Given the role that inadequate regulatory oversight played in almost bringing down the banking sector – and with it the whole economy – it makes sense that the Central Bank should change tack with its supervisory approach. After all, the famed "light touch" approach that was in vogue internationally during the boom years did nothing to stop, or even inhibit, reckless lending in the banking sector.
But whether or not financial institutions are willing to pay for the extra effort involved in its new approach remains to be seen.
Risk-based supervision was first introduced by the Central Bank in November 2011. It seeks to ensure that those firms whose failure would pose most risk to the economy or to consumers are subject to the highest levels of supervision and that resources are allocated accordingly.
Rather than allocate supervisory resources based on the size of a company of some other metric, the Central Bank will now do so based on the risk an institution poses. For deputy governor Matthew Elderfield, it's about targeting "the energy and expertise of our supervisors to where they will make the greatest difference".
Rising costs
But such an approach costs money. Already staff numbers have jumped at the Central Bank over the past few years – up from 385 at the end of 2009 to more than 700 in 2012.
Now the Central Bank is proposing to significantly increase the levies imposed on industry to fund the extra expense. Unsurprisingly the financial institutions subject to the levy have come out against this.
Since 2004, the industry has funded about 50 per cent of the cost of regulation, with the public sector shouldering the balance. Last year, the industry’s contribution was put at €75 million – up from €22 million in 2005. This year’s figure has yet to be disclosed.
To pay for the new risk-based approach, the industry will be expected to contribute more.
Currently, the Central Bank puts the firms it regulates into 14 industry categories for the purposes of levy setting. Under the new approach, however, companies have been segmented into one of six categories, depending on the bank’s Prism (Probability Risk and Impact System) analysis.
Over the past year, institutions have been informed as to where they rank, with “ultra high” risk institutions, for example, having eight supervisors attached to them, while a “medium-low“ institution will have between 10-20 per cent of a supervisor’s time.
The Central Bank, in its consultation paper on how it will be funded under the new system, proposes that each category will pay a different levy.
So, for example, a bank of the likes of AIB or Bank of Ireland can expect to pay almost €4 million, while a “medium-low” insurer will pay about €40,000 and a low-risk broker less than€900.
These figures represent a significant increase on the old system, with the Irish Insurance Federation putting potential increases as high as 300 per cent.
There is also the fear that such an approach might dissuade companies from developing their business and increasing employment levels if they were to face higher supervisory charges.
Financial Services Ireland (FSI) for example, cites a cross-Border life insurer currently deemed as “low risk” that would pay €27,086 a year under the new approach. If it were to develop its business, however, and move to a high risk category, its levy would increase by 500 per cent.
The approach might also be a problem for companies categorised as “high risk” because of one particular product they write.
"They need to be more granular in how the levy is assessed," says Brendan Bruen, director with FSI.
Some smaller independent brokers might decide that the levy is "too prohibitive" to keep trading, says IBA chief executive Ciaran Phelan, particularly when it comes on top of levies for the Financial Ombudsman and the Investor Compensation Scheme.
“The cost of regulation is putting a strain on small businesses,” he says.
The levies are expected to issue at the end of 2013, but most of those responding to the consultancy paper want it pushed back to 2014 at the earliest.
Bank of Ireland suggests it is delayed in order to give “sufficient time for consultation”.
Application fees
In another major departure, the Central Bank also intends to introduce application fees for firms seeking authorisation, which "will reflect the cost involved in the processing of applications".
According to the Central Bank, proposed fees will range from €2,000 for a retail intermediary or moneylender; €5,000 for a credit union; €15,000 for a designated fund manager; and up to €50,000 for a credit institution or stock exchange member firm.
These fees will apply whether or not an authorisation is granted, and will not be refundable in the event that an application is withdraw or refused.
This move has raised the ire of the financial services industry, with many arguing that such an approach could hinder the development of the sector.
Bruen describes it as being “out of line“ with those in other jurisdictions such as Malta and Luxembourg, where fees are considerably lower, while Aon Insurance managers argue that such a fee should be “reassessed” so it’s not an “automatic barrier to entry”.
Otherwise, the insurer said, it could have a “significant depressing effect” on new applications which would be in “contradiction to the stated aim of government to expand employment in the IFSC”.
Bruen agrees that the fee “doesn’t make sense”, even if, as the Central Bank has suggested, it’s to prevent people from submitting half-hearted applications.
“We should be encouraging people, even if it is just case of coming in and kicking the tyres. In doing so, they are going to be spending money in Ireland,” he says, adding that such approaches may also end up in significant investments.
For its part, the Irish Brokers Association (IBA) says the proposed fee of €2,000 for authorising firms in its sector is too high.
“That’s a barrier to entry into the market place which is wrong; you should have a fee because of the administration costs involved, but don’t make it prohibitive,” urges Phelan, suggesting that a more appropriate fee would be €500. He would also like to see any application fee deducted from a firm’s levy in its first year of trading.
Credit unions
Since 2004, credit unions have contributed just 0.01 per cent of their total assets towards the cost of regulation, with the balance covered by the Central Bank. However, with assets remaining static and the overall cost of supervising the sector rising due to solvency and other concerns, the Central Bank is calling for the sector to contribute more.
In 2012, for example, the credit union sector contributed just €1.4 million of the estimated €9 million that it cost to regulate the sector. And this gap is likely to rise further, says the Central Bank, “in view of the difficulties currently being experienced by the sector which have resulted in the deployment of increased regulatory resources”.
It has questioned whether or not this level of public sector subsidy is “justified” and whether the industry should be required to fund a greater proportion of the cost of financial regulation, “thereby reducing the burden on the taxpayer”.
The Central Bank has put forward three scenarios:
1) Maintain the status quo of capping funding at 0.01 per cent of assets, which would result in levies of between €106 to €32,200
2) Require credit unions to fund 50 per cent of the costs, which would see levies jump to between €3,800 and €52,000;
3) The Central Bank's preferred approach, which is to phase in the move to 50 per cent over five years.
For Kevin Johnson, chief executive of the Credit Union Development Association (Cuda), which represents credit unions with a combined member base of more than 250,000, a key issue with the proposals is whether or not credit unions will be able to afford the levy increases.
“Unfortunately, no analysis was conducted to assess affordability when this proposal was made. Credit unions have recently incurred considerable levies and charges, most notably the resolution charge and further charges are set to come to support restructuring and stabilisation,” he says, arguing that he would like to see the Central Bank undertake a regulatory impact analysis, which would take into account all costs facing the sector.
The future
As mentioned, the industry currently funds 50 per cent of the Central Bank's costs. But the regulator has signalled that it would like to see this increased. This would lead to a further hike in funding levies, something Bruen argues "wouldn't make sense at the moment".
“We’ve already seen a fairly substantial increase in costs to industry,” he says.
For Phelan however, the increase is “inevitable in time”.
Whether or not any concessions are made to the industry when it comes to the level of levies imposed, this will become clear over the coming months, but you wouldn’t bet against the Central Bank sticking with its convictions. Perhaps it’s best to give the last words to Elderfield.
“Some in industry would doubtless like us to revert to pre-crisis approaches to regulation but I’d suggest that – rather than railing against what is in fact a new global supervisory approach – they work with us to adapt to the new reality.”
