Analysis: Will Dublin’s IFSC really benefit from Brexit?

It may have put London at the eye of a storm, but the UK's surprising decision to exit the European Union has thrust Dublin's international financial services into the spotlight. Indeed media commentary since Friday's vote has led to a flurry of speculation that the city could benefit, as UK based financial institutions look to alternative locations to run their European businesses from.

Global financial institutions of the likes of Morgan Stanley and Legg Mason have been touted as potential candidates to shift some of their business to Dublin, creating thousands of financial services jobs in the process. Michael Mainelli, international advisor to the IFS Industry Advisory Committee and chairman of Z/Yen, which publishes a bi-annual global financial centres report, suggests that as many as 300,000 people could work in the sector in Ireland over the coming years, if it capitalises on the possible potential Brexit poses. But is this likely to happen?

Brexit will hurt Dublin too

The first point to note is that Brexit will hurt not just London as a financial services centre - it will hurt Europe as one too.

“ Less international finance will come to London, but that doesn’t mean it will still come to Europe,” says Mainelli, adding that Brexit means “a lot of confusion which isn’t good for any marketplace”.

Indeed in Mainelli’s Z-Yen financial centres report, London, Singapore and Hong Kong typically feature at the top of the rankings, and it is to centres like Singapore that global financial players may now look.

“Dublin and other financial centres might gain, but ultimately they’ll be gaining a larger share of a shrinking pie,” he says.

Sarah Goddard, chief executive of the Dublin International Insurance & Management Association (DIMA), agrees that uncertainty will be problematic.

“London is one of the major centres for global insurance and that (Brexit) will have potentially a profound effect,” she says, adding, “ uncertainty is not the lifeblood of a sustainable insurance or reinsurance business”.

Another factor is that a lot of the business that comes to Dublin originates in London and the closeness of the two centres has been a pivotal factor in Dublin’s relative success.

Many structured financial transactions such as special purpose vehicles (SPVs) are done out of London for example, with the subsequent listing or corporate structure often facilitated in Dublin. If this business no longer originates in London but moves to Frankfurt or Paris, will professionals in those centres think of Dublin as easily as someone in London would have?

Tumbling markets are proving difficult for the funds industry. Ken Owens, asset & wealth management partner at PwC Ireland, says that the current disruption in the markets and a prolonged period of uncertainty will not be positive to asset managers as the value of the portfolios they manage falls, or is volatile.

“ This will put their businesses under increased pressure from a margin perspective as they deal with possible falling revenues and increased costs in the form of dealing with a new regime, or potentially having to move certain operations,” he says.

And this, in turn, will put pressure on Irish based fund players and their employees.

But it does stand to benefit

One of the major problems for the UK’s financial services sector if it’s out of the EU is that companies based there will no longer be able to “passport” their services throughout the EU under freedom of services.

This, potentially, presents a huge opportunity for Dublin.

“The classic arguments for London - such as the time zone, it’s English speaking - apply to Dublin as well. It is a good location and tax friendly,” says Mainelli, adding, “If Dublin can improve its infrastructure in clearing and settlement, it can build a huge market in areas like UCITS, wholesale insurance, and protected cell captives”.

Indeed in funds, new rules will now be needed on how UK domiciled funds can be sold in Europe. Last month the pan-European regulator ESMA warned that the UK’s access to fund passporting arrangements would be “at risk” if it left the EU.

But as Owens notes, Ireland is already a large domicile for the EU branded UCITS and alternative investment funds which are marketed from Ireland throughout Europe and around the world - and that could be a reason for some UK asset managers to move fund ranges, and maybe people, to Dublin.

“A number of financial services firms already have a presence or operations in Ireland and they may seek to expand the business that is conducted from Ireland as an EU base. Others, who have a base in the UK but not elsewhere in the EU may need to set up or move business here, or to another EU jurisdiction” he says. But as with everything, “Until there is a clearer line of sight on what the new world order will be it is difficult to predict what business might move where”.

In insurance too, there could be an opportunity for London based business to move to Dublin, notes Goddard.

The regulator will be busy

Regulation may be one stumbling block to attracting the levels of business that have been discussed.

“Ireland is seen to have a more stringent environment from a regulatory perspective than many others,” notes Goddard, adding, “although one could say the same about the UK”.

Mainelli, too, bemoans the regulator’s approach, which he says has been more akin to “ teeth pulling” since the financial crisis.

Another issue may be the Central Bank’s capacity to deal with a potential flood of authorisation applications. While the regualtor has opted not to give an indication on authorisation queries over the weekend, noting that “It is too early to speculate on potential increases in applications for authorisation”, it did say that it is prepared for any uptick.

"Should there be a marked increase in the financial sector regulated in Ireland, supervisory and enforcement resources will be increased in a commensurate and appropriate manner," the Central Bank said on Monday, adding that it "will deploy staff to deal with increases in the authorisation pipeline and will reprioritise workload, as appropriate".

The opportunity is now

While political machinations - at both UK and European level - and visibility on what exactly the UK’s financial services sector will look like post-Brexit are likely to take some time to conclude, some argue that those financial services institutions looking to move won’t wait until negotiations are finalised - and will do so in the short-term.

“Business will come thick and fast - there is an opportunity for Dublin to up its game,” says Mainelli, “With the new IFS brand already launched Dublin is poised and ready”.