SERVICE IS THE KEY WORD
The financial service industry would not exist if its sole purpose was to provide jobs for those employed in it, and consequential revenue to the state. Like any other institution, like even money itself, the financial service industry exists because it is socially useful.
Before jobs or taxes, the industry exists to serve society, and to meet real needs of real people.
Of course, some participants in the industry have done things that were not consistent with social benefit. Sometimes they have spoken about their business to the rest of society , in such impenetrable jargon, and even with such condescension, that the social goals and benefits of financial services been completely obscured from public view.
As President of IFSC Ireland, my job is to promote Ireland as a location for new financial service activities. I put the emphasis on the word “service”. The industry exists here to provide a service to the rest of the world. If it fails to provide a good service, the business will go elsewhere.
My argument is that Ireland can and does provide these services to global customers better than is done anywhere else in the world. We have had some success in this.
6000 EXTRA JOBS SINCE 2008, AND OVER 2 BILLION IN REVENUE TO THE STATE EACH YEAR
In 2009, 29,704 people were employed in the Irish international financial services. By 2012, according to Department of Finance figures, the number of jobs had risen to 35,698.
And the taxes paid by the industry have risen commensurately. We have estimated that the tax contribution of the International Financial services industry to the Irish Exchequer is 2.1 billion euros. 2.1 billion euros is equivalent to two thirds of the entire voted capital budget of the state, or to 10% of the entire Social Protection budget, and is the same amount as the entire correction that has to be made in 2015 budget according to the programme agreed with the EU/IMF.
Sometimes it is helpful is seeing the value of something by posing the counterfactual, where would we be if we had no international financial services industry? We would have almost 36000 fewer jobs and would have to make a 4 billion euro budget correction next year, rather than a 2 billion euro one.
That’s important to say.
But it is only possible to say it because our financial services industry provides a service that shrewd professional all around the world are prepared to pay good money to have done in Ireland. And they are only prepared to do that because this industry provides a good service, a social benefit, to their clients .
HELPING PEOPLE MITIGATE THE RISKS OF LIFE
The basic social goal of the Irish financial services industry, is to help people to all over the world make financial provision, in the most efficient way, to mitigate the risks of life.
Risks are always there. Mitigating risks, managing risks, and choosing between risks.
These are the tasks that have to be undertaken.
In some countries, people mandated the state to cover these risks for them. But as society ages, many states will have less and less fiscal capacity to cover all the risks they were able to cover when to working age population was bigger, and the elderly population smaller. Families all over the world will find themselves having to do more of the risk management for themselves. That is where the skills deployed by the professionals in Irish international financial services industry will come into play.
The Irish international Funds industry, for example, invests savings generated by pension contributions, and does so in such a fashion as to ensure that, when people can no longer work for a living, they will have a pension.
That requires spreading money around different types of investment, so that risks of one type of investment are hedged by other investments.
SPREADING INVESTMENTS TO AVOID VULNERABILITIES REQUIRES SKILLS
Unlike what happens when people put money into a share in particular company, or putting it all on deposit in just one bank, putting money into a fund, which invests in different activities, makes sure people do not have all their pension eggs in one basket, so to speak.
Different funds, and different investment strategies, will be tailored to different purposes.
An insurance company must ensure it always has money available to pay big claims if there is bad weather or some other such one off unexpected episode. It needs to be in a position to find a lump of money quickly.
In contrast, an investment for a pension fund will aim at having a steady flow of income.
An investment to cover the cost of education will require a different strategy to one to cover end of life nursing care.
The skill of the financial service professional lies in understanding the needs of the client, and tailoring the mix of investments to get the right return, over the right time frame and with the right mix of risk and reward.
The Irish industry can provide those skills.
It can also look after the administration of the funds, enabling the asset managers to focus on what they do best.
RENEWING GLOBAL INFRASTRUCTURE AND FILLING THE LENDING GAP
Another social need met by the financial service industry is that of assembling finance for the building and renewing the world’s infrastructure of roads, airports, rail links, electricity generation and distribution systems. Here the investor expects no return in the short run, but big and steady returns ones in the long run. This sort of investment is ideal for pension funds.
The contraction of the European banking system, because of past mistaken lending in the property sector, has created opportunities for other types of finance to enter the market and fill the gap in the provision of credit for business and house purchase.
Some of the capital of pension funds and insurance companies can, if supported by innovative intermediaries, be used to meet the social need for finance for family home and business working capital. Irish innovation can play a role here in meeting both local and global needs and in filling gap in the market left by the necessary contraction of traditional banks.
TECHNOLOGY TO IMPROVE CONVENIENCE
Another social goal the Irish financial services industry should aim to fulfil is that of extending the convenience of a banking service to people who still have to rely disproportionately on cash.
A Technology centre in the Digital Hub in Dublin has been established to link innovators in the Irish software industry, where we are world leader, with the international financial sector, where we are also a world leader. The aim is to use the most sophisticated information technology to extend banking services to a wider public, as well as complying with necessarily complex rules introduced since the financial crisis.
The application of technology can also help identify gaps in the market, by using the skills n data analytics that exist in this country.
FINDING OUT WHY THE CRISIS REALLY HAPPENED IS THE ONLY WAY TO AVOID A REPETITION
Another area to which we must apply our talents is that of ensuring that the financial and banking crisis, from which we are slowly emerging, never happens again.
Asset bubbles and financial crashes have been part of human history since the invention of money. To mitigate bubbles and crashes, we must truly understand why and how they happen.
As the Nobel Prize winning economist, Robert Shiller said in his recent book “Finance and the Good Society”
“As much as Wall Street had a hand in the crisis, it began as a broadly held belief that housing prices could not fall—a belief that fuelled a full blown social contagion”
He was speaking of the United States but he could have been talking about Ireland . In other words, he was asking why people came to believe something that was fundamentally unbelievable, namely that house prices could only go upwards and not downwards.
He went on
“Learning how to spot bubbles and deal with them before they infect entire economies will be a major challenge for the next generation of finance scholars”
He could have added a major challenge for “finance practitioners and politicians”.
Ireland needs to apply its best brains to this, to preventing this infection happening again, to understanding the psychology of our recent bubble. Only thus can we prevent a future one.
The task is not so much about apportioning blame. That’s the easy bit. It is about understanding why people came to believe, what they believed during the bubble. Unfortunately perhaps, no country is better positioned to provide that understanding of recent history than Ireland is. Doing so would be conferring a social benefit on the world.
These are some of the social benefits the Irish financial services industry provides to the rest of the world. Apart from jobs and taxes, what other benefits does it confer on Ireland itself?
INTERNATIONALISING OUR SOCIETY
It internationalises our country, bringing young people from all over the world to work here, and creating new opportunities for spin off businesses.
It regionalises our country, bringing high quality jobs the places like Limerick, Carrick on Shannon, Navan and Naas, relieving congestion in the capital.
The above is based on remarks made at a business breakfast of the Dublin Chamber of Commerce on 27 May 2014 by John Bruton, President of IFSC Ireland