Despite its limitations, Dublin is promoting itself vigorously as a post-Brexit haven for UK financial services entities seeking unfettered access to EU markets with minimal disruption to existing operations. Paul Golden writes
The financial services industry in Ireland covers domestic and international and retail and wholesale activities. The International Financial Services Centre or IFSC in Dublin – established in 1987 – employs around 36,000 people and earlier this year Financial Services Ireland, the group that represents the financial services sector, announced the creation of 1,000 new apprenticeships aimed at school leavers, candidates with third level qualifications and workers looking to upskill.
Dublin’s strong showing in the latest Global Financial Centres Index will provide encouragement to decision-makers considering the Irish capital as a potential alternative to the UK. While it is only the eighth-highest ranked location in Europe, Dublin has risen eight places in the global ranking over the last 12 months.
PwC’s Global Economy Watch financial services attractiveness indicator places Dublin second only to London among the major European financial centres, although it does not measure the appeal of different cities as a place to live.
A Zurich-based pension fund manager quoted in the Global Financial Centres Index report stated that Dublin – along with Zurich, Frankfurt and Luxembourg – would be the most likely beneficiary of significant migration from London.
In late October the Irish government made a public declaration of interest in Ireland becoming the location for the offices of the European Banking Authority (EBA). As part of the negotiations associated with the UK’s decision to withdraw from the EU, it will be necessary for the EBA to relocate to an EU member state from its current location in London.
The country’s minister for finance observed that Ireland has a significant financial services sector, efficient transport links to other European capitals and experience in providing links to banks and companies in the UK market.
Daniel Mulhall, Irish ambassador to the UK told a conference on Ireland’s position as a gateway to Europe in the post-Brexit universe attended by business leaders from leading financial services organisations, asset management firms and professional services companies in September about some of the other attractions the country has to offer.
“At a practical level, Ireland has in recent years added to its stock of high-quality office spaces and continues to do so while maintaining rental costs at an internationally competitive level,” he said. “There is also the consideration that many Irish people who have worked in the financial services arena outside of Ireland in recent years will be attracted home.”
Brendan Dowling, chairman of Dublin-based DKM Economic Consultants says it is important to be realistic when it comes to expectations of a boom in financial sector employment in Dublin. Personal tax rates in Ireland are very high by European standards with anyone earning over €70,000 ($74,400) per annum considered an ultra-high earner and taxed accordingly. Mangers in senior positions in London would expect to earn multiples of this amount annually and would undoubtedly be reluctant to move to such a high tax regime.
In addition, the domestic UK market in financial services is relatively large, as is the market for financial services to other parts of the world – the growth of London has not just been due to EU membership, adds Dowling. “The City has thrived even though the UK remained outside the euro. The shift of financial services out of London may be much smaller than some commentators anticipate, even if EU passporting is restricted or abolished.”
Speaking at the September conference in London, William Fry partner Eavan Saunders observed that while Ireland has a strong reputation as a gateway to Europe for financial services, there are concerns around its capacity to continue to provide quality office space in the right locations, the lack of an large indigenous customer base for global financial services businesses and the availability of housing and school places in comparison to other locations also offering EU access.
A bulletin published by the financial services regulatory group at Dublin-based law firm McCann Fitzgerald just prior to the EU referendum stated that the UK’s presence in EU negotiations of financial regulation has carried significant weight and that in most cases, Ireland takes a similar position on the direction of EU policy.
The authors noted that while Brexit could bring short and medium-term gains (there are some Irish solutions to a number of potential issues that could arise for UK investment funds) the longer-term position would be uncertain. They observe that Ireland has benefited from the UK’s market strength and size in policy discussions regarding (and legal and regulatory changes affecting) financial services and that without its presence at the negotiation table, Ireland’s interests could be “impacted adversely”.
While any flow of business from London to Dublin is likely to be a steady stream rather than a torrent and the highest earners would not be particularly enthusiastic about handing over a larger portion of their sizeable salaries in tax, even Dowling acknowledges that Dublin stands to benefit from an expansion of EU-centred operations at the expense of London.
Financial services firms will be looking for opportunities to increase efficiency in specific areas of their business and in some case this will be achievable by moving these operations to Dublin, which offers an English-speaking market with very similar employment legislation to the UK in a common law jurisdiction, observes Brian Keegan, director of taxation at Chartered Accountants Ireland.
“The cost base in Dublin has fallen since the recession and compares favourably to the major European financial services hubs,” he says. “This suggests that it’s a good location, if not for front office then certainly for middle office and back office services.”
Keegan accepts that Dublin cannot compete directly with London as a financial service centre, but adds that firms are looking where they can deliver their service from and specifically where they can deliver EU regulated services following Brexit.
Some UK-based financial services firms had been planning to move some or all of their operations to Ireland as a contingency before the EU referendum and are now pressing ahead with those plans according to Certified Public Accountants in Ireland (CPA Ireland) chief executive, Eamonn Siggins.
More of these firms are now looking seriously at Ireland’s attractiveness in terms of language, legal framework, talent pool, quality of life and guaranteed future EU membership, he explains. “Dublin is gearing up in terms of investment in new office accommodation and transport links, while Ireland has invested in its regulatory capacity to cater for the additional inward investment.”
Cormac Kelly, executive director EMEIA financial services at EY Ireland refers to activity across all sectors of financial services (insurance, banking, asset management and financial technology) as firms review their European business and operating models. “Brexit represents a fundamental change in the European financial services landscape. Those organisations that position appropriately, take a strategic perspective and a planned holistic approach to their future European business model and operating model will likely benefit.”
Impacted organisations are assessing the implications and scenario building for possible situations, to accommodate the challenges of passporting and future European business models, says Kelly. “During the past month there have been increased conversations with clients, albeit there is generally a hesitance to move decidedly on any Brexit strategic initiative. Ambiguity and uncertainty on what Brexit will really mean, or the form and outcome of the UK negotiations with the European parties is holding clients back from taking action.”
Prior to the EU referendum there was very limited interest in putting front office activities into Ireland, which may have been partly down to staff wanting to stay in the UK. If companies are now looking at a different cost benefit analysis that should open doors for Ireland – but it’s not the only country they will be looking at so it needs to make sure it is the obvious choice by providing a straightforward route to establishment and regulation.
That is the view of Niamh Meenan, partner financial services audit at Grant Thornton Ireland, who recommends a number of measures for consideration including a review of IFS 2020 (Ireland’s strategy for international financial services); reconsideration of the tax regime for expats; and a review of the regulatory regime to see whether it could be tailored for companies with an existing UK authorisation.
Brexit most definitely presents financial services opportunities for Ireland, which has a history of clear, long-term tax rules and legislation which provides certainty to companies considering investing there says Cathal Cusack, founder of MSI Global Alliance member firm Cusack Garvey.
“However, there’s a concern that the Central Bank of Ireland, the regulator of financial services, might not have the capacity to manage a large influx of financial services companies,” he continues. “There’s a conflict between the possibility of significant new business moving to Ireland and the risk associated with that business being domiciled in Ireland. Ensuring that the regulator is suitably resourced would help speed up the compliance process for new business.”
In addition to the opportunity to engage with UK financial services firms looking to relocate, there’s also scope for a large number of financial services firms being instructed by legal firms to explore establishing Irish entities observes BDO Ireland managing partner, Michael Costello.
Linda Doran, senior audit manager at Baker Tilly Hughes Blake reckons Ireland’s status as the only country in the EU with English as its first language once the UK has left the politico-economic union gives it a considerable advantage over other potential locations such as Paris, Luxembourg and Frankfurt. “Many asset management companies will be looking to Ireland to domicile their funds, with back office functions already based here.”
When asked whether the Irish government would have scope to incentivise financial services firms to relocate, Keegan refers to the country’s 12.5% corporate tax rate as a strong incentive that is already in place. “In addition, we have a network of double-taxation agreements. Firms moving from the UK would not be able to avail of a similarly attractive corporate tax rate in France or Germany.”
According to Siggins at CPA Ireland, Ireland’s inward investment agency (the Industrial Development Authority or IDA) is working hard to pitch Ireland’s unique advantages. “Ireland’s track record in foreign direct investment will give comfort to those looking at migrating from London and firms will see an open attitude to hiring international talent and a certainty about tax and regulatory frameworks.”
One potential fly in the ointment for attracting business from the UK is that Ireland’s continued EU membership and therefore adherence to EU rules would prevent it from offering a special tax rate for financial services companies. Once it has left the EU the UK will no longer be subject to these rules and could therefore reduce its corporate tax rate to a figure below even the Irish rate. However, any such reduction would come at a considerable cost to the UK exchequer.
According to Manus Brady, principal of Alliot Group member firm Manus Brady Chartered Accountants & Registered Auditors, Brexit represents a timely opportunity to review Ireland’s tax regime to ensure that it is competitive and attractive with particular reference to securing foreign direct investment.
“A detailed review and possible overhaul of our existing investment incentives (as limited in the context of BEPS and OECD scrutiny) such as SARP, share schemes, headline income tax rate, R&D credit, knowledge development box and start-up company exemption, among others, should be considered, bearing in mind our biggest competitor now has the freedom to incentivise foreign direct investment through its tax regime without restriction by the EU,” he says.
The Special Assignee Relief Programme or SARP was introduced in the 2012 Budget to reduce the cost to employers of assigning skilled individuals in their companies from abroad to take up positions in the Irish-based operations of their employer.
Kelly suggests that Ireland needs a strategic plan to ensure it plays a significant part in the post-Brexit financial services landscape, including state commitment to supporting the next phase of the IFSC development, both by the way of infrastructure and policy.
The main purpose of IFS 2020 was to increase the numbers employed in the financial sector in Ireland by 10,000 over the period 2015-2020 and the Irish government has stated that this document provides a road map to maximise the country’s ability to attract financial services companies as a result of Brexit.
However, Crowe Horwath Ireland audit partner Chris Magill says it’s difficult to believe that a document published 15 months before the EU referendum result could have fully considered the opportunities and challenges.
“The strategy is aimed at companies considering where to establish a financial service function using standard methods of appraising the jurisdiction in which to set up a financial services business,” he explains. “Brexit could mean that financial services companies operating in the UK (which must continue to be EU regulated) will have to move and Ireland needs to present itself as the best alternative.”
John Byrne, tax partner at Crowe Horwath Ireland suggests that key decision-makers need assurances that Ireland has the regulatory environment, infrastructure and qualified staff to allow their companies/
clients to move operations seamlessly and that there’s a risk that the regulatory authorities may be faced with a deluge of applications.
“Ireland should consider establishing an independent agency, made up of industry professionals and public servants, who can facilitate international companies establishing in Ireland and act as a conduit with other government agencies,” he adds.
“This agency should promote Ireland as a location as well as help review the regulatory environment to remove any perceived obstacles for international financial services companies.”
At an individual level, one of the issues that has arisen is availability of school places for the children of foreign executives. The Irish school system is already oversubscribed and it’s particularly difficult to obtain places in private schools – although Cusack notes that private school fees are considerably less expensive than in the UK and that there are proposals to develop ‘international’ schools that would cater for this section of the population.
Infrastructure (including transportation and availability of both commercial and residential property) is an area that will need attention if there was to be a significant flow of financial services companies relocating to Ireland from the UK, observes Doran at Baker Tilly Hughes Blake.
“Office space and residential property in the capital is in short supply,” she says. “However, some companies (such as BNY Mellon and State Street) have successfully decentralised some of their back office funds administration offices outside Dublin, so there could be potential to replicate this on a larger scale.”
Tim O’Keeffe, partner at MGI member firm Copsey Murray is confident that there would be enough financial services professionals in Ireland to cope with demand from companies relocating from the UK, noting that the 2016 FAE results showed a pass rate of 80%, the highest level for some time.
Both Eoin Ryan, HLB McKeogh Gallagher Ryan’s business advisory partner and Derek Ryan, partner HLB Ryan & Co share this confidence, although the former acknowledges that Ireland would also need to attract top management.
To a certain extent, financial services professionals are mobile and will relocate with their work, as evidenced by the flood of UK qualified solicitors registering to practice in Ireland says Derek Ryan. “There are many nationalities represented in financial services in London who don’t have strong ties to the UK and might also consider the move. Under post-Brexit immigration reforms they may well feel more at home in Ireland.”
Geoffrey Lewis, partner at BKR’s Irish member firm Ormsby & Rhodes agrees that many professionals would transfer if their employer relocated, while Keegan suggests there’s a risk of underestimating the track record Ireland has in financial services.
“We’ve had an international financial services centre for nearly 30 years and over that time universities have been geared up to provide the type of graduates required to work in this area,” says Keegan at Chartered Accountants Ireland. “There would also be Irish professionals living abroad who would return home if the right opportunity was available. Highly skilled people are always in demand but I am confident that we could absorb increased demand for financial services skills as and when that becomes necessary.”
Siggins at CPA Ireland observes that while there are already around 10,000 people employed in the financial services sector outside Dublin, many of their employers are multinational firms with access to wide talent pools – including the Irish diaspora already working in international financial services.
“Many of those working in Ireland’s financial services sector regularly commute between Ireland and their operations in the UK (making the Dublin-London route one of the busiest in the world) so we have many professionals who are already very accustomed to the City of London,” he continues. “We also have a significant population of accountants, lawyers and tax professionals to service inward traffic and are seeing significant numbers of UK lawyers registering with the Law Society of Ireland, thus adding to the security of talent supply.”
Meenan at Grant Thornton Ireland suggests that a more proactive response is required, though, referring to existing high levels of demand for accountants from practice, industry and regulators. She says: “We need to attract Irish talent back home or provide attractive opportunities to those overseas professionals looking for a new challenge. We also need to increase the pipeline of suitably qualified and experienced individuals, perhaps looking again at the courses, degrees and postgraduate courses on offer to see if they could be more relevant, review internships and consider employment grants.”
Cusack also refers to a shortage of financial services, legal and accounting staff (especially in Dublin) and observes that salary costs have been rising steadily over the past few years – although they have not reached London levels.
“There was a considerable dip in the numbers of accountancy trainees following the economic turmoil and numbers only recovered in 2013 and 2014. Accordingly this has lagged into a current lack of staff with appropriate training and experience,” he concludes.
