EDITION 4 NOVEMBER 2006

INSIDE

Is Irish Banking Developing the Where to for

Competitive? Regulatory Landscape International Financial
A Customer Viewpoint in Financial Services Services in Ireland?
 ABOUT BANKING
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 Contents
2-4 Newsdesk
The latest news from the
Irish financial services sector
6-8 Is Irish Banking Competitive?
A Customer Viewpoint
Brendan Burgess
9 Stamp Duty Out
Mary O’Sullivan
10-13 Developing the Regulatory
Landscape in Financial Services
Dermot Gleeson
15-17 The Changing Face of Financial Crime
Colm Murphy
18-20 Where to for International Financial
Services in Ireland?
Enda Twomey
22-24 Harmonisation of Banking Rules and
Supervisory Practices in Europe
Danièle Nouy
About Banking
ISSN 1649-6671
About Banking is a publication
of Irish Banking Federation (IBF).
Opinions expressed in the magazine
are not necessarily those of IBF,
its Council, Committees or the
Editor. Reproduction in whole or in
part without written permission is
strictly prohibited.
Irish Banking Federation is the
leading representative body for
the banking and financial services
sector in Ireland. Membership
of over 60 institutions includes
licensed domestic and foreign
banks and financial services
institutions operating here.
The Federation of International
Banks in Ireland (FIBI) and the
Irish Mortgage Council (IMC)
are affiliates.
President: Richie Boucher
Chief Executive: Pat Farrell
Irish Banking Federation,
Nassau House,
Nassau Street,
Dublin 2
Tel: +353 (0)1 6715311
Email: ibf@ibf.ie
www.ibf.ie
Editor
Felix O’Regan
Head of PR and Public Affairs
felix.oregan@ibf.ie
Production
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Advertising
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NewsDESK
IBF/PwC Mortgage Market
Profile launched
A new, comprehensive profile of the Irish mortgage market
was launched in September by Irish Banking Federation (IBF).
The IBF/PwC Mortgage Market Profile is a quarterly
publication that provides unique market data on the
number and value of new loans secured by residential
housing. PricewaterhouseCoopers (PwC) provides
independent oversight to IBF as to the quality of the data.
Developed by IBF in cooperation with the country’s leading
mortgage lenders, which are IBF members, the data looks
at mortgage loans for housing purposes and for the first
time, mortgage loans for non-housing purposes, such as
re-mortgages and top-up mortgages.
“We believe that the IBF/PwC Mortgage Market Profile
will prove a valuable, additional information resource
for lenders, policy makers, regulators, analysts and
researchers,” said IBF Chief Executive Pat Farrell.
The full content of the IBF/PwC Mortgage Market Profile
can be viewed online at www.ibf.ie.
IBF Chief Executive Pat Farrell and Eimer O’Rourke, Head of Member
Services - Retail, IBF, reveal the results of the first IBF/PwC Mortgage
Market Profile.
2 ABOUT BANKING
IBF calls for prompt action
following IFSC report
An Taoiseach Bertie Ahern, TD, launched the Government’s
strategy document for the further development of
international financial services in Ireland in September.
The document, Building on Success, represents a welcome
re-affirmation of the Government’s commitment to the
financial services sector and to building on the considerable
success achieved to date. Many of IBF’s proposals have
been taken on board by the Government as part of the
strategic review.
However, prompt action is needed to deliver the
potential benefits.
“We will need An Taoiseach and his Government to
remain engaged and committed as we now move to
implementation if we are to fully realise the opportunities
presented,” said Mike Ryan, Chairman of the Federation
of International Banks in Ireland (FIBI - which is affiliated
to IBF). “Just as we have shown in the past, IBF members
are willing to play their full part in bringing international
financial services in Ireland to the next level of success.”
An Taoiseach Bertie Ahern, TD, and Mike Ryan, Chairman, FIBI at the
launch of Building on Success.
Financial Regulator provides IBF launches business
unique perspective on switching code
Consumer Protection Code The IBF Business Account Switching Code, which makes it
easier for businesses to switch accounts from one financial
A seminar organised by IBF and The Institute of Bankers
institution to another, became operational in June.
in Ireland in September provided key perspectives on the
Financial Regulator’s Consumer Protection Code.
Developed by IBF in association with the Irish Payment
Services Organisation (IPSO) and in consultation with
Donnie Kennedy, a senior regulator in the Financial
the Financial Regulator, as well as a number of business
Regulator’s Consumer Protection Codes Department,
representative groups, the Business Switching Code covers
outlined the main aspects of the Code and said there
current accounts and demand deposit accounts held by
would be ongoing monitoring of the effectiveness of the
business customers. All financial institutions, including non-
Code’s provisions, with a full review in 2009.
members of IBF, are welcome to subscribe to the Business
Switching Code.
The Financial Services Ombudsman, Joe Meade, discussed
the implications of the Code for his office and Darragh
The Code outlines the simple steps involved in switching to
Murphy, Solicitor, McCann Fitzgerald, provided an overview
a new account and highlights the importance of business
of the legal risks involved.
planning for any switch.

Banking industry representatives at the seminar, which

was chaired by Philip Brennan, Group General Manager
of Regulatory Compliance and Business Ethics with AIB,
welcomed the publication of the Code. Bill Hannan, Group
Head of Compliance & Risk Policy, Irish Life & Permanent
and John Murphy, Head of Group Regulatory Risk &
Compliance, Bank of Ireland, addressed the practical
implications of its implementation.

Pictured at the launch of the IBF Business Account Switching Code:

Eimer O’Rourke, Head of Member Services - Retail, IBF; Mary O’Dea,
Bernard Sheridan, Head of Financial Regulator’s Consumer Protection Codes Consumer Director, Financial Regulator; and Patricia Callan, Director,
Department opening September’s seminar. Small Firms Association.

Industry focus on
regulatory reporting
IBF and The Institute of Bankers in Ireland jointly hosted in
July a two-day training session on Basel II and the regulatory
reporting package published by the Committee of European
Banking Supervisors (CEBS).

The training session was provided in conjunction with Deloitte,

Pictured at the Basel II – Regulatory Reporting training session are:
which has agreed to assist IBF in an industry initiative to Derek Moriarty, Deloitte; Debra McCarthy, Adviser - Risk Management
compile guidance notes to accompany the common reporting and Prudential Supervision, IBF; Vishal Vedi, Deloitte; Geraldine Lyons,
or COREP package. DEPFA Bank; Robert Freese, The Institute of Bankers in Ireland.

ABOUT BANKING 3
NEWSDESK
A sector that adds real value
for Ireland
If you have been an avid follower of what is termed by the media
as the “silly season”, you would probably be hard put to identify
with the title of this article. Predictably each time the “banks”
debate gets going in earnest, the headlines and soundbites
invariably revolve around words and phrases such as “excessive
profits”, “rip offs”, …and the list goes on. I say ‘predictably’
because it seems to be one of the great paradoxes of the Irish
psyche that, while we rightly celebrate our economic, sporting and
cultural successes, we are at our most comfortable when knocking
the system.
So now that we have moved into a new season, let’s see if we can
bring a little more balance into the debate as I invite you to reflect
on the banking sector’s broader impact on everyday lives. What
added value does the sector offer to society?
• Through the development of one of the most innovative and
competitive mortgage markets in Europe we have enabled Irish
people to achieve one of the highest levels of home ownership
in the world.
• We provide a world class payments infrastructure which affords
people the ability to securely access and move their money
24/7 through branch, phone, internet and ATMs both at home
and abroad.
• By maintaining strong profitability, banks can continue to
generate the levels of capital necessary to meet personal and
business credit demand in what is - and has been for many
years now - one of the fastest growing economies in the world.
• Strong profitability is not at the customer’s expense, as
independent research consistently demonstrates that
we are highly competitive in mortgages, personal
loans and current accounts - basic products which
account for the main bulk of activity in any market.
The sector is far from complacent as new entrants
and new products continue to target the Irish
market. Furthermore, customers’ ability to change
Pat Farrell,
IBF Chief Executive
Strong voice, strong sector
We represent a sector that plays a pivotal role in the
economic and social life of the country. Working to create
and maintain an innovative and competitive environment to
enable the continued growth of our sector, we often speak
with many voices. This is understandable on one level. We
are a very diverse industry with many dimensions: retail;
wholesale; international; domestic; even different corporate
forms.” However, those that strongly influence and shape our
regulatory and compliance landscape increasingly speak with
one voice. 
4 ABOUT BANKING
provider is enhanced through IBF’s Switching Codes for both
personal and business customers.
• Pension funds, whose performance underpins the future
retirement plans of close on one million workers on this
island, depend on banks’ strong profitability and share price
performance to generate the investment returns necessary to
secure the financial futures of those retiring.
• Generated through direct and indirect employment, the
banking and financial services industry sustains close on 80,000
well-paid jobs, in a progressive and growing sector. After
Luxembourg, we have one of the highest levels in the EU for
banking employment as a percentage of the economically active
population. By any standards, that’s a striking measure of the
importance of the sector to the national economy.
• The banking sector has been instrumental in creating the
success that Ireland enjoys as an attractive location for
international financial services, with many of the world’s largest
financial institutions now based here. IFSC exports (business,
insurance and financial services) now total €14.8 billion -
around one-third of our total services exports.
• The sector’s annual tax contribution of close on €1.5 billion
underwrites the entire cost of the Department of Education
and Children’s current expenditure on third-level and further
education grants and services.
• The sector is one of the biggest private sector contributors
to community, sporting, cultural, voluntary and charitable
organisations providing as it does over €30 million annually.
We freely acknowledge that mistakes have been made in the past
and we have rightly been called to account. Who is to say we
won’t have further mistakes in the future? We know we are far
from perfect but we are working hard within our organisations,
and with our customers, regulators and other stakeholders to
build increased transparency and safeguards into
the system so that the risk of such recurrences is
minimised. It is important, however, that the bigger
picture is not overlooked - a sector that at its core
makes a significant and positive contribution to the
economic and social well-being of the country.
In this new paradigm there is a real danger that our point
of view on such matters becomes diluted, our positions
weakened, resulting in sub-optimal outcomes for member
institutions. A growing awareness is developing that we need
to change: we need to pull together and speak with a strong
voice to ensure we maintain a competitive and innovative
environment for banking and financial services. IBF has long
recognised the potential strength of united action. In this key
area of concern we are taking the lead more and more in
identifying opportunities for joint representation and working
with sister organisations to deliver much better outcomes than
those achieved through a “go it alone strategy”. It’s not rocket
science and our members deserve nothing less!
BANK ACCOUNT
SWITCHING
MADE EASIER
Switching current accounts and demand deposit accounts from one financial
institution to another is much easier: for business customers since 30 June 2006
and for personal customers since 1 February 2005.

Under the new Business Account Switching Code the country’s retail banking
institutions now have straightforward step-by-step procedures in place to
make switching business accounts easier and smoother. Furthermore, the Code
commits these institutions to have the new account up and running within 10
working days and to have switched standing orders and direct debits from the
old to the new account within 7 working days.

Similar step-by-step procedures and timeframes operate under the Personal

Account Switching Code to make switching personal accounts a simple and
straightforward process.

“Switching pack” material is available from the institutions that subscribe

to these Codes. This material clearly explains the switching process, who is
responsible for what, how long it will take and what the customer has to do.

Developed by Irish Banking Federation (IBF) in association with the Irish

Payment Services Organisation (IPSO), the Business Account Switching Code and
the Personal Account Switching Code can be viewed on the web at www.ibf.ie.

Issued by Irish Banking Federation on behalf of ACCBank,

AIB Bank, Anglo Irish Bank, Bank of Ireland, Bank of Scotland
(Ireland), EBS Building Society*, First Active*, ICS Building
Society, IIB Bank, Irish Nationwide Building Society*,
National Irish Bank, Northern Rock, permanent tsb,
Ulster Bank.

*These institutions subscribe only to the Personal Account

Switching Code.
 Is Irish Banking Competitive?
A Customer Viewpoint
Brendan Burgess, Campaigner on Consumer Finance Issues
The banking market here is competitive but
customers are not doing enough themselves
to benefit from this, says Brendan Burgess.
The Competition Authority stated
in 2005 that banks did not compete
aggressively for customers; but it
would, wouldn’t it? The banking
industry says that it does compete
aggressively for customers. Which
should we believe?
So why not ask the customer? Ask
anyone who has shopped around for a
mortgage recently. Their answer will be
a resounding yes. Lenders are fighting
each other for the business.
And they are fighting on the most
important aspect - rates. Anyone who
has not got a bad credit record will get
a very good deal at the moment. In fact,
institutions are competing so hard that
they are being accused of irresponsible
lending. If the lenders were to act
“responsibly” and to agree amongst
themselves not to lend more than
80% loan to value and not to lend
more than four times salary,
the Competition Authority would
be down on them for anti-
competitive behaviour.
6 ABOUT BANKING
Inertia the problem, not lack
of competition
Lenders have been forced to compete
as switching a mortgage has become
very easy for consumers. Lenders are
not allowed to charge early repayment
penalties on variable rate mortgages
and these account for around two-
thirds of all mortgage loans approved.
Competition among solicitors means
that it will cost consumers less than
€1,000 to switch. And many institutions
will offer good rates and pay the
solicitor’s fees. It really can’t get any
more competitive.
So is Irish banking competitive? Why not
ask the person who has money to put
on deposit? The best available deposit
rate is around 4% from Northern
Rock which is actually higher than the
cheapest mortgage rate of around
3.75% from National Irish Bank. Most
money on deposit is earning less than
4% and most mortgages are costing
more than 3.75%. However, that is not
the fault of the banks, but the fault of
people who fail to shop around.
 “Competition and profitability are not mutually exclusive.
Banks make huge profits in the Irish market. So the media jumps on
this as proof of a lack of competition. But the reality is that banks are
competing vigorously with each other.”
It is very easy to switch deposits. If
people have large balances earning less
than 1% when they could switch to
an account that would earn them 4%,
don’t blame the lack of competition.
This all came starkly together at the
Annual General Meeting of the EBS
Building Society, for example. As a
mutual which is not trying to maximise
profit, one would expect it to pay the
best deposit rate and charge the lowest
mortgage rate. Before the Irish market
got competitive a few years ago, the
EBS was able to achieve this. However, a
speaker from the floor at its recent AGM
complained about being a member of
the EBS for years and earning a very
low deposit rate. The next speaker
complained that their mortgage rate is
no longer the lowest in the market. The
reality is, however, that it is difficult for
any bank to pay the best deposit rate
in the market and to charge the lowest
mortgage rate in the market, when the
best deposit rate exceeds the cheapest
mortgage rate!
What about charges on
current accounts?
What about them? They really are
insignificant in the overall scheme of
things. I choose my current account on
the basis of the service I get. The primary
issue for me is a good Internet offering.
I get that from my current bank. Overall
they are fairly efficient. They have made
mistakes on my accounts in the past, but
they have corrected them.
How much do I pay? It works out at
about e80 a year. How much do I pay
on my mortgage? Around e20,000 a
year. Which one do you think I shop
around for?
As far as my current account is
concerned, I would not switch to save
e80 and run the risk of getting a bad
service. If the service from my current
bank deteriorates, I will switch. But I will
not choose the new bank on the basis
of price.
Inertia, not lack of competition, is the
biggest barrier to getting a good deal.
Irish consumers are well off and most of
them just will not shop around. They are
too busy making money and spending
it. When the typical Irish consumer
walks into a car showroom, he or she
is thinking of engine size, colour and
what he will look like driving around
in the new model. He is not thinking
about the price of financing it and so
will enter into an expensive, inflexible
hire purchase agreement without
really thinking about the financial
consequences. The banks cannot be
blamed too much for taking advantage
of this lucrative market - the primary
blame rests with the consumer.
Information further
driving competition
A dramatic increase in information has
encouraged the banks to become more
competitive. The amount of coverage
that is given to personal finance issues
has increased in the newspapers over
the past ten years or so. Every paper has
one or more journalists specialising in
personal finance. Most papers publish
‘Best Buys’ tables. It is easy to find the
best deposit rate, the lowest mortgage
rate, the cheapest life insurance, the
lowest charging stockbroker. It is easy to
shop around as the information is
readily available.
The Internet has also helped to make
shopping around much easier. No longer
is there a need to ring around to find
the best rates. You can find them easily
on company websites. Additionally, you
can compare different products on sites
such as www.askaboutmoney.com,
where consumer discussions also take
place whenever there is a new product
or a change to an existing product.
Add to this mix the consumer
publications programme of the Financial
Regulator’s Consumer Information
Section. The Regulator is doing a very
good job on the information front, with
its fact sheets and cost surveys obtaining
widespread publicity on the airwaves
and in the newspapers. Its website,
www.itsyourmoney.ie also provides
comprehensive information.
Competition and profitability
Competition and profitability are not
mutually exclusive. Banks make huge
profits in the Irish market. So the
media jumps on this as proof of a lack
of competition. But the reality is that
ABOUT BANKING 7
Is Irish Banking Competitive? A Customer Viewpoint
banks are competing vigorously with
each other. Mortgages, deposits, current
accounts, car loans and, to a lesser
extent, credit cards, all are keenly priced.
There was a time when the Irish
mortgage market was not very
competitive. Margins were about the
highest in Europe. Bank of Scotland
(Ireland) entered the market and cut
lending rates by about one percentage
point. In the process that bank has not
built up a very large market share, but
it has forced all of the other mortgage
providers to react.
Some concern existed at the time about
the impact of this development on the
profitability of Irish mortgage lenders.
But what has happened? Their profits
have increased dramatically! While this
is due in the main to the huge growth
in lending, competition has also forced
lenders to become more efficient and
has probably helped them to become
more profitable in the longer term.
Product innovation is often used as
an indicator of competition. With so
many institutions competing for new
business, they have to bring out new
products to distinguish themselves
from their rivals. Over the last ten years
we have seen the scrapping of entry
and exit charges on many investment
products. We have seen the introduction
of current account mortgages, offset
mortgages and tracker mortgages.
We have witnessed the introduction of
online banking. Stockmarket investors
can now invest in an ISEQ Exchange
Traded Fund with an annual charge of
0.5%. We have seen the introduction
of execution only investment brokers
where nil commission products can be
bought or where the commission can
be refunded to customers. And we have
seen the introduction of the IBF Personal
Switching Code, under which customers
can more easily switch their current
accounts from one provider to another.
Can we have too much competition?
A major push is underway at European
Commission level to harmonise EU
legislation in order to create a single
European financial services market. I
would be concerned that this would not
8 ABOUT BANKING
be to the benefit of the Irish consumer.
Irish consumers of financial services
are currently well protected under the
Consumer Credit Act, the Financial
Regulator and the Financial Services
Ombudsman. Further European
harmonisation could weaken this
level of protection for the theoretical
benefit of allowing other product
and service providers easier access to
the Irish financial services market. I
see very little potential benefit from
such harmonisation and the ensuing
competition. If Irish consumers are not
prepared to shop around within Ireland,
I find it very hard to see them putting
their money on deposit in Lithuania for
an extra 0.2%, for example.
Another example relates to overseas
investment funds. Up to a few years
ago, the tax treatment of overseas
unit-linked funds made them very
unattractive to Irish investors. It was
argued that this allowed Irish fund
managers to levy very high charges as
there was no competition from abroad.
The tax rules were changed in due
course to remove this disadvantage.
However, few Irish people have bought
these foreign funds; nor have I seen
any advertisements targeted at Irish
customers. We still only trust our money
to the big names that are familiar to us
and have a physical presence in Ireland.
Treating customers fairly
Better treatment of customers could
become an area of competitive
advantage between providers
of financial services. Despite the
dramatically improved lot of the Irish
financial consumer, there is still a view
out there that the customer is put upon
and exploited. The Financial Regulator
and the Financial Services Ombudsman
are highlighting and quantifying
instances of overcharging. While one
can expect system problems and human
error to give rise to charging issues,
there seems to be very few examples
of undercharging. This is odd. One
would expect the errors to be in both
directions. But undercharging does not
seem to happen. I don’t think that it’s
a question of consumers not reporting
cases of undercharging; rather, I don’t
think it’s happening very much.
Financial institutions could seek to
differentiate themselves from one
another by publicly committing to
Treating Customers Fairly. They could
put this at the centre of the product
offering: by highlighting the complaints
procedure, ensuring that they have the
systems in place to respond quickly
when there is a complaint and by
designating a senior employee as a
customers’ advocate - much as the
appointed actuary is for life companies.
Additionally, they could examine their
product advertising to determine
if it can be made clearer and fairer
- by highlighting the exclusions and
conditions as well as the benefits.
Take credit card interest calculations
as an example. To the best of my
knowledge all credit card companies use
the same complicated way of providing
interest free periods. None explains
the restrictions prominently. To qualify
for the interest free period, one has to
pay the full balance by the due date.
If one does not pay the full balance,
then the full interest is charged from
the date of the transaction. This causes
great annoyance to the customer who,
for example, has a balance of €2,050,
pays €2,000 for convenience expecting
interest to be charged on the €50, but
ends up paying interest on the €2,050
until the date that the partial payment
was made.
Why is this the only way interest is
charged? Why does one institution not
break ranks and give an interest-free
period on all purchases paid off by
the due date, irrespective of whether
one’s balance is paid off in full or not?
Why does some institution not give a
straight 30-day interest free period on
all purchases irrespective of whether
it is paid in part or in full? If someone
were to break ranks on this, it would
give them a huge competitive advantage
and would be a further sign of treating
customers fairly.
Though writing here in a personal
capacity, Brendan Burgess is founder of
the website askaboutmoney.com where
you can discuss this article.
 Stamp Duty Out

Mary O’Sullivan, Head of Tax and Accounting, Irish Banking Federation (IBF)

The case for the Such duties act as a direct disincentive to

customers switching from cash to more
by the hampering impact that such
duties have on the roll out of credit
abolition of various efficient means of payment as envisaged cards - which are a vital requirement in
forms of stamp duty under the Government’s National
Payments Strategy. At this point, stamp
facilitating e-payments and e-commerce
in wider Irish society.”
is a central theme duty is the only cost attaching to current
of IBF’s pre-Budget accounts for many Irish consumers as
more and more providers have begun to
submission, writes offer free transaction accounts
Mary O’Sullivan. to customers.

There is no stamp duty on bank cards

IBF’s pre-Budget submission focuses
in other EU countries. Unlike the plastic
on proposals to enhance competition
bag tax, no other country has seen this
and competitiveness, to improve the
as an appropriate tax to copy! Other
efficiency of the tax system and
countries clearly see that such a tax is
to strengthen our position as a
unhelpful in the important move away
preferred location for international
from cash.
financial services providers. While
the latter is addressed in detail
In its 2005 report on the retail banking Pictured at the launch of the Stamp Duty Out
by IBF’s Enda Twomey elsewhere initiative are: Dermott Jewell, Chief Executive,
market, the Competition Authority
in this edition, our submission Consumers’ Association of Ireland;
called for the review of such duties and
also proposes changes in the way Pat Farrell, Chief Executive, IBF; John Dunne,
noted that the levels of stamp duty on Chief Executive, Chambers Ireland.
preliminary Corporation Tax is
the various bank cards act to distort
calculated and paid by companies.
competition by discouraging consumers
Mindful of the unnecessary and
from holding multiple accounts. Stamp duty on mortgage deeds
wasteful duplication of resources
Under stamp duty legislation, legal
that the current process entails, IBF
As for consumers themselves, they view mortgages securing in excess of
proposes that companies be allowed
stamp duty on bank cards as one of the e254,000 must be stamped and a
the option of basing the payment
most unfair taxes in Ireland (confirmed duty paid of 0.1% of the value of the
of preliminary Corporation Tax on
by research conducted by the Irish mortgage - subject to a maximum duty
the Corporation Tax paid in the
Taxation Institute). The Consumers’ of e630. This stamp duty is a significant
preceding accounting period.
Association of Ireland (CAI), in the words administrative cost burden on the Land
of its Chief Executive, Dermott Jewell, Registry, the Revenue Commissioners,
Our concern to see stamp duty
has made clear its strong opposition: industry and consumers. At the same
tackled in the Budget is reflected in
“…these duties, when introduced, were time, it generates little benefit for
the ‘Stamp Duty Out’ campaign that
unrealistic and specifially anti-consumer government finances. The stamping
IBF has undertaken jointly with other
in nature. They represent an element of mortgage deeds gives rise to an
stakeholders in the consumer and
of over-taxation - nothing more - and inefficient, paper-based process which
business sectors.
their abolition is too long overdue; and needs to be eliminated in order to allow
consumers know it.” development towards an e-registration
and e-conveyancing environment.
Stamp duty on cards
The business sector recently added its
Stamp duty is currently applied to bank
support to the case for abolition, with
cards, with ATM, debit and credit cards
Chambers Ireland Chief Executive, John
each attracting specific levels of duty
Dunne stating: “The revenue generated
ranging from e10 to e40 per year.
from credit card stamp duty is offset

ABOUT BANKING 9
 Developing the Regulatory Landscape
in Financial Services
Dermot Gleeson, Chairman, AIB Group
AIB Chairman, Dermot Gleeson, outlines
some personal thoughts on the development
of the regulatory landscape including MiFID,
describing as naïve the view that more rules
always equals better regulation.
Financial services firms and regulators
share a common interest in a system
of regulation that supports economic
growth, financial stability, and customer
protection. Nonetheless, there is
increasing concern about the growing
complexity and cost of the evolving
regulatory landscape. This concern arises
around four key points:
• The ability to serve customers better
can be hindered by excessively
prescriptive approaches.
• Overly detailed regulations are not
well suited to maintaining regulatory
effectiveness as market practices
change rapidly.
• Inconsistent regulations and
uncoordinated supervisory practices
diminish regulatory efficiency; and
they can create unnecessary burdens
for both regulators and firms and can
increase costs to consumers.
• Regulatory safeguards are threatened
when the same rules for market
conduct, risk management and
customer protection do not apply
equally to regulated and unregulated
firms offering comparable products
and services.
10 ABOUT BANKING
More is rarely better
The political demand for more rules, a
thicker rule book, can frequently result
in a dilution of the quality of regulation,
while increasing its quantity.
One of the things that I learnt when I
had responsibility for the Parliamentary
Draftsman’s Office ten years ago was that
in every controversy where a government
is thought to be found wanting - from
child protection, to protection of the
environment, to the regulation of the
greyhound industry - the political demand
from the press and the chat shows is for
more legislation and regulation, a newer,
thicker rule book. In the nature of the
political process governments are, in turn,
understandably tempted to respond by
producing more rules, the thicker
rule book.
There is always political pressure for
more rules, more regulation, more
enforcement. However, in the rules
business, more is rarely better.
This simple paradox needs to be more
widely understood and internalised.
 “There is always political pressure for more rules,
more regulation, more enforcement.
However, in the rules business, more is rarely better.”
It has begun to be addressed in Ireland
by the excellent Government White
Paper, Regulating Better. However, we
could still learn from other developed
countries: the Netherlands where there is
an ongoing effort to reduce the burden
of regulation by targeted percentages;
and Canada where every single piece of
legislation is compulsorily reviewed after
five years to see how it has worked.
By contrast, in banking, the Basel II
documentation is now five times the
size of its predecessor, Basel I. The
regulations of the UK’s Financial Services
Authority extend to 8,500 pages. If one
sits on the Board of a company whose
shares are listed in Dublin, London and
New York, the applicable rule books,
stacked in a corner of a room will
comfortably exceed the height of the
tallest Bank Chairman.
When it comes to rules and regulation,
more is not better. In fact more is
usually worse.
First, more regulation means that the
rules are more difficult to explain, to
promulgate and to understand; and the
population who are familiar with and
understand them is immediately
reduced. A new rule book means
that the existing core of experts, the
cognoscenti of the existing regime,
have their expertise reduced overnight.
Secondly, more regulation makes
transparency of the purpose of the rules
more difficult to ensure; and without
transparency of purpose (why are we doing
this?) compliance is much more difficult to
ensure - especially by front line staff.
Thirdly, more regulation means that more
people are required to explain, administer
and enforce the rules - more people on
the regulatory staff and corresponding
battalions in private sector firms. Already
legal and accountancy firms have
equipped themselves to advise on the
new organisational requirements for
investment firms - ultimately giving
rise to more cost.
Skilled regulatory staff are scarce.
Principles-based regulation is an
excellent objective and can be easily
practised by those at the most senior
level of the regulator and regulated
entities. But when you go down the
ladder to the mid-ranking level, both
on the regulatory and the industry side,
principles-based regulation is more
difficult to maintain. Here there is an
increased demand for the apparent
certainty of rules, for bright lines,
which enable clear and certain advice.
What is to be done? What are the
antidotes to the apparently unstoppable
demand for and proliferation of rules?
The first and most important antidote
is political leadership to counteract the
naïve view that more rules equals
better regulation.
Getting the balance right
We are entitled to be encouraged
by the attitude to regulation of EU
Commissioner for the Internal Market
and Services, Charlie McCreevy, which
he has repeatedly articulated since
assuming office. Speaking to the
Institute of European Affairs in Dublin in
June 2005 he stated: “Better regulation
is at the core of the new Commission’s
agenda and my agenda for Internal
Market and Services. No legislative
provision will get the McCreevy
stamp……without the better regulation
tests being passed with flying colours”.
The talk has been followed by action.
Following the adoption of the EU Better
Regulation action plan, one-third of the
183 proposals for Directives awaiting
attention were withdrawn.
I also very much welcome Commissioner
McCreevy’s statement that the creation
of the Single Euro Payments Area
(SEPA) will facilitate the dismantling of
the statutory control of bank charges
in Ireland. Competition controls prices
much better than bureaucratic oversight.
The statutory basis for price control of
banking charges in Ireland - Section
149 of the Consumer Credit Act 1995
- could not possibly pass a proper
regulatory impact assessment; the costs
simply outweigh any conceivable benefit.
This instinct towards sensible regulation
needs to be driven not just at EU level,
but domestically as well. A problem
arises when Member States add or retain
extra provisions when they implement
EU Directives - the so called “gold-
plating” problem. The only protection
against this is to strictly apply the basic
ABOUT BANKING 11
Developing the Regulatory Landscape in Financial Services

“Regulators must provide clear, balanced principles

and be prepared to provide additional insight into their thinking
to further enhance clarity and understanding.”

principles set out in the Regulating
Better White Paper. Put in the form of
questions, these are as follows.
• Is the regulation necessary?
• Is it properly targeted?
• Is it going to be properly enforced?
• Is there a smarter way of achieving the
same goal?
• Have we consulted with stakeholders
prior to regulating?
• Is the regulation clear about who is
responsible to whom and for what?
• Are we inventing regulatory regimes for
one sector without applying the lessons
learned from regulating other sectors?
The Department of An Taoiseach’s
guidelines on regulatory impact analysis
(RIA), published in July 2005, specifically
require that the burden of enforcement
and compliance with any regulation
must not exceed the benefits to be
achieved. The guidelines also require that
tangible costs should be quantified as
far as is possible, including compliance
costs. Significant costs are defined as
initial costs of €10 million or cumulative
costs of €50 million over ten years (to
include both costs to the Exchequer and
third parties). The challenge now facing
government departments, regulators and
industry is to take these well thought-
out guidelines and develop a practical, It needs to be recognised that, in a
efficient methodology that enables principles-based environment, all firms
meaningful and consistent quantification will not necessarily adopt one single
of the costs and benefits of proposed approach to achieve compliance.
legislative initiatives at a stage in the Regulators must provide clear,
legislative process which allows positive balanced principles and be prepared
influence, on the final outcome. to provide additional insight into their
thinking to further enhance clarity and
In June 2006, the UK’s National Audit understanding. Industry must interpret
Office produced an instructive and principles sensibly and responsibly and
critical evaluation of the use of RIAs in find an effective way to reflect them
that jurisdiction. Some useful lessons in different business models based on
might be learned from that exercise. that understanding. Industry needs to
The RIA process was often ineffective if balance the principles-based approach
started late: government departments with its desire for certainty through
focused primarily on the introduction excessive queries and detailed rules; while
of new regulations and had largely regulators need to reciprocate through
neglected to evaluate the impact of new balanced regulation and enforcement.
regulations after they were introduced.
RIAs are often complex, lengthy tools and
their purpose was not always properly
understood by government departments:
there was a lack of consistency both in
the way analysis was conducted and in
the way the results were presented.
In a broader context the development
of principles-based regulation - whether
reflected in statutory codes, national
or European legislation - represents
a significant challenge and demands
increasing maturity from all participants.

12 ABOUT BANKING
 MiFID: A Case in Point
One of the main objectives of the
Markets in Financial Instruments
Directive (MiFID) is to provide a
framework that will lead to greater
cross-border trade in financial services.
As one of the most globalised
economies in the world, Ireland has a
very strong interest in this objective.
According to the OECD, exports of
services from Ireland in the period
1997-2004 grew at a rate of 5% per
annum - the fastest in the OECD and
twice as fast as the second ranked
country, Greece. Total services exports
from Ireland in 2004 were over
$52 billion - more than for Austria,
Switzerland, Sweden, Denmark and
Canada; and about half the level of
France. Anything that makes cross-
border trade easier is very important
for Ireland.
The revised “Single Passport” rules
at least begin to confront the home-
host regulatory issue - the intractable
problem of having a minimum of
two cooks in the regulatory kitchen.
If this model for resolving that issue
actually works, it might provide
a key to a solution to the same
problem which recurs in other areas
- for example in relation to banking
supervision. The decision of the
Committee of European Securities
Regulators (CESR) to include aspects
of the functioning of the “passport”
- including transitional arrangements
and home/host relationships in
the phases of authorisation, free
provision of services/activities and the
establishment of branches within its
Level 3 work programme - will be
crucial to making these rules workable
in practice.
However, if an investment firm whose
home is in a small Baltic State were to
become a significant player in London,
for example, it would be interesting
Dermot Gleeson is Non-Executive Chairman of Allied Irish Banks p.l.c. He is a Barrister and former Attorney General of Ireland. This article
is based on remarks originally delivered to the Institute of European Affairs in Dublin in June 2006. The views expressed are personal.
to observe for how long the Financial
Services Authority would be content
to leave the major control function in
Tallinn, Vilnius or Riga.
A key question remains as to whether,
from a market participant’s point of
view, the corpus of rules known as
MiFID can convincingly be described
as principles based rather than rules
based. Of course there are principles,
enshrined in the 2004 Framework
Directive, for example. However, by
the time MiFID makes its way on to
the desk of a compliance officer in
a medium-sized investment firm, I
suspect that it will look very much like
a book of new rules.
Maximum harmonisation and
“gold-plating”
There remains some concern that
certain provisions of MiFID provide an
opportunity for individual Member
States to introduce or retain additional
rules that could undermine the anti
“gold-plating” objective and place
firms in certain jurisdictions at a
competitive disadvantage when
competing for business against firms
in other jurisdictions. This could
also create difficulties for firms
“passporting” into such jurisdictions,
as they would be subject to additional
conduct of business rules (and cost)
in relation to business conducted in
those jurisdictions. Member States
must notify the Commission and
include a justification before imposing/
retaining any additional rules, but
the Commission has no powers of
approval or refusal in relation to these
notifications. In short, the Commission
cannot prevent Member States from
retaining or adding distinctive (and
possibly distorting) local rules. The best
solution to this problem is for Member
States to fully respect the maximum
harmonisation principle in the interests
of cross-border consistency and cross-
border trade and to abandon all
“gold-plating” - old or new.
Engagement and consultation at
national level
Given the significant impact that
MiFID will have on investment firms
and credit institutions, it is critical
that there is an open, consultative
and co-operative approach between
industry, the Financial Regulator and
the Department of Finance (which is
charged with drafting the transposing
regulations). Genuine co-operation will
provide for an effective, co-ordinated
and efficient implementation process,
within the very tight constraints
imposed by the EU transposition
timeframe and ensure that costs,
which are going to be significant in
any case, are not unnecessarily so.
The Financial Regulator has taken
steps in recent months to engage
market participants and to develop
a formal consultation process.
Continued focus on this critical
exercise is of great importance. With
a formal transposition deadline of 31
January 2007 and the significant tasks
of finalising the drafting, debating
and passing the transposing legislation
remaining, there remains a very short
time in which to reach consensus
on key issues that influence the
legislative transposition process. The
period between national transposition
and MiFID implementation provides
a key opportunity for the Financial
Regulator to facilitate implementation
with practical guidelines on some
of the more onerous and complex
requirements of MiFID such as best
execution, transaction reporting and
client classification.
Consultation really does improve
legislation and eases implementation.
To deliver those benefits, however, it
needs to be real, thorough and timely.
ABOUT BANKING 13
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The Changing Face
of Financial Crime
Colm Murphy, Technical Director, Espion Risk Management Consultancy
With phishing and
other cybercrime
activity on the
increase, organisations
need to understand
the security threat
in order to create a
solution, writes
Colm Murphy.
As society has benefited from
technology, so too has criminal
activity. Just as technology has
advanced, crime has followed.
In some instances, technology does
not lead to new crimes, rather
to new ways of committing old
crimes. For instance, conspiracy
has been a crime for a very long
time, but the advent of three-way
calling puts a new twist on an old
problem. The Internet provides
similar opportunities for conspiracies
and other crimes as well. Law
enforcement agencies around the
world are grappling with crimes
involving new and easier ways of
committing identity theft.
Of course, technology not only provides
innovative ways of committing crimes,
it also provides new ways of fighting
crime. The past few decades have
witnessed remarkable advances in the
technologies used to find and collect
evidence. The same fingerprints that
can be lifted today in double quick
time would have been impossible to
acquire a generation or even a decade
ago. Ballistics imaging systems are now
used that can harness the power of
computers and automated technologies
to match bullet and cartridge case
evidence with crime guns. Chemical
agents and laser technology now
facilitate the identification of blood and
other bodily fluids even after they have
been “cleaned” from surfaces. In short,
advances in technology have changed
the way crimes are committed and
investigated in ways that are astounding.
These advances are not limited to the
criminal underworld. The increasing
admissibility of electronic evidence in
court and companies’ growing fears
about employees using work computers
for improper activities have been
catalysts for an increased demand in the
specialised area of computer forensics.
Focus on financial crime
We have witnessed monumental
changes in the landscape of digital
attacks. No longer are the computer
viruses of old sufficient to penetrate the
layers of security defences in modern
organisations. Instead, cybercriminals
now have the capacity to track every
computing move and to target websites,
such as those of banks, where personal
data - fraudulently obtained - is used to
gain access to personal records.
An indication of the extent to which
the criminal world has intensified its
efforts is provided by the fact that
seven so-called phishing attacks were
targeted against one Irish bank in
September of this year alone. The
industries most affected by phishing
are financial services, Internet service
providers and online retailers. However,
businesses in other industries, such as
telecommunications companies and
electricity and gas utilities are also being
targeted. The rapid increase in phishing
attacks comes after the explosion of
spam several years ago - although
phishing is much more harmful to
ABOUT BANKING 15
The Changing Face of Financial Crime
the consumer who is being targeted
and to the business whose brand and
reputation are under threat.
It would appear that consumers expect
the financial services sector to take
even greater steps to protect their
identities and to ensure the security
of their personal information. For
example, US technology research firm,
Gartner, estimates that only 22% of
consumers believe that their banks
are extremely competent in protecting
their information. In a 2003 study, UK-
based market research firm, Ipsos MORI,
found that improved security measures
were more likely than cost, reliability
and functionality to encourage offline
customers to bank online. The study also
found that consumers are prepared to
take action to ensure proper security.
The same Ipsos MORI study concluded
that over 13% of online banking
users would be tempted to move their
business to banks offering two-factor
authentication. A more recent 2006
survey by Canadian security software
company, Entrust, shows 94% of
respondents as willing to use
additional security measures such
as strong authentication when
banking online.
One form of two-factor authentication
involves the use of a password-
generating device along with
conventional passwords. This means
that a thief must know more than just
a password to gain access to a user’s
account. Although the technology
helps to guard against fraud, recent
attacks show that the defence is far
from foolproof. A recent bogus security
warning arriving in inboxes around the
world urged recipients to visit a website
and enter not only their account details
and password - as with conventional
phishing scams - but also the code
generated by the customer’s password-
generating device. These authentication
key codes change every minute or so.
The fraudulent site was automated to
use this information to log onto the
authentic site, allowing fraudsters to
gain access to compromised accounts.
According to Bruce Schneier, a respected
visionary and author on all cybercrime-
1
Bruce Schneier (2005). Two-Factor Authentication: Too Little, Too Late, Inside Risks 178, April 2005. Communications of the ACM 48(4). http://www.schneier.com/essay-083.html
16 ABOUT BANKING
related matters, “The real threat is fraud
due to impersonation, and the tactics of
impersonation will change in response to
the defences. Two-factor authentication
will force criminals to modify their
tactics, that’s all”. 1Early adopters may
force the attackers to move to easier
prey, but in the long term it can only be
seen as a temporary solution. Despite
such concerns, US federal regulators
have urged banks to adopt two-factor
authentication as a means of combating
the growing problem of online
account fraud.
Another, and possibly more devious
approach that has emerged in recent
times is the increased use of ‘keystroke
loggers’ (keyloggers) to capture a
user’s personal information and in turn
forward these details to a malicious
third party. Keyloggers are computer
programs which, when installed, run
invisibly and capture and record every
single keystroke entered on the system.
This includes passwords, emails, Internet
sites and documents.
In March of 2005 a highly organised,
yet unsuccessful, attempt to fraudulently
transfer millions from the London
branch of a Japanese bank was reported
in the world’s media. Allegedly, the
perpetrators had infiltrated a number
of internal systems and had installed
keyloggers. Over a period of four
months, they had gathered enough
information - specifically passwords
- to arrange the transfer of Stg£220
million to ten bank accounts around
the world. According to reports at the
time, the authorities were alerted to
the scam when an Israeli bank noticed
unusual transactions at one of their
local branches. With the assistance
of the UK’s National Hi Tech Crime
Unit, the plot was subsequently foiled.
However, it gives a clear signal as to the
determination and resolve of those who
harness modern technology to achieve
unscrupulous goals.
Understanding the security threat
Unfortunately, for many Irish
organisations, security is regarded
as a nuisance, a distraction and a
resource drain. It can also be expensive.
However, when that worm hits or
when that hacker attacks, then blame
can be quickly assigned. What most
organisations do not yet understand is
that improving security is not all about
buying the latest or best products. It is
about changing the corporate culture to
make security a realistic priority; and to
understand that upfront investment in
security resources and processes will cost
far less than reactive efforts after
an attack.
Information is power and technology
pioneers have always sought the holy
grail of information at their fingertips.
Our lives and businesses are constantly
becoming more digital, and that only
makes it easier for criminals to further
capitalise on the security vulnerabilities
within software and systems. As
technology develops further, the
effects of a successful hacker will
grow exponentially more severe. With
this increase in the critical nature of
threats, innovative and proactive security
solutions will be required more than
ever before. But more importantly, we
need to encourage and develop through
education and learning a culture
of awareness. Armed with a better
understanding of the security threats,
we can expect to keep our much-valued
information firmly in the right hands and
our hard-earned reputations intact.
Colm Murphy specialises in computer-
based forensic investigations and has
headed up information security projects
for public and private sector clients in
Ireland, Asia and Australia.
 Making Online Banking representative organisations and private companies,
More Secure the initiative is the largest IT security campaign ever
undertaken in the State.
Irish people are increasingly banking online and
catching up with their European counterparts, Presented principally through the website
according to Anthony O’Brien of Irish Banking www.makeITsecure.ie, the initiative is designed to
Federation (IBF). inform people of the risks that they potentially face
when transacting online and the steps that they can
Ireland is certainly no exception to the upward growth take to protect themselves, their personal and financial
pattern recorded in the use of online banking. By June information, their families and their businesses.
2006 around 1.8 million accounts here were registered The makeITsecure campaign was backed by extensive
for online access of which 1.1 million had been advertising, marketing and direct mail. A booklet with IT
activated, according to figures compiled by the Irish security information and advice was distributed to over
Payment Services Organisation (IPSO). 1.2 million households in the country by means of a
newspaper insert and other channels.
While Irish consumers turn to online banking in
ever larger numbers, the penetration rate here still As partners in the campaign, IBF member institutions
lags behind much of the rest of Europe, as Figure 1 also helped to raise awareness among bank customers.
illustrates. However, figures from Eurostat and our own Over 70,000 booklets were distributed through 800
Central Statistics Office (CSO) paint a brighter picture for bank branches and offices throughout the State.
business use of online banking, showing the penetration
rate to be on a par with the EU average. By March 2005,
71% of Irish businesses (77% of businesses with Internet Hi Tech Crime Forum
access) had used the Internet to access banking and Most recently IBF has been instrumental in establishing
financial services - up from 67% a year earlier. the Hi Tech Crime Forum to help combat the increasing
threat posed to online banking by fraudulent activities
such as phishing. As the name suggests, the Forum
Figure 1: Consumers using financial services online (2005) is designed to facilitate discussion and an exchange
%
of information and experiences among the main
% of individuals using Internet in past 3 months

90

80 stakeholders - including institutions with Internet

70 banking services, IPSO, the Garda authorities, the
60
Department of Justice’s Internet Advisory Board and the
50
Internet Service Providers Association of Ireland. Under
40

30 the chairmanship of IBF, the Hi Tech Crime Forum has

20 the following aims:
10 • to promote understanding of Hi Tech crime amongst
0
industry participants and stakeholders;
ce lic ry nd us ia aly ia al ia in nd via ria m K ny rg en rk ds nd ia nd ay
ee ub ga la pr vak It ven rtug uan Spa ela Lat ust lgiu U ma bou ed ma rlan ela ston nla rw
Gr ep un Po Cy Slo
h
R H
o
Sl Po Lith Ir A Be r w n e
Ge xem S De eth
Ic E Fi No • to identify crime detection and crime prevention
ec Lu N
Cz Source: Eurostat measures;
• to exchange information amongst industry participants
When it comes to the broader issue of Internet access at and relevant stakeholders on Hi Tech crime threats
home for whatever purpose, Ireland also trails behind the and attacks;
EU average. An estimated 45% of Irish households had • to promote public awareness through educational and
access in 2005 compared with an EU average of 54%. media campaigns;
While 72% of consumers who had recently used the • to make representation as necessary to deliver
Internet had done so at home, some 46% gained access at changes to regulatory, legislative, security and business
work and 10% at school or college. environments.

Regarding the Forum’s main aim of information

Promoting awareness exchange, Paul O’Connor, its chairman and IBF’s Head of
IBF is a key partner in the ‘makeITsecure 2005’ Prudential Supervision and Risk, states: “Any information
campaign, a public-private partnership aimed at will be shared in a non-competitive environment and
improving IT security awareness in Ireland. Developed will draw on the experience of all stakeholders. Hi Tech
by a coalition of interests, including the Department of crime is not an institutional or a national issue, but an
Communications, Marine and Natural Resources, various international one.”

ABOUT BANKING 17
 Where to for International Financial
Services in Ireland?
Enda Twomey, Deputy Chief Executive, Irish Banking Federation (IBF)
Enda Twomey assesses Building on Success, the
Government’s strategy document for the further
development of our international financial
services sector.
It is difficult to remember the state
of the Irish economy in 1987, the
year in which the International
Financial Services Centre (IFSC)
was launched. Unemployment
was running at 17%, our public
finances were in a perilous state
with our debt to GDP ratio running
at 114% and the Dublin docklands
area lay derelict. The cynics were
amused when the Government
announced that an international
financial services centre was to be
established in Dublin. Contrary to
their expectations, this initiative
has succeeded way beyond original
expectations - considering the
original target was to create 5,000
jobs! The sector currently provides
direct employment to 19,000, not
to mention the thousands more
indirectly employed through related
and support services.
Today, Ireland’s international financial
services sector is made up of the
biggest names in global banking and
insurance. Based not just in Dublin’s
IFSC but in many other parts of the
country, firms are engaged in a variety
of activities which include banking and
asset management, fund management,
custody and administration, insurance,
reinsurance, life assurance and captive
18 ABOUT BANKING
insurance, corporate financial services,
treasury, pensions and leasing.
The combined assets of the banking
sector here now exceed the trillion euro
mark for the first time. This exceeds
much longer-established financial
centres such as Luxembourg. The speed
at which this asset base is growing
reflects the dynamism of the sector
(see Figure 1).
Figure 2 shows the size of the assets
in a country’s banking system relative
to the size of that country’s economy.
A high ratio can indicate the extent to
which a banking sector has become
internationalised. Ireland ranks second to
Luxembourg in this respect.
The continued success of the
international financial services sector
is clearly central to the future welfare
of the Irish economy. Thus, the recent
launch by An Taoiseach of Building
on Success was particularly welcome,
setting out as it does the Government’s
strategy for the further development
of the sector in Ireland. Bertie Ahern
described the strategy document as
“providing a robust plan that will sustain
the industry in the years ahead - an
industry which has been an outstanding
success in the years since 1987”.
 Figure 1: Assets of Credit Institutions in Ireland (�bn) Figure 2: Bank Assets/GDP Ratio - EU15 (2005)

30.0

Ratio of credit institution assets to GDP

June 2006 1,051

2005 942 25.0

2004 723
20.0
2003 575

2002 475
15.0
2001 422

2000 355 10.0

1999 303
5.0
1998 235

1997 185
0.0
0 200 400 600 800 1,000 1,200 g d m ark nds 25 ny nce tria ne gal ain en aly ece nd
ur lan UK iu
bo Ire lg nm erla EU rma Fra s zo tu Sp ed It re inla
Au uro Por
Assets (�bn)
m B e
De eth Ge Sw G F
xe E
Lu N

Source: CBFSAI Source: EU Banking Structures, October 2006, European Central Bank

An assessment of key elements of the Dealing with each of these issues We also focused in our submission
strategy is presented here. in detail is beyond the scope of this on the importance of ensuring an
article. However, as an illustration of efficient and risk-based approach
In our submission to the Clearing our approach, and in the context of the to capital regulation, particularly in
House Group of the Department of proposals put forward by IBF, we can relation to the implementation of the
An Taoiseach, IBF advocated certain focus on the commitments provided in Capital Requirements Directive (CRD).
initiatives that were deemed necessary in the strategy in respect of two key areas: Implementation must enhance, not
order that the success of the past could namely, creating a sound regulatory regime undermine in any way, the competitive
be maintained and exceeded. These and adopting a segmentation approach. position of the financial sector; and no
were grouped around the following requirements should be adopted that
actions: are more conservative than the major
• Ensuring a supportive fiscal, legal and Creating a sound regulatory regime centres such as London or New York
regulatory regime. IBF believes that a robust regulatory without a risk-based justification.
• Supporting innovation. environment is crucial to the success of
• Aligning the vocational and educational any financial centre and that the role The Financial Regulator has committed
sector with industry needs. played by the Financial Regulator dictates itself to engagement on the issues
• Adopting a segmentation approach. the nature of that environment. raised. We are well advanced in our
• Clear ownership and measurement to preparations for the implementation of
deliver results. In line with our proposals, the Building the CRD and a new liquidity framework
on Success strategy commits the Financial and we continue to engage with the
The Building on Success strategy Regulator to develop service protocols Regulator so as to ensure that any
represents a welcome re-affirmation with the industry, to clarify its role in conservative positions adopted in the
of the Government’s commitment to relation to innovation and product exercise of their discretion within the
the financial services sector and to development, to clarify its role in relation regime will be fully supported at all
building on the considerable success to regulation of wholesale and retail times by robust risk assessment.
achieved to date. The general approach financial service providers and to seek
of building the strategy on the efficiencies in the authorisation process.
following competitive advantages is Adopting a segmentation approach
sound: a flexible and sound regulatory The IBF submission also alluded to The financial sector believes that the
environment; an attractive legislative the skills gaps that exist in the public approach of the authorities must
and fiscal regime; expertise in markets; service. This is recognised in the strategy change from just looking at a sector
world-class skills; education and training; with the commitment by the Financial in its generality towards a more
product development, innovation Regulator to continue to recruit tailored approach to individual business
and R&D. specialist staff. lines within the sector. The role of

ABOUT BANKING 19
Where to for International Financial Services in Ireland?

“The general approach of building the strategy on the following

competitive advantages is sound: a flexible and sound regulatory
environment; an attractive legislative and fiscal regime; expertise
in markets; world-class skills; education and training; product
development, innovation and R&D.”

government in this regard is to ensure
that the business line that makes up that
cluster of activity is fostered through
specific initiatives. The focus must be
on the work programmes and actions
that can reinforce the cluster and drive
innovation and productivity gains.
In our submission we identified the
Investor Group of the Irish Securitisation
Forum (ISF) as an example of a viable
and dynamic segment upon which this
approach can be built.
The Building on Success document
goes some way towards adopting
a segmentation approach to policy
formation. IDA Ireland has been given
the role of working with the ISF to
develop a specific strategy for the
securitisation sector. IBF is working
with the ISF Investor Group on a set of
proposals that could form the basis of
such a strategy.
However, the document falls short of
adopting a formal segmentation strategy
for the development of international
financial services and IBF believes that
this is a missed opportunity. That said,
the nature of the interaction between
the various parties under the Clearing
House Group of the Department of
An Taoiseach allows for adoption of
an informal segmentation strategy. IBF
contends that it would be much more
effective if this strategy were formally
adopted along with an explicit cluster
development approach. We could then
accelerate the process by which the
individual segments can be built
so that the entire sector becomes
more successful.
Promoting innovation and R&D
Together with the initiatives outlined
above, we welcome the positive
commitment made on a number of other
fronts consistently advocated by IBF: is necessary to drive the knowledge
• The active promotion of an R&D economy in financial services. Together
incentive programme, based on official with recognition of the need to
recognition of the central importance foster innovation and research and
of innovation to the longer-term development, these commitments
growth of the financial services sector, provide a sound basis for achieving
is particularly significant. the targets set out in the EU’s Lisbon
• The establishment of a Centre for competitiveness agenda.  
Financial Services Skills and associated
Fund, informed by a Specialist However, further refinement of strategic
Study into Future Skills Needs, will thinking is required so as to more fully
help to place education and skills adopt a segmentation approach built
development at the heart of any around the ideas of cluster development
future growth strategy. theory. For our part, IBF is committed
• The establishment of a Financial to working with government and its
Legislation Advisory Forum and agencies to make this strategy a success.
the broadening of the remit of the The challenge for this generation of
Company Law Financial Services Unit policy makers is to make Building on
in the Department of Enterprise, Success as dramatically transformational
Trade and Employment will enable as the original decision to set up the
the development of a world-class IFSC was in the dark economic days
legislative regime for financial services. of 1987.
• The commitment to conduct, in
conjunction with stakeholders, a
comparative review of fiscal policy in
competing jurisdictions will keep a
relentless policy focus on maintaining
our competitive edge.
• Recognition of the growing trend of
regionalisation is critical to the future
development of the financial sector.
An increasing number of IBF-member
institutions now generate significant
economic and employment activity in
the regions.
Conclusion
Building on Success has been warmly
welcomed by the financial sector.
Its focus on refreshing the existing
legal, fiscal and regulatory regimes is
essential for the further development of
international financial services in Ireland.
Furthermore, the emphasis on more
fully resourcing education and training
and on the further development of links
with the academic and business world

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 Harmonisation of Banking Rules and
Supervisory Practices in Europe
Danièle Nouy, Chair of the Committee of European Banking Supervisors
Creating a level playing field whereby banks
and investment firms face similar prudential
requirements across the EU is the challenge
facing the Committee of European Banking
Supervisors (CEBS), according to Danièle Nouy.
Growth in cross-border banking
and the centralisation by banks of
key business functions are the main
market trends affecting banking
supervision in Europe today. These
trends create a misalignment
between the legal and operational
structures of cross-border banking
groups; and they present challenges
to the smooth functioning of a
decentralised supervisory framework
and to the implementation of
European banking legislation.
In reality, the vast majority of the 10,000
credit institutions and investment firms in
the EU operate either on a purely national
or regional level. This suggests that
specific national rules and practices may
still be required. In these circumstances,
the main objective of the Committee of
European Banking Supervisors (CEBS) is
as follows: to respond to these challenges
by promoting cross-border supervisory
co-operation, as well as the safety and
soundness of the European financial
system, without creating unnecessary
supervisory costs or restricting
fair competition.
22 ABOUT BANKING
CEBS aims to pursue these objectives
in an effective and efficient way by
adopting good international supervisory
practices and by encouraging its
members to implement these in a
convergent and consistent manner.
CEBS’ guidelines foster a common
understanding between national
supervisors. Co-operation and the
exchange of information on the conduct
of day-to-day supervisory tasks are
encouraged among the relevant
national authorities.
The Financial Regulator in Ireland
participates in a number of CEBS
committees and sub-committees.
For example, during 2005 its
representatives attended over
twenty CEBS meetings. Through this
representation, the Irish Regulator
provides technical advice and
endeavours to address the concerns
of the Irish financial services industry
about inconsistent application of
European regulatory requirements.
This helps to ensure that commonly-
agreed principles are translated
into practice.
New capital requirements
The Capital Requirements Directive
(CRD) represents a paradigm shift in
banking supervision. The new capital
adequacy framework for banks and
investment firms not only harmonises
capital requirements but also encourages
institutions to improve their risk
management processes. At the same
time, this regime change has provided
CEBS with a unique opportunity to foster
convergence in supervisory practices.
From 1 January 2007 the CRD will
transpose the Basel II capital framework
into EU legislation and will complete
a long transition from rules-based
supervision to a risk-based approach.
This new approach relies on internal
safeguards being developed by banks
themselves and on their ability to apply
best practice developments in the
marketplace. The more advanced the
methods they have in place, the more
effectively they can use their capital
for business expansion. Good risk
management should ultimately benefit
customers in the form of a lower cost
of capital.
The Financial Regulator and Irish
Banking Federation (IBF) have jointly
established a CRD taskforce and
implementation forum in Ireland
which has been working for the
last two years on various technical
aspects of the CRD.
The banking sector faces another major
challenge in the new International
Financial Reporting Standards (IFRS)
which will also benefit harmonisation
of reporting and public disclosure
of financial statements. CEBS is also
seeking to seize this opportunity
to develop standardised reporting
frameworks for European banks.
Level playing field
In working to ensure that banks
and investment firms face similar
prudential requirements across the EU,
CEBS frequently has to take various
considerations and challenges into
account when drafting guidance.
The legal responsibilities of national
supervisors do not always correspond
with the operational structures of cross-
The role of CEBS
CEBS was established as part of the Lamfalussy approach to financial
regulation in the EU - so named after Baron Alexandre Lamfalussy who
chaired the process which gave rise to the Final Report of the Committee
of Wise Men on the Regulation of European Securities Markets. This report
proposed a four-level regulatory approach which is designed to make the
decision-making procedures faster and more flexible, while still ensuring
the uniform application of Community law. New powers were given to
supervisory committees known as Level 3 committees. They are expected
to deliver convergence in supervisory practices and to contribute to a level
playing field across Europe.
Figure 1: Applying the Lamfalussy approach
Level 1: European Commission
European Parliament Council
Legislation
Policy and
Level 2: European Banking Committee
implementation
measures
Convergence and Level 3: CEBS
supervisory co-operation
Enforcement Level 4: European Commission
Source: CEBS
Commencing operations in January 2004, CEBS was mandated with three
main tasks: (i) to provide advice to the European Commission; (ii) to ensure
consistent implementation of Community legislation in the banking field and
convergence in supervisory practices; and (iii) to promote supervisory
co-operation and exchange of information. These three tasks mirror those
set for the other two Lamfalussy committees; the Committee of European
Securities Regulators (CESR) and the Committee of European Insurance and
Occupational Pensions Supervisors (CEIOPS).
CEBS issues regulatory guidelines and standards in order to harmonise the
supervisory approach across the EU. Although based on voluntary
co-operation between members, common guidelines are expected to lead
to a gradual convergence of supervisory practices. Decisions are made on a
consensus basis and are fully endorsed by the Member State authorities.
border banking groups, which can be whereby, for example, deposit guarantee
characterised by centralised business schemes are based on national solutions.
lines and risk management functions. The structure of today’s cross-border
Also, small and large banks have banking market poses a serious
different demands and expectations challenge to risk-focused supervision.
with regard to supervision. Furthermore, The bank as a legal entity is not
the retail markets are still fragmented necessarily a self-contained body which
ABOUT BANKING 23
Harmonisation of Banking Rules and Supervisory Practices in Europe

“The banking sector has been quite vocal in its demands for principle-
based guidance as opposed to the more detailed approach adopted by
CEBS. In many areas CEBS has not been able to build on existing practices
and some detail in the guidelines has been deemed necessary in order to
achieve convergence and to deliver a level playing field.”

performs all the functions relating to
the provision of services in that same
jurisdiction and which directly controls
all the attending risks. By contrast,
supervisory responsibilities are allocated
on the basis of the country of residence
of the legal entity, while the monitoring
of the risks may well require access
to information that is outside that
supervisor’s jurisdiction.
The CRD reflects awareness of this
issue. By enhancing the tasks of the
consolidating supervisor, greater
co-ordination between competent
authorities is facilitated. This should
minimise the scope for duplication
and for additional compliance costs.
However, all of these provisions
- particularly those requiring a joint
decision to approve validation of the
Internal Ratings Based and Advanced
Measurement Approaches - call for
supervisory guidelines which more
appropriately define the respective
tasks of all of the parties involved.
CEBS has published guidelines
governing co-operation and exchange
of information between home and host
authorities. These provide a framework
for the effective and efficient supervision
of cross-border groups - one that should
allow for a clear division of labour
between all of the authorities involved. It
is important to recognise that the degree
of involvement and co-operation should
be defined according to the significance
of a banking entity, with respect both
to the business group and to the local
markets in which it operates. This
principle of proportionality is reflected in
all CEBS guidance.
The banking sector has been quite
vocal in its demands for principle-based
guidance as opposed to the more
detailed approach adopted by CEBS. Also, CEBS guidelines on supervisory
In many areas CEBS has not been disclosure through the proposed
able to build on existing practices and web-based framework will provide a
some detail in the guidelines has been meaningful comparison of rules and
deemed necessary in order to achieve guidance implemented across the EU.
convergence and to deliver a level This greater transparency will help to
playing field. identify authorities who are diverging
from the common approach and will
bring about greater consistency.
Common European
supervisory culture A common supervisory culture can
The ultimate challenge of achieving be promoted through training and a
a common European supervisory programme of staff exchanges. We have
culture and approach is complicated introduced our first common training
by differences that are evident across programmes for national experts. In the
the national supervisory authorities. In future CEBS members could establish
some countries the emphasis is more joint examination teams to validate
on contacts between the supervisor internal systems and models and to
and the supervised entity through engage in staff exchange. It is still early
on-site inspections as well as the use days but the first steps have been taken
of published data. In other countries, on the road to supervisory convergence.
supervisors base their assessments on
specific data which they request in Convergence is not a magic wand that
addition to that already in a can change the world overnight. It is an
public domain. ongoing process towards a regulatory
level playing field across Europe.
In practice, CEBS has to work
towards the development of in-depth
convergence in day-to-day supervision
and active co-operation across the
operational networks of supervisors.
These networks will monitor consistent
implementation of the CRD and the
CEBS guidelines and will aim to address
outstanding issues.
One important aspect in building a
common supervisory culture is the
open and transparent manner in which
CEBS itself operates. We consult with
interested parties before drafting new
guidance and all consultation papers,
together with responses, are published
on the CEBS website (www.c-ebs.org).
Transparency of banking supervision
practice will not be restricted to the EU
level but will be applied at national level.

24 ABOUT BANKING
 The Institute of
Bankers in Ireland

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