In the span of 24 years, Ireland has evolved into Europe’s principal location for exchange-traded funds (ETFs). ETFs are a type of investment fund that can comprise multiple equities, mirroring an index like the FTSE 100 in London or Wall Street’s S&P 500. It can also include bond baskets, commodities, and almost any peculiar asset conceivable.
The assets in ETFs registered in Ireland, which are marketed globally, have surged from €162 billion to €1.45 trillion in the last ten years, according to the Central Bank data. Irish ETFs meeting all sorts of investment preferences, from global infrastructure and data centres to the junk bonds of companies that have lost their standing, are often listed on the Dublin stock exchange and are readily available for trading, often sans commissions with online brokers.
This has led to the creation of an Irish hub accommodating thousands in product creation, administration, custody, legal, auditing and accounting, making ETFs a striking success in Ireland’s more extensive €4.5 trillion funds industry, providing almost 20,000 direct jobs.
However, the broader issue is that ETFs, which give investors more diverse options and more protection than having a single share or bond, have yet to captivate small investors within Ireland. Less than 0.9% of Irish households’ total wealth, valued at a cool €781 billion was invested in ETFs in 2019, as per the most recently available data.
One potential risk is the difficulty in trading private assets or establishing their worth during times of crisis, making such investment options especially hazardous without regulatory control.
The local retail investors’ lack of enthusiasm for ETFs is perhaps best exemplified by the company that launched an ETF tracking the Iseq 20 index in 2005, only to shut it down four years later.
While Irish households are better at saving than investing (with €178 billion in banks and credit unions, mostly churning out little to no interest and depreciating with over 6% inflation), there’s good reason for those who take interest in shares to invest directly in specific companies rather than opting for investment in ETFs and other funds.
The Irish system, known for its unique financial regulations, imposes a capital gains tax (CGT) of 33% on individual investments. Meanwhile, funds and life insurance products are subjected to an even higher tax of 41%. Moreover, an eight-year deemed disposal rule is applied to assets in funds and life policies, causing the 41% tax charge to come into effect after eight years, regardless of whether the funds have been sold off or not. This rule often compels individuals to relinquish a portion of their investments in order to pay the tax, with the added drawback that losses from fund investments cannot be offset against gains for tax relief purposes.
Surprisingly, when officials from the Department of Finance, appointed by ex-Minister Michael McGrath barely a year and a half ago, were tasked to examine the future of Ireland’s international funds industry, nearly three-quarters of feedback submissions were from individuals instead of corporate entities or lobbying groups. Many were apprehensive about the various tax systems that can affect casual investors – from the 33% rate on deposit interest retention tax (Dirt) to the marginal income rate applied when withdrawing from pension funds.
To their credit, the officials conducted a thorough review and, in a report released recently, proposed aligning the tax rate for funds with the 33% CGT rate, scrapping the eight-year deemed disposal rule, and introducing a restricted form of loss relief.
They recognised the importance of personal savings and investments, as well as pensions, for life events whilst simultaneously supporting real economic activity. In light of recent patterns such as increased average lifespans, riskier retirement income and a shifting employment landscape, this need could not be stressed more.
However, the issue is Jack Chambers, McGrath’s successor, has been in possession of this draft report since July and had an opportunity to act in the recent budget but did not. The report is currently stagnating, pending any future government’s interest to put it into action.
The review team suggested improving the existing tax system for investors, instead of introducing a tax-advantageous retail investment plan along the lines of the individual savings accounts (ISAs) scheme that originated in the UK 25 years ago. Many people find it hard to dispute this.
In other areas, the authorities correctly dismissed finance industry proposals to adopt an unregulated, unsupervised fund type to enable Ireland to compete with a similar system in Luxembourg for housing private assets such as private credit, private equity, property, infrastructure, and venture capital.
They rightly held their ground, aware that doing so could potentially tarnish Ireland’s standing as a regulated funds stronghold. The trading or valuation difficulties of private assets in a crisis make these entities alarmingly risky without supervisory regulation.
However, the review failed to seize the chance to regulate Ireland’s €1.1 billion tax-neutral special purpose vehicle (SPV) sector, predominantly used for the crucial task of bundling assets and refinancing them on bond markets to maintain international finance activity but also used for some dubious practices.
Rather than regulation, the review recommended bolstered transparency, with measures including the publication by Revenue of a list of SPVs exploiting the ultra-tax-advantageous Section 110 regime, and additional exploratory work to better evaluate money laundering and terrorist financing threats in the sector. This, however, is deemed insufficient.