^{Tom Ferris is a Consultant Economist specialising in Better Regulation. He was formerly the Department of Transport’s Senior Economist}

Financial Regulation – who pays?

Last Friday (3 July) saw the publication of an interesting consultation paper on “Funding the Cost of Financial Regulation”. It is a joint production by the Department of Finance and the Central Bank of Ireland. At the heart of the consultation is the question: should there be a change from the current partial funding system of the cost of financial regulation by the industry, towards a full industry funding? An open invitation has issued for interested parties to give their views¹. Submissions should be made to funding@finance.gov.ie no later than September 25 2015.

The consultation paper addresses a number of topics including:

·         the case for full industry funding;

·         the current regulatory cost model;

·         the future cost of financial regulation;

·         international comparisons;

·         domestic comparisons; and

·         regulatory landscape for each of the regulated sectors.

The Current Situation

The recent financial crisis, from which Ireland is still recovering, underlines the huge economic cost that comes with recessions associated with severe financial crises. For this reason, policymakers should not skimp on the cost of financial regulation. The cost may be huge, but it is necessary.Costs over five years have risen from a lower base of €60.2m in 2009 to €139m in 2014, in order to fulfil the mandate of protecting consumers and safeguarding stability. The costs relate to the direct supervision team, supervisory specialists, consumer/policy/risk & enforcement, and ancillary/support services. Who pays is a separate question. At present, the industry in Ireland generally funds half of the costs incurred by the Central Bank. This translates into a corresponding reduction in the annual surplus remitted by the Central Bank to the Exchequer. There are some exceptions to the 50:50 rule, e.g. Credit Institutions that had participated in the Eligible Liabilities Guarantee Scheme 2009 are required to fund 100% of supervisory costs. Given that only half the cost is paid by the industry, the Irish taxpayer that is responsible for the other half. But, as the consultation paper points out

whereas the Irish taxpayer currently subsidises the cost of financial regulation, the consumers of these services are located both here and abroad.

The Case for Full Industry Funding

The consultation paper points out that, in Ireland, the general approach adopted by regulators in other sectors is that industry fully funds the cost of regulation (e.g. the Commission for Energy Regulation, the Commission for Communication Regulation). Moreover, the dominant position internationally is that industry funds the cost of financial regulation and this is elaborated in the international comparison section of the consultation paper.

Full funding of financial regulation by industry would, however, eliminate the need for the Central Bank to provide an annual subvention. This would increase the reserves retained by the Central Bank which in turn would have a positive impact on Exchequer funds; amounting to around €67 million in 2015 alone. It would also remove certain anomalies. For example, the Central Bank recovers its full supervisory costs in respect of the Irish institutions which participated in the Credit Institutions Eligible Liabilities Guarantee Scheme 2009 (AIB, Bank of Ireland and Permanent TSB) while most other credit institutions and industry sectors contribute only half of the costs of regulation.

Structured Consultation

To gain a structured response, the consultation seeks answers to a set of nine questions. These are reproduced below:

Nine Consultation Questions

2. Do you consider that there are any particular consumer or tax payer issues to be taken into consideration in revising the funding approach? Please state clearly your reasons for any such issues and suggestions on how they may be addressed.

3. Do you consider it appropriate for taxpayers to continue to fund a significant proportion of the cost of financial regulation activity? If you disagree, what would you propose instead?

4. Do you consider it appropriate that industry be required to fully fund the cost of financial regulation activity? If you disagree, what would you propose instead?

5. Do you consider it appropriate that a move to full funding should commence in 2016? If you disagree, what would you propose instead?

6. Do you consider it appropriate that a move to full funding should take place in a single step in 2016? If you disagree, what would you propose instead?

7. Do you consider it appropriate that any revision in the proportion of funding provided by industry should continue to apply uniformly across all industry funding categories? If you disagree, what would you propose instead?

8. Do you consider that there are any particular industry funding categories which warrant a derogation or alternative funding approach? Please state clearly your reasons for such a view.

9. Are there any other considerations that you think should be taken into account in seeking to come to a decision on a move to full industry funding? If so, what are they?