regulatory system places too great a burden on financial services firmsâ€™. Regarding the Financial Regulatorâ€™s intention to carry out Regulatory Impact Analysis (RIA), one respondent said that there was â€˜a tokenism about itâ€™, and the Regulator was merely â€˜ticking boxesâ€™.
Satisfaction with the regulator
There was general agreement in the survey that the â€˜Financial Regulator focuses more on consumer protection than on innovation and competitivenessâ€™, with 54 per cent of respondents asserting this, and as few as 6 per cent disagreeing. Moreover, 25 per cent of respondents disagreed with the statement that â€˜the Financial Regulator exercises the principle of fairness in its dealings with the financial services industryâ€™, with 50 per cent staying neutral on this issue.
Further examples of the industryâ€™s disillusionment with the Regulator comes with the next statement, â€˜the Financial Regulator has delivered in the way that the industry hoped it wouldâ€™, with only 12 per cent agreeing, and 40 per cent disagreeing.
When the results are broken down, almost half of larger firms (50+ employees) do not feel it has delivered versus expectations. However, the report concedes that the situation in Ireland is better than in the UK, where 63 per cent of firms feel the Financial Services Authority has not delivered, according to a similar report.
â€˜As is the case in the UK, and as was substantiated in the qualitative research, the perceived failure to deliver is partly linked to the perception that current legislation places too great a burden on organisations. However, in the qualitative research it also emerged that hopes that visible regulation would increase levels of public confidence had not been fulfilledâ€™, the report states.
The industryâ€™s belief that the regulatory regime hinders competitiveness was also apparent in this statement, â€˜the working practices of the Financial Regulator do not hinder the development of new financial products and servicesâ€™, as only 17 per cent agreed, and 41 per cent disagreed.
Performance of regulator
Just over 1 in 4 firms (26 per cent) believed that the regulatory system â€˜fosters safe and sound financial institutions while operating in a competitive and expanding market of high reputationâ€™.
However, almost 20 per cent disagreed with this statement, with an additional 20 per cent disagreeing with the statement that the regulatory system is being â€˜continuously enhanced and developedâ€™.
But, based on the qualitative aspect of the research, the report asserts that â€˜there is...some sympathy on the basis that the Financial Regulatorâ€™s office is seen to be shouldering an enormously heavy burden of work emanating from the EU and from rapidly expanding sectors such as funds, which has put a huge strain on resourcesâ€™.
Practitioners rated the performance of the Financial Regulator on a 7-point scale, ranging from â€˜poorâ€™ to â€˜excellentâ€™. The most positive rating which emerged was in relation to â€˜encouraging the education of the public about financial products and servicesâ€™. The most negative was in terms of â€˜knowing and understanding your firm and its situationâ€™, with other highly rated negatives including, â€˜fostering a sense of partnership with the financial services industryâ€™, and â€˜listening to industry views when deciding policies and proceduresâ€™.
As the median employment size in an international financial services company, is between 30 and 50, according to the latest Finance Dublin employment survey, the regulatorâ€™s relationship with smaller entities is important. However, according to the survey, 67 per cent of respondents disagreed with this statement that the regulator â€˜recognises the impact of regulation on smaller firms/credit unions and seeks to accommodate them accordinglyâ€™.
The attitude of the industry to the costs of compliance with the regulatory system, are fairly balanced, with 20 per cent saying they are reasonable, 42 per cent saying they are high but not excessive, and 37 per cent saying that they are excessive.
Half of all firms estimated that the total identifiable current costs of compliance with the Regulator, represented 5 per cent or more of their total business costs, while 12 per cent estimated that compliance represented over 15 per cent of their overall costs.
With regards to complying with the EU Financial Services Action Plan, 40 per cent of firms felt they were â€˜excessiveâ€™; the same number said they were â€˜high, but not excessiveâ€™; while 20 per cent said they were reasonable.
Regarding funding of the Regulation, in general, practitioners would be unhappy if the proportion of funding contributed by industry were to increase. This view was held by two thirds of all firms. Relatively few firms held the view that the proportion of funding contributed by the industry as a whole is currently reasonable.
As one retail banker commented, â€˜I think the industry would be mad to let them increase it past the 50 per cent. I donâ€™t see why they should because the industry pays its taxes like everybody else.â€™
The equality with which the levy is distributed both by and within industry sector is not well regarded, with twice as many firms saying that this was not equitable as were happy with the distribution of the levy. This may itself, in fact, be an issue of transparency, and these concerns might be lessened by a clearer understanding as to the manner by which the distribution of the levy by industry sector is decided.
The survey also sought to measure numerically the satisfaction of practitioners with the relationship between the Financial Regulator and their business. According to the report, â€˜this will then form a benchmark against which future measurements can be comparedâ€™.
Less than one in five practitioners expressed dissatisfaction with the Regulator, and over 40 per cent were either satisfied or very satisfied. The level of satisfaction expressed was marginally higher among small firms than larger organisations.
However, the report adds that, â€˜The significance of these figures should not be underestimated, since although a dissatisfaction figure of 18 per cent is higher than one would wish, it is far from disastrous, acts as a useful counterpoint to the complaints made by firms on specific issuesâ€™. On the other hand, this score does not compare favourably with the UK rating of 12 per cent dissatisfaction.
One area in which the industry is dissatisfied is consultation, as almost 30 per cent of practitioners expressed dissatisfaction with the effectiveness of the consultation processes, and only 18 per cent were satisfied.
Breaking this issue down, it can be seen that the industry would like to see more of the following:
â€¢ Financial Regulator consultation papers should be more concise
â€¢ More feedback from the results of consultation exercises
â€¢ Future regulatory initiatives should be subject to rigorous cost-benefit analysis
â€¢ Financial Regulator consultation papers need to be more sensitive to competitiveness issues
One of the consistent themes in the report is the sense that there is a lack of understanding among Financial Regulator staff of the businesses they are dealing with. This is again evident in terms of attitudes towards supervision, with 43 per cent of firms disagreeing that, in supervising their organisation, the Financial Regulator has a good understanding of their business. Opinion regarding the amount of detailed information requested was relatively balanced, with a slightly higher number of firms not feeling that too much information is asked for. Indeed, perhaps if more information about their business was requested and provided, this might lead to a better understanding of the business.
Less than 25 per cent of firms felt that the Financial Regulator applies a reasonable level of supervision for a business of their size and type, and this was broadly consistent across both large and small firms, â€˜though whether this indicates a need for more, or less supervision is unclearâ€™.
Regarding supervisory staff, opinions on supervisory staff tended to be fairly neutral overall, â€˜Reflecting a general lack of experience of such visitsâ€™ according to the report. The greatest level of criticism emerged in terms of Financial Regulator staff not taking account of the commercial realities or understanding the technicalities of their business. To a lesser extent, there was a feeling that the Financial Regulator does not make good use of the information provided to inform its dealings with organisations. The staff themselves tended to attract more positive comment than negative in terms of their interpersonal skills and treating firmsâ€™ staff as trustworthy.
In terms of European and International issues, relatively few practitioners felt capable of giving a definite view, indicating a general lack of awareness of the activities (and therefore the performance) of the Financial Regulator in this regard. This was more likely to be true among the smaller companies. According to the report, â€˜Where opinion was given, it tended to be slightly more on the negative side, particularly in terms of the Financial Regulator having improved Irelandâ€™s international competitive position in relation to cross-border and domestic issues, improving Irelandâ€™s ability to innovate and prioritising international issuesâ€™.
The highest rated positive was the degree to which the Regulator improves â€˜Irelandâ€™s international ability to innovate in financial servicesâ€™, with 13 per cent agreeing with this statement. However, it also attracted the highest number of negatives, with 22 per cent disagreeing with it.
Almost 30 per cent of practitioners agreed that EU and international issues were a top priority for their business in the future, with only half as many not expecting this to be the case. However, despite this anticipated priority, as few as 8 per cent of firms claimed to actively participate in EU consultations.
Here again, as expected, there was a difference by size of firm, with only 6 per cent of smaller firms actively participating, but this still only rose to 27 per cent among larger companies. One third of firms felt that the Financial Regulator responds to developments in international regulation as opposed to leading them. Despite this, among those expressing an opinion, substantially more practitioners felt that the Financial Regulatorâ€™s application of directives sometimes exceeds EU requirements.
On balance, there was more feeling that Irish regulations and EU standards are similar enough to be satisfied by a single EU requirement than not. According to the report, â€˜Although it was acknowledged that we are to some extent forced to bow to EU pressure, there were those who felt that we bow too readily, to our disadvantage. Some specifically felt, particularly in the funds area, that a too-literal interpretation of some EU directives risks putting Ireland at a competitive disadvantageâ€™.
In the quantitative survey, practitioners were asked if they had seen or heard anything about the Financial Services Consultative Industry Panel (FSCIP) prior to receiving correspondence regarding the survey. Only one in three practitioners said they were aware of the FSCIP before the survey.
Among those aware of the Panel, almost half agreed that it has an important role to play on behalf of their type of business, with slightly less feeling the FSCIP is helping the Financial Regulator understand the views of industry.
It became clear in the qualitative research that many were unclear or confused about the role of the Panel. For example, some seemed to see the Panel as yet another representative body, which they thought was unnecessary duplication. The view overall was that it is early days yet for the Panel, and they have made a good start, but they could do more to inform the industry of their precise role and the progress that they are making.
The full report can be downloaded from www.financialregulator.ie