Funds Sector 2030
Introduction
Ireland plays a vital role in enabling long term savings and the flow of capital across global markets, including servicing the needs of the European Single Market. In doing this, Ireland’s international financial services sector employs 57,000 people, 20,000 of whom work in the funds and asset management sector.
To protect and grow its leading position, the Department of Finance’s (DoF) conducted the Funds 2030 review and produced its “Final Report” after an extensive consultation process with stakeholders from the funds and asset management industry both locally and internationally. The Final Report presents forty-two recommendations aimed at ensuring the industry’s resilience, competitiveness, and meaningful contribution to the Irish and EU economy are protected.
Established through a culture of collaboration between Government, industry and state agencies, Ireland remains one of the world’s leading global fund domiciles, with €4 trillion in assets under management. Yet, the industry faces pivotal shifts, driven by an evolving economic and regulatory environment as well as intensifying competition from rival jurisdictions and evolving investor demands. For Ireland to maintain and grow its leadership position and deliver greater economic value domestically, the recommendations from “Funds 2030” must be embraced with the same enthusiasm and urgency in which the DoF conducted its Review.
As a leading professional services provider to the Wealth and Asset Management industry in Ireland and globally, EY welcomed the opportunity to contribute insights on how Ireland can sustain and strengthen its position as a premier funds and asset management domicile. Our recommendations focused on key areas to ensure resilience and future readiness, including the establishment of a dedicated team within the DoF to support the funds sector, enhancing Ireland’s offering in private assets, and maximizing the industry’s value to the local economy. This includes boosting employment, investing in SMEs and infrastructure, and creating long-term savings opportunities for Irish investors and households.
This article explores these three areas, the related recommendations and why they are significant not only for the industry’s future but also for Ireland’s broader economic and social progress.
1. Competitiveness: The Risk of Standing Still
Background
Ireland’s reputation as a premier funds domicile can be attributed to the vision, collaboration and constructive challenge between industry, Government and Regulatory authorities dating back to the establishment of the IFSC, the adoption of the UCITS Directive, more recently AIFMD adoption as well as fund specific structures such as the ICAV and Investment Limited Partnership.
However, as the global financial landscape changes rapidly, Ireland must innovate and evolve its offering. Jurisdictions like Luxembourg and the UK are innovating to attract new investment flows, while the legislative agenda of a post Brexit E.U., driven by the Capital Markets agenda, the ever-evolving ESG landscape and a new U.S. administration, the industry is preparing for both challenges and opportunities. For Ireland to retain and grow its leading position it needs to remain agile and evolve to meet the needs of its stakeholders in a changing world. The Funds 2023 review provides Ireland with this opportunity.
To remain competitive, one of the key recommendations from industry stakeholders, including EY, was the establishment of a dedicated funds team within the DoF. This unit would focus exclusively on monitoring global trends, anticipating regulatory shifts, and responding swiftly to emerging opportunities or threats.
While the DoF did not explicitly state the establishment of a dedicated funds team, it has shown through the Funds Review its commitment of time to the industry and it has made several recommendations to strengthen engagement with industry. In his comments, Jack Chambers, Minister for Finance stated that the review has led to a period of deeper thought, not just on today’s priorities, but the future outlook and how the sector interacts with Government, with regulators and with its customers. The recommendations made in this area are focused on legislative development, regulatory policy and the promotion of the sector locally and abroad. The recommendations included:
- the establishment of an annual roundtable between the Minister for Finance and the Minister of State and a representative cross-section of the funds and asset management sector.
- that the DoF continues to facilitate effective engagement on policy development, including through (i) an enhanced role at the Funds and Asset Management Steering Group; (ii) by providing clarity on roles and policy responsibilities across the Department; and (iii) by considering the establishment of working groups where issues are cross-cutting in nature.
- that the Central Bank of Ireland (CBI) continues to review its engagement with the funds sector to ensure it is as effective and efficient as possible.
Additionally, the DoF highlights the activities of IDA Ireland and Enterprise Ireland who are leading the promotion of Ireland as a place to do business. The DoF has also recommended that industry optimises all opportunities for engagement with policymakers, including the DoF and other government departments.
2. Private Assets: Responding to Global Trends
Trends
Investor demand for private assets has surged, with global private capital assets under management (AUM) doubling from $9.7 trillion in 2012 to approximately $24 in 2023. However, this growth is not mirrored in private asset funds domiciled in Ireland. Despite Ireland’s expertise in servicing private assets, respondents to the consultation attribute this gap to a stated number of limitations in local legal, regulatory, and taxation frameworks, driving asset managers and investors to jurisdictions like Luxembourg.
Private assets are a significant component of capital markets. They provide diversification for investors and can be more resilient during economic downturns. Proposals by respondents to enhance Ireland’s appeal for private assets included the introduction of an Indirectly Regulated AIF fund structure in Ireland, like the Luxembourg Reserved Alternative Investment Fund (RAIF), in Luxembourg. While acknowledging the private assets market’s growth, the DoF opted against this. The DoF cited Ireland’s strong reputation for regulated fund products (UCITS, MMFs, ETFs) and the risks associated with private assets, such as liquidity mismatches and valuation challenges. Furthermore, the DoF stated that existing authorised and supervised fund products are sufficient for private asset strategies.
Comments from the CBI relating to unregulated products would seem to support this position but for different reasons. Through its CP158 consultation on the Consumer Protection Code, the CBI states that the provision of unregulated products and services by regulated firms can result in customers not being aware of the nature of the product and service they are accessing, and the risks associated with them. Given the RAIF is not a regulated fund vehicle but managed by a regulated AIFM, this seems to suggest that the regulatory status of the RAIF may not be fully understood by investors.
Notwithstanding the position taken, the DoF recognises that more can be done and should be done to encourage the establishment of private asset funds in Ireland. This includes:
- Prioritising the transposition of the revised AIFMD when issued in 2016
- A review by the CBI of its AIF Rulebook and associated requirements that impact on the establishment of private asset funds in Ireland.
- Specific measures to improve the attractiveness of the ILP (an Irish fund product designed for private assets), including the design of the participation exemption and a review of the scope of the DWT exemption (both of which are underway).
Although the absence of an Irish RAIF equivalent may disappoint some, the successful implementation of the suite of measures, in addition to improving the authorisation process and consequently speed to market, could solidify Ireland’s position as a leading regulated fund domicile for private assets in addition to public assets.
3. The Case for Domestic Participation
Ireland’s funds industry has traditionally been export-oriented, with a strong focus on serving international investors. While this has brought substantial employment and revenue to the country, it has left a significant opportunity untapped: engaging Irish households and businesses as participants and beneficiaries of the industry.
Currently, Irish investors face tax disadvantages when investing in funds compared to direct investments in Irish shares or bonds. This disparity not only discourages participation but also limits the industry’s ability to provide long-term savings solutions for Irish households which as of July 2024 have €156 billion in low earning bank deposits. This means Ireland has one of the lowest retail participation rates in Europe and Europe’s participation rates are already considered too low, particularly compared to the U.S. Addressing these barriers, along with improving education of financial markets and investment risks, could unlock a new source of capital while providing Irish resident taxpayers with greater financial security in retirement.
Of the forty-two recommendations made by DoF, eight were focused on enabling more retail participation. However, despite the recommendations, in simple terms, Irish tax resident individuals will still pay a higher rate of tax by investing in an Irish domiciled fund compared to investing in an identical US domiciled fund. This could mean that Irish Household participation in financial markets remains lower than the average.
Financing the local economy through the funds industry
Beyond individual investors, the funds industry has the potential to play a transformative role in Ireland’s broader economy. For example, by channelling capital into indigenous business, national infrastructure projects and housing and healthcare, the industry can create a ripple effect of economic and social benefits. For example, from a housing perspective, the Final Report notes that for Ireland to build 50,000 homes per annum there is a need for an estimated €20 billion of equity and debt financing with a substantial portion of this needed from private capital. In examining how the Irish funds industry could play a role in this area, the DoF examined the IREF and REIT regimes which are designed at enabling the financing of real estate. The Report notes that the IREF regime is not meeting its objective of protecting the Irish tax base, while the REIT regime has not achieved its intended scale. The Report recommends:
- The DoF should undertake a public consultation setting out potential options for an entity-level tax for IREFs
- If a review of the role of Exempt Unit Trusts (EUTs) in the property market is undertaken, then examining the regulatory oversight of EUTs by the Central Bank of Ireland and the Interdepartmental Pensions Reform and Taxation Group (IDPRTG) should also be examined
- Introducing legislative changes enabling Revenue to collate data on large landlords and share it with relevant stakeholders within the civil and public service to inform policy
In maximizing the industries contribution to the local economy, the Report highlights a dual opportunity for Ireland’s funds industry: fostering greater domestic investor participation and addressing critical national challenges like financing the development of housing. Addressing tax disparities, enhancing financial literacy, and promoting the benefits of fund-based investments are important factors in engaging Irish households as active participants in the Irish Funds industry. Additionally, creating more effective mechanisms for channelling private capital into housing, could position the funds industry as a catalyst for greater retail participation and contributing to solving the acute shortage of housing. The recommendations in these areas go some way towards realising the potential for the Irish funds industry to contribute to solving these challenges. However, further collaboration between policymakers and industry, through the implementation of the recommendations and greater engagement between government and industry will be needed to realize the full potential of this opportunity.
Looking Ahead
Looking Ahead: A Call to Action
The “Funds 2030” strategy outlines a clear roadmap for the future of Ireland’s funds industry. However, its success hinges on timely and decisive implementation of the recommendations. By being agile and responsive towards changes in the industry, unlocking the potential of private assets, and fostering domestic investment, Ireland can secure its place as a global leader while delivering tangible benefits to its economy and society.
As the industry evolves, collaboration between government, regulators, and private stakeholders will be more critical than ever. Together, we can create a funds ecosystem that not only meets the needs of global investors but also serves as a catalyst for sustainable growth at home.
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