I thank the Chairman and the committee members. We very much welcome the opportunity to appear before them today to discuss Brexit. As the Chairman said, I am joined by Mr. Gerry Cross, director of policy and risk, and Mr. John Flynn, head of Irish economic analysis.
In our opening remarks I will start by making a few key points which summarise our overall perspectives and approach. I will consider the overall effects of Brexit on Irish financial services. I will outline our approach to dealing with the challenges of Brexit for existing firms. I will summarise our approach to engaging within the Europe supervisory framework. I will provide a brief overview of our engagement with firms considering relocating business from the UK and I will also cover the Central Bank’s approach to the resourcing challenges it poses.
To start with a few key points, the Central Bank's mandate and mission of protecting consumers and safeguarding financial stability underpins our approach to dealing with Brexit. In this regard, I would highlight that the Central Bank has been working on Brexit-related risks for nearly two years and, overall, we still consider that Brexit will have negative effects for Ireland. From an early stage we have sought to ensure that financial services are adequately prepared and resilient enough to cope with plausible stress scenarios related to Brexit. It is both desirable and realistic that decisions related to the relocation of activities from the UK to other parts of the EU be driven by factors other than regulatory and supervisory differences.
The Central Bank's approach across different financial services firms is consistent with there being commonality across sectors in many of the key regulatory and supervisory issues to be considered as part of any relocation of activities from the UK. The Central Bank is engaging effectively in influencing European regulatory and supervisory approaches to dealing with Brexit-related issues, as well as operating consistently with them. We expect Brexit to have significant impacts on the Irish financial services industry, with some negative but manageable impacts for domestically focused firms and those with a UK focus. We expect a material increase in authorisation activity due to UK firms seeking to relocate some of their activities.
I will briefly cover the macroeconomic impacts. Ireland has a substantial, complex and multifaceted financial services sector. Brexit effects on the financial services sector will, therefore, vary accordingly. For domestically focused firms, the Brexit-related effects on the domestic economy will be critical. While a wide range of factors will determine the precise impact on Ireland's economy, our analysis is that the overall economic effects for Ireland in the short and longer terms will be negative, and will be much worse if there is no free trade agreement.
Furthermore, a hard Brexit may also require sudden regulatory and financial adjustments, given that UK financial services firms would lose passporting rights to operate across the EU and vice versa. This risk is likely to be associated with a period of heightened uncertainty in the financial services sector. This emphasises the importance of a transitional period to mitigate potentially disruptive cliff effects and the associated financial stability risks.
I will turn to the Central Bank's approach to existing firms operating in Ireland. Prior to the referendum, we carried out extensive analysis of the regulatory, policy, economic and broader financial sector effects of a potential Brexit, including the risks arising for the firms supervised by the Central Bank and for the bank itself. That work prepared us for a number of potential Brexit scenarios.
The Central Bank set up an internal Brexit task force in advance of the UK referendum comprising representatives from across the bank. Its work is ongoing and it provides comprehensive assessments of Brexit-related matters to the Central Bank's financial stability committee and the Central Bank commission.
From a regulatory and supervisory perspective, the focus has been on ensuring that regulated firms are addressing and planning for the effects, such as currency movements, liquidity provision and so on. We continue to push regulated firms across all sectors to plan and adapt to the potential implications of Brexit.
In terms of European engagement, the lessons from the global financial crisis remain fresh in the minds of the European regulatory community and form the foundation for assessing the implications of the new organisational configurations that Brexit will trigger. For these financial stability reasons, the importance of a robust approach to prudential supervision is a widely held view. The post-Brexit evolution of the European financial system cannot involve any dilution of the capacity of supervisors to ensure effective regulation of international financial services firms.
At a European level, in light of the obvious material Brexit impacts on the State, the Central Bank has been to the fore in the discussions on the regulatory and supervisory approach to Brexit across all three European supervisory authorities, ESAs, and the work of the ECB and the single supervisory mechanism, SSM. The aim of this approach is to mitigate against the risk of regulatory and supervisory arbitrage and to ensure that, regardless of where a firm relocates to, it can expect a consistent application of the applicable EU regulatory standards and intrusive ongoing supervision.
Specifically, the aim is to ensure that the Central Bank is operating in line with European regulatory and supervisory norms and is being effective in influencing them. We are satisfied that this approach is correct and proving worthwhile, and it is clear through our interaction at the European level, but also with individual firms, that the opportunities for regulatory arbitrage are being successfully targeted and addressed.
The role of the SSM in banking supervision ensures that there is a level playing field in terms of banks. Although there is more national autonomy in respect of other types of financial services firms, national regulators operate within the broad framework of the European system and there is a significant, if incomplete, convergence. With a broadly similar regulatory framework across member states, the primary focus of firms in Brexit planning should be on non-regulatory criteria such as business model fit, legal systems, workforce, quality of relevant infrastructure and so on.
The SSM and the ESAs are developing guidance that will set out the approach they expect to see adopted by national authorities and firms themselves when dealing with Brexit-related matters. The bank has also been actively involved, via ESA working groups and membership of the relevant boards of supervisors, in contributing to ESA considerations of Brexit issues across all sectors.
We have had significant engagement with firms that are considering relocating business away from the UK. This includes currently authorised firms that are considering changes to existing operations and those that are considering seeking entirely new authorisations. This engagement represents a major increase against normal activity and has been observed across all sectors. In addition to individual engagements, we have held a number of round tables with industry to detail our approach and hear views, with accounts of these meetings published on our website.
In terms of our approach, we have dealt with all inquiries in an open, engaged and constructive manner. We are approaching new authorisations and material business model changes in a similar way through a clear, well-structured, transparent, consistent and predictable authorisation process. Our approach is in line with sound practices agreed across Europe and our responsibility is to ensure that firms authorised to operate from Ireland are soundly run in compliance with EU requirements. To this end, we seek to ensure that an entity will be substantively run from Ireland and that the set-up permits effective supervision, with local management accountable for decision making. Moreover, we are actively considering the financial stability risks associated with potential changes to the financial services sector in Ireland.
Nonetheless, it is clear that London will remain an important location for financial services activities. The level of activity that moves from London because of Brexit is highly uncertain and contingent on the outcome of the negotiations between the EU and the UK. In the face of this uncertainty, hundreds of meetings are being held across Europe between firms and regulators as each seeks to navigate a path through the uncertainty created by Brexit. Firms that are considering moving activities from the UK are typically visiting several jurisdictions to assess the fit of each jurisdiction for their businesses. They are then whittling those locations down to two or three possibilities and, in all likelihood, might have further visits. They will make their decisions and inform the regulator and other stakeholders, and they will then embark on a formal application process. Even at this latter stage, a submission of a formal application may be several months away. Different firms are at different stages of this process.
In the same way as scores of meetings are being held in Dublin, they are also being held in Paris, Frankfurt, Amsterdam and so on. The number of meetings held to date gives no indication as to the likely outcome, nor does the number of applications or expressions of interest give any sense as to the size, scale or complexity of an operation. Based on the many meetings that we have had to date, though, Ireland can expect to receive a meaningful share of the activities that will move from the UK.
I will turn to the Central Bank's organisation. The bank is committed to ensuring that we are well positioned to predict, understand, assess and respond effectively to developments arising from Brexit. Of critical importance, we are seeking to ensure that we have the skills, experience and resources that will enable us to deal with the authorisation of new and materially changed firms and their subsequent supervision and possible resolution. While the common European approach should ensure that regulation is not the deciding factor for firms in their relocation decisions, it is important to bear in mind why we regulate in the first instance - to have a well-functioning financial sector, to safeguard stability and to protect consumers. We have approved the recruitment of additional staff and set up new teams in order to manage Brexit-related authorisation queries across all sectors. The need for further resources is being kept under constant consideration.
The Central Bank has taken a proactive, considered, adaptive and influential approach to dealing with the impacts of Brexit on financial services and beyond. We remain conscious of the likely negative effect of Brexit on the Irish economy. Our approach is anchored by the core mandate of protecting consumers and safeguarding financial stability. We are working effectively to operate within and influence European norms so that relocation decisions will be based on factors other than potential regulatory or supervisory differences across Europe.