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Forget the last annus horribilis, the financial-services sector offers huge growth opportunities for Ireland, writes Sarah Gilmartin.

Eighteen months after global finance, as the world knew it, was raised to the ground, Ireland is well-placed tocapitalise on new opportunities tentatively underway to rebuild the sector,according to senior sources in the industry. With measures outlined by Minister for Finance Brian Lenihan in his Finance Bill, published in early February, to enhance the attractiveness of the IFSC as a centre of financial excellence, Government officials and industry leaders alike are keen to be ahead of the curve as international recovery gains momentum.

Education, innovation and competitivenessare all key components of Ireland'sbid for global financial stardom, but as the sun starts to slowly rise again onthe sector, does the IFSC have what it takes to outshine its rivals?

Started 23 years ago by a small group of visionary businessmen and politicians, the IFSC has proved a valuable asset tothe country in terms of employment and putting money in Government coffers. As it moves into a new era, debate is centred around what direction it needs to goin. "It almost has to press reboot and go for an IFSC II," says Brian Lucey, associate professor of finance at Trinity College.

"We need to recognise that financial services can be an export business if we put the resources of the State behind it. A lot of the Governemnt's strategy for economic growth is pinned on information and communication technologies (ICT) and biotech. If even a small percentage of the grant was given to front-end, high-quality, properlyregulated financial start-ups, then there is great opportunity there," he says.

While developing a strong indigenous basein financial services is something definitely needed for Ireland, the Government also has big plans to attract more foreign companies to these shores. Kieran Donoghue, head of international financial services at the IDA,says that in 2009 the organisation had the highest numbers of site visits by financial-services firms in the last five years. Welcome, if rather surprising,news given the crisis, a site visit is where a foreign company sends over agroup of executives to investigate a country as a potential overseas location.

"Right now, IDA Ireland has 220 international financial-services operations in the country, owned by about 145 companies. The sector employs a ballpark figure of 20,000-25,000. As aproportion of the total number employed in the IDA portfolio, it accounts forabout 17%. It would be reasonable to grow that to 20% or more over the nextfive years. That might seem like a modest level of growth but part of the challenge is to retain what you have. Over the next five years, we have set atarget to create 9,000 new jobs in the sector," he says.

A chastened cost base, new regulators and the English language all stand as feathers in Ireland's cap. Donoghue believesthe IFSC has a bright future as global investors are now looking to consolidate and have a small number of centres worldwide that have a good reputation, a strong regulatory environment with a good track record. But surely this could work against Ireland, given the recent perception in some quarters that our system of financial regulation was severely lacking?

Given the battering the domestic-banking sector has taken and the culpability of the Financial Regulator in allowing the damage to be done, one would imagine that Ireland is not a particularly easy country to sell to international investors right now.

Not so, according to Donoghue, who saysthat Dublin is still viewed quite positively abroad, adding that the appointment of Professor Patrick Honohan and Matthew Elderfield to the Regulator has been viewed well inglobal financial circles because both come with international reputations.

"I think those who are close to itrecognise that a lot of the difficulties in the broad financial-servicesspectrum in Ireland was centred around the domestic banks. We need to be careful and distinguish between the domestic sector and the piece of the industry that has always been trading internationally. There wasn't significant issues in these types of international institutions operating in Ireland. In media commentary, however, the domestic and the international became conflated. If you stand backand look at the list of international institutions that are there, while some of them were seriously impacted by the crisis because of what was happening to their parent, the Irish part of the operation stood up really well," he says.

When announcing the Budget last December, Lenihan said he would introduce measures to improve Ireland's competitiveness in the international funds sector, among them new laws that will give Ireland access to deal in Islamic finance (see box out). The intention behind these new measures, published in early February, is to make Ireland a centre for international companies looking to rebuild business - a nest of choice for the proverbial phoenix as it dusts itself off and rises from the ashes. 

The Bill sees the reintroduction of the remittance basis of taxation for non-domiciled Irish and foreign professionals working here. It reverses a decision made by the Government in 2006 to stop the tax advantage. Reintroduced in a limited capacity in 2008, this year's changes allow for more favourable tax treatment of foreign workers in Ireland, something the financial-services industry believes is vital in attracting top talent to the country.

The Bill will also result in a reduction in the amount of time individuals who fall under the remit must stay in Ireland, from a minimum of three years to one year. Although some in the industry say more far-reaching changes could have been made, it is hoped that the reintroduction of the scheme will improve Ireland's chances of becoming a centre for green finance.

 All new measures in the Bill are aimed at enhancing Ireland's attractiveness ahead of the introduction of the UCITS IV directive next year which will see competition for the funds industry get a lot fiercer in Europe.

"Competitiveness in Ireland has improved very substantially and that's because occupancy and labour and thecost of new hiring have seen dramatic improvements," says Willie Slattery, head of State Street International's Irish operations.

"The Finance Bill has been very helpful,not only in the specific measures and there were a number of these, but also because of the recognition in the Bill of the very valuable contribution to the Irish economy in terms of employment and tax revenue that the IFSC is making,"he says.

"The most important things in the Bill are the certain changes in income-tax arrangements for non-Irish workers in theindustry. International services here requires a mixture of Irish and non-Irish people and our income-tax environment for both is simply not competitive but these changes represent a very valuable contribution to that.

"What is really helpful for us working inthe IFSC, who have been subject to a lot of criticism in the media, is that the Bill goes some way to show that the Government recognises all the hard work that we do. To be honest, that is really encouraging.".

Other proposals in the Bill include: the extension of stamp duty to accommodate mergers of investment undertakings; and a provision that allows investment funds marketed exclusively outside of Ireland to avail of a waiver from the requirement for each non-resident to complete a declaration.

Some industry sources said the Bill could have done more. Issues that could have been tackled but were not include:facilitating cash-pooling activities and the deductibility of interest for treasury companies. Tom Woods, a partner at KPMG, says that although somethings lobbied for were not progressed, big steps have been taken. "I believe there was not enough time to get agreement around some particular areas but,overall, I think the changes for the financial-services sector have been quitepositive."

So where to look for the next decade ofIFSC growth? Donoghue says its three main business lines - banking, insurance and investment management - are all evolving and that opportunities are already becoming apparent in the wake of the crisis. As well as these, future hopes arepinned on green finance, emissions trading, data and analytics, innovation and developing Ireland'sindigenous base, especially in the area of financial technology. "We want to blend our strengths in the ICT sector with financial services and what international companies are looking for. Technology is needed to increase the security of online transactions, technology will be asked to help fund administrators and fund managers see through into the value of underlying assets, technology will help banks streamline information.

"There's also a natural affinity between the tag 'green' and Irelandas a country, so we feel that there's definitely something in there to be developed."

Sharia law

Opening up to Islamic finance market

Despite criticism from Opposition partiesthat the Finance Bill lacked ambition and sufficient innovation, the Finance Bill does contain some measures that will increase opportunities down IFSC way. One of the biggest - and most necessary, say industry experts - are new laws to facilitate the development of Islamic finance in Ireland. Islamic finance, which is carried out under the faith-based principles of Sharia law, is currently valued at an estimated $700bn. Having been relatively protected from the financialmeltdown last year, that figure is likely to substantially increase in the future. The measures in the Finance Bill aim to ensure Ireland doesnot lose out on this potentially very lucrative market.

Interest is forbidden under Sharia law.Market structures and arrangements are designed not to charge interest but togive the borrower or lender the same commercial advantage as if it was astandard loan by using other means.

Tom Woods, partner at KPMG, says Ireland's taxlaws couldn't accommodate that up until now because they are very much form-based: "We usually look at the form of the transactions. Instead, for these specific type of transactions, what you're looking at doing is electing into a regime where you look at the substance of the transaction instead and taxing it in that way. The changes have been introduced to allow Islamic banks to conduct business in Ireland and be taxed the same way as a conventional bank."

Woods, along with colleague KashifJahangiri, heads up KPMG's Dublin-based Islamic finance team which wasinstrumental in getting the issue of Sharia law on the Minister's agenda last year: "We had approached the Department of Finance early last year to notify them of the developments in Islamic finance and to suggest that they may consider doing something in the Finance Bill this year to get the ball rolling on that."

He says that in the wake of the financial crisis, there was much more focus on Islamic banks to provide a source of funding for conventional banks and also for retailers and corporates globally. "What has happened is that there has been a dawning in Europe that this is the case and there has effectively been a scramble around various countries at this stage to amend their tax laws to accommodate Sharia financing."

The legislation will be put in place at the end of March and the changes will come into effect from early May. While those in the industry welcome this, Irelandis still behind its European counterparts in preparing for these new realities.The UK started introducing laws in 2003 to accommodate Islamic finance and now stands well-placed to be come the European financial centre for the Middle East. While this may be largely expected given London's prominence as a global player, other countries such as Luxembourg, a rival to the IFSC in attracting foreign business, are also ahead of Ireland.

"We're very much coming to the table quite late," says Woods. "Luxembourg has already changed its laws and it would be a direct competitor for us. We really needed to do this to get ourselves out there in a position where we would be able to pitch for the work and get Islamic companies to locate European hubs in Ireland."

On the positive side, he says that although we are behind the curve, the Government has agreed to implement a range of significant changes: "The UK has drip fed provisions in over what is now nearly seven years and to be fair to the department and the Revenue, they have put inquite a substantial body of legislation dealing with a wide range of financial-services sectors in the Islamic market. It's down now to industry to translate the opportunity that's there into real business in Ireland. We have a very attractive offering compared to a lot of other EU countries, particularly around our skills base and our history in the finance sector."

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