Fine Gael has rejected a central recommendation of the McDowell report on financial regulation that a new organisation separate from the Central Bank be established to regulate the sector. Such a move would have seriously adverse consequences for the financial services industry in Ireland, and particularly the IFSC, it warns.

Instead, it support in general terms the minority recommendation in the McDowell report, proposed by the representatives from the Central Bank and the Department of Finance, that the new single financial regulatory authority be located within the Central Bank.

The Fine Gael front bench, in a statement, gave a number of reasons for opposing the establishment of a greenfield regulator. It questioned whether it could be independent of the financial services industry - which would have to fund it - and said it could reduce the confidence of the international banking community in Ireland's regulatory system.

Relationships that the Central Bank had built up with regulators in other states - particularly in overseeing the IFSC - might not transfer to a new institution. Mr Michael Noonan, the party's spokesman on finance, said that excluding the Central Bank from regulation would "raise questions about the independence and the competence of the single regulatory authority (SRA) in carrying out its functions".

Mr Noonan said it would be unwise for the new SRA to be funded by the financial services industry because "he who pays the piper usually calls the tune". If the new authority was established outside the Central Bank, problems may be encountered with the recruitment of experienced regulators. The report recommends that regulators for the new body be drawn from the existing pool of 170 central bank regulators. However, MSF, the union who represents most Central Bank employees, advises that if their link is cut with the Central Bank many will take redundancy packages or go to work at the IFSC.

Mr Noonan said: "If the pool of regulators available to the SRA were reduced at a time when the proposed workload being allocated to the SRA is being significantly increased, there must be serious doubts about the ability of the SRA to carry out its functions."