The Irish Financial Services Regulatory Authority does not understand the needs of smaller firms, according to a survey of financial services companies commissioned by the regulator's consultative industry panel.

The regulator should hire staff with direct industry experience to get a broader perspective on the financial services sector, panel chairman James Deeny said at the publication of the panel's first annual report yesterday.

But an earlier idea whereby people from the financial services industry would be seconded to the regulator for short periods has been scrapped, over concerns that they would have too much access to competitors' files.

Almost two-thirds of the 1,116 regulated firms questioned by Millward Brown IMS on behalf of the panel disagreed that the regulator showed an understanding of smaller firms in the development of their policy and operations, while 49 per cent said the regulatory system placed too great a burden on companies.

"There is a feeling that the regulator isn't paying enough attention to the impact of regulation on small businesses and don't have an understanding of what they are doing," said Mr Deeny.

Over one-quarter of firms agreed with the statement that the level of regulation is detrimental to consumers' interests.

Mr Deeny said independent brokers were merging operations in order to pool the cost of compliance and that this might create barriers to entry in the sector.

"It isn't in consumers' interest to see smaller service providers disappearing from the market."

There was positive feedback for the financial regulator, however, as 92 per cent of respondents said they believed that their relationship with the regulator had either remained the same or improved over the last two years.

There was also strong recognition of the openness and informal nature of the regulator.

The industry panel said the scale of the wholesale financial services sector justified the creation of a wholesale director position alongside the regulator's prudential and consumer directors.

Barriers to innovation and competitiveness in the payments area, such as stamp duty on cards and cheques, and section 149 of the Consumer Credit Act, which requires banks to seek approval before they can change their fees and charges, should be reconsidered, the annual report states.

The role of the consultative industry panel, and a corresponding consultative consumer panel, is to advise the financial regulator as it seeks to build a balanced regulatory environment.

Mr Deeny said there was "constructive tension" between industry and the regulator.

"If we thought the regulator was perfect, there would be something wrong and if they thought we were perfect, there would be something wrong."