The efficacy of the Irish Financial Services Regulatory Authority (IFSRA) is under scrutiny again following the near collapse of Sachsen LB, a state-backed German bank, as a result of credit problems at its Irish operation.
The regulator and its parent, the Central Bank, have gone to some lengths to disavow responsibility for regulating the particular Dublin-based fund at the heart of the problem, Ormond Quay.
But, as the name implies, it is undeniable that Ormond Quay is an Irish company, based in Ireland and with two Irish directors. And this company somehow got itself into a predicament so serious that the collapse of a German bank was only avoided through emergency intervention to the tune of €17.3 billion by a group of other German banks.
The fact that the Irish regulator is not technically responsible for Ormond Quay does not detract from the reality that something occurred within this jurisdiction that has cast the financial services regime here in a very bad light. The Central Bank and IFSRA cannot simply wash their hands of the matter. They must take steps to ensure no recurrence. That is the essence of their job.
The implosion at Ormond Quay is not the first occasion on which the nature of the regulatory regime has been called into question. An unregulated Dublin- based operation was a significant cog in the complex financial fraud that led to the demise of the Italian food group Parmalat. More recently, the Irish operations of Cologne Re were linked to bogus reinsurance contracts written by the group, but the Irish regulators response was at best sluggish compared to other jurisdictions.
On the face of it, there appears to be a strong case for stricter regulation of international financial services here. Iconsidering any such action, however, it is important to have regard to the role that the existing "light touch" regulatory regime has played in the development of a world-class financial services industry in a few short decades. International financial services have become a significant part of the economy and a source of well-paid jobs and considerable tax revenue for the State. And for every problem company, there are hundreds more successfully pursuing their business.
A balance must be struck between a regulatory approach, on the one hand, that encourages innovation and investment in this important sector, while on the other hand ensuring that Dublin does not become a haven for activities that might bring Ireland Inc into disrepute.
What is missing in the current set-up is any sense that the Government and the organisations it charges with achieving this balance, the Central Bank and IFSRA, are proactively weighing the potential costs against the benefits. The priority appears to be facilitating growth in and around the International Financial Services Centre. As recent events demonstrate, the risks attached to this approach - reputational and otherwise - are real.