With its pristine streets, manicured parks and waterfront vistas, St Helier looks every inch the picture-perfect tourist town. Yet, the capital of the Channel Island of Jersey is also an offshore financial hub, with 943 regulated investment funds domiciled in the town, housing net assets of stg£314 billion.

The man responsible for regulating the financial services industry is Martin Moloney, a former senior Irish regulator and civil servant who was appointed director general of the Jersey Financial Services Commission in February 2019.

He spent 17 years with the Central Bank, working as special adviser on risk and regulation. Previously, he worked with the Department of Justice, the Competition Authority and the Department of Finance.  

In a neat, functional meeting room of the commission’s headquarters, Moloney tells me he was attracted to Jersey because the jurisdiction wants to be at the forefront of what he believes is the biggest threat to the global financial system: financial crime.

Many of his views stem from his time as a regulator in Ireland during the crisis. Some colleagues, he says, went into denial about the cause of the crisis. However, he says others found it formative, instilling a determination to improve financial regulation and build an effective supervisory system.

In a wide-ranging and refreshingly frank interview with The Currency, Maloney gives his opinions on a range of issues relating to both Ireland and the international finance system. Over the course of the interview, he called for a more outward facing Central Bank in Ireland, and also stated:

• Ireland deserved a “tap on the shoulder” in relation to tax deal with the multinational giant Apple.
• The lack of a well-informed political debate in Ireland is actually a risk for Ireland.
• The Central Bank needs to be better at explaining issues such as the tracker mortgage scandal.
• One of the biggest threats to the global financial system is financial crime.

“There are state actors involved in financial crime”

Ian Kehoe (IK): You have identified financial crime as a growing threat to the global financial system. This is going to require a shift for regulators. Are they ready for the challenge?

Martin Moloney (MM):  If you look at the Danske case [In 2018, the Danish bank was at the centre of a €200bn money laundering scandal], Europe has really been caught napping by the fact that it didn’t really have a strong centralised anti-money laundering authority.

On the other hand, you see that the global standard-setting body for fighting financial crime has gone far ahead of the other global standard-setting bodies in really trying to establish standards for effective supervision.

I was really interested in that. We now have a risk that is global – there are state actors involved in financial crime, in actually trying to actually organise financial crime. So it has stepped up a level in terms of global importance. But the regulators have also stepped up and tried to really make the system more effective. And that’s a really interesting and exciting combination.

“You are talking about a full range from terrorist financing at one end of the spectrum, right through to the attempts to move the proceeds of tax evasion through the system.”

IK: And where does Jersey fit into that agenda?

MM: Jersey has, for a number of years, tried to position itself at the conservative end of the spectrum, as they’re not interested in dodgy business here. They are interested in good quality business. And for that reason, Jersey has really pushed strongly to try to always be at the cutting edge in relation to AML (anti-money laundering) supervision and fighting financial crimes. They’ve always tried to do that. And now the whole challenge has moved up a gear.

IK: When you say crime, you mentioned state actors, you mentioned crime gangs. Are we talking about corporates also?

MM: That’s part of the problem. You are talking about a full range from terrorist financing at one end of the spectrum, right through to the attempts to move the proceeds of tax evasion through the system.

IK: And the skill sets required to monitor all this is huge?

MM: It is and the real issue now is that a key part of the agenda no longer just sits within financial regulators but fits within the whole supervisory system. So, if you look in Ireland, for example, they recently had a very good report from the Law Commission on how to deal with white-collar crime and so on. And those sorts of questions are part of the issue. How well the courts work in relation to this? How well skilled are the police? How well coordinated the police, the courts, the legislators, the regulators are in order to be agile enough to change the law to cover all the issues that can arise? It’s a whole system issue challenge now. Whereas in the past, you could say that’s the job of the central banker. That is not the case anymore.

“Ireland almost deserved the tap on the shoulder in Apple case.”

IK: A lot of offshore financial hubs have a bad reputation, and a lot really deserve it. Do you think that Jersey gets a fair hearing?

MM: Like with all debates on reputation, it is complicated and emotional rather than rational sometimes.  People sometimes go for the easy option in terms of analysing the issues rather than looking to where the problems are. So there’s a huge difference between international financial centres and how they approach the questions of financial crime and how rigorous they are in fighting it.

And a lot of the public debate confuses the issue of tax competition with the issue of financial crime. And if you confuse those two questions, you won’t be able to differentiate between a place like Jersey and other jurisdictions, which are not as well placed as Jersey is.

That’s something Irish people should well recognise, because in a European context, we are often derided as doing something inappropriate in Ireland because we have a low corporate tax rate. And the Irish constantly have to explain how we know that rate may be low, but it’s a legitimate rate and it’s a rate that is well applied in general. So that kind of a debate I’m quite familiar with yes. You always have to be on your toes to keep the message clear.

IK: Increasingly, tax has become more of a live issue, particularly with the transparency agenda which is ongoing at the moment. We can see the mood music from the Irish government who are talking about potential changes. Within the tax sphere, these changes could impact here.

MM: One can get things wrong. If you look at the Irish Apple case, I am no tax expert, but my perception as one who isn’t, is that actually Ireland almost deserved the tap on the shoulder to say ‘guys, you have got a little bit too far here’ in terms of coming to bilateral arrangements in individual firms rather than applying for a standard rate.

So, it is possible for a jurisdiction that wants to be in a good place to sometimes slip into a bad place. I’m glad to say I’ve seen little sign of that here in Jersey. They’ve been quite resolute in sticking to their focus, and in ensuring that they don’t get business here that is trying to hide behind the legitimate structuring of your affairs to be tax efficient to get into really aggressive tax planning in ways that are that actually undermine public trust, which definitely can happen.

I welcome the fact that the OECD is working quite hard to try to get a better global consensus around what is fair tax competition and what isn’t. We don’t actually have that at the moment. And that’s where a lot of the reputation debate comes from.

“I can’t actually say to you now that the post crisis change programme was either a success or a failure”

IK: You have been appointed for a five-year term, but there is a three year strategy initially. What are your priorities?

MM: We are really going to try to make risk focused regulation a reality. Around the world you’ll find regulators talking about risk focus regulation, but actually very few really achieve it. It is kind of the holy grail of effective regulation. You get your supervisors looking at where the real risks are, rather than following a standard programme of desk based reviews, inspections, and so on which just focuses on the biggest risks.

We want to get to a system where supervisors are much more agile and are chasing down the problems and doing so in ways that get results and leads to good enforcement and industry lessons. That’s kind of the holy grail of good supervision, and very few people are anywhere close to it. We’re going to have a good shot of that here in Jersey.

IK: Why do regulators struggle to get this place?

MM: My suspicion is that, actually, regulators are having the same problem that industry is having. Ever since the crisis, industry has been told to get risk-focused in their decision making and they have struggled really to do that. It ends up with large organizations having far too many risks to manage, and not knowing how to mitigate those risks effectively. This is a real intellectual as well as an operational challenge. It’s a really difficult thing to do and I know the Central Bank is working hard on in Ireland and made a good deal of progress, but I’d say they would admit that they’re not where they would like to be in that regard either.

IK: but we have gone through a decade of massive regulatory reform. Have we pushed it in the wrong direction, have we gone off-piste slightly?

MM: It is actually quite a hard question to answer. We have done a huge amount of work. And that work has been focused in two areas. I think restructuring the way risk exists within the system. So where for example, risk and the derivative markets used to be distributed, it’s now centralized in the clearing houses. We’ve put a lot of rules around activities that we used to not have any rules around. And we’ve also collected a huge amount of data.

Now, some of those rules that we’ve put in place; you could argue that we didn’t do enough work in preparing to ensure that those rules were proportionate when we designed them. We went for a shotgun approach and we put rules in everywhere. But the issue that I think where we really are open to legitimate criticism is we have collected a lot of data but we haven’t yet found a way to use that data. And this is back to my previous point, to really focus our supervisors and actually be looking for where the problem areas are. So it is a long way to go still, even though we’re 10 years down the road in responding to the financial crisis.

And that’s actually one of the things that scares me, because whenever you try to change financial services regulation, the change cycle is getting longer and longer. It used to be possible to change financial regulation over a one, two, three year period. And then it started to take about 10 years to go through a change cycle in relation to regulation. If you look at the post crisis changed cycle, we are still in it. And we have been for ten years. There’s an element of exhaustion in the system. That’s the biggest challenge because I can’t actually say to you now that the post crisis change programme was either a success or a failure, because it’s still in course.

“I think financial services sector it is a bit like nuclear power. It is hugely beneficial, very big potential within it. But it’s also potentially very dangerous.”

IK: Why is this? Is that a lack of capacity to do something on a multilateral level, is it lobbying efforts by the financial industry themselves, or is just tardiness within the system.

MM: It’s the complexity of the system. The system is hugely complex at this point. If you go back to globalization and you look at the financial system that we had in the mid-90s, it was an extremely simple system compared to the system that we have now. The global coordination of financial markets with limited coordination among jurisdictions and among regulators is really a huge challenge to us.

I think financial services sector it is a bit like nuclear power. It is hugely beneficial, very big potential within it. But it’s also potentially very dangerous. And the challenge of controlling and directing and funnelling the financial sector to do things that are productive for society, rather than to cause damage and harm is, is one of the major global challenges facing us all. And we should never think that the financial sector can take care of itself. It has to be regulated, organised, structured, and funnelled into doing good, or it will generate risks.

“Brexit has gone down my agenda since I have come to Jersey”

IK: What sort of impact is Brexit going to have?

MM: One of the things that I spend a lot of time working on when I was working in Dublin in the Central Bank was Brexit. That has thankfully gone way down my agenda since I have come to Jersey.

“If you talk to most financial institutions, political risk is at the top of their agenda. Political risk in a place like Jersey is pretty well close to zero.”

IK: Seriously?

MM: Jersey is relatively safely placed with regard to Brexit. We’re already outside of the European Union, while clearly it has close contacts with the UK. And we need, like the UK, to be a prosperous location that is doing well. And so in the short term, we could say Brexit has very little crisis management impacts for us.

Our position is relatively straightforward. In the medium to longer-term, I actually sometimes wonder about people who go around telling people that they know that know what the implications of Brexit are going to be, because I don’t know. And I’m very clear on that. I don’t have a crystal ball. But one thing I’m very clear on, when talking about large financial institutions, is that an answer a bit like the answer Zhou Enlai gave to the question of ‘what do you think of the French Revolution,’ and he said: ‘it’s too early to tell’.

That definitely applies to Brexit, and will apply to Brexit for a very long time, because Brexit is potentially a part of a very significant repositioning of jurisdictions in relation to how they compete internationally and the significant change in relation to what regionalism means in Europe. So I think it will be years before we know the implications.

IK: But you’re not seeing short term or medium term movement of entities into Jersey or out of Jersey as a result?

MM: I think it’s not driving decisions one way or the other at this point in time. I wouldn’t exclude the fact that at a certain point in time, Jersey might, as indeed Ireland, look like a safe, stable place to do business. And it might well be the case that people would think that’s actually a good place to go in order to deal with some of the political risks. And if you talk to most financial institutions, political risk is at the top of their agenda. Political risk in a place like Jersey is pretty well close to zero.

“That lack of a well-informed political debate in Ireland is actually a risk for Ireland”

IK: What’s your take on Ireland at the moment?

MM: I mean, it’s great to see prosperity, and it’s great to see the country doing so well. It’s great to see numbers like the debt to GDP ratio falling. I think I’m very much, and you’d expect this I guess from somebody with my background, I’m very much with those who say, be careful about the tax take, don’t make the same mistakes again.

IK: Well, the tax take looks fairly frothy towards the multinational?

MM: That is wise advice and I understand it’s tough for the political system to take that advice, but it is wise advice. I think one of the best things the Central Bank did, although it’s not popular with everyone, was the introduction of the mortgage rules in relation to the limits on people’s capacity to take out mortgages. That will stand Ireland in good stead because it remains the case that the housing market globally is one of the big risk areas created by globalisation and financial markets, that you get excessive price inflation in housing markets. You have to control that.

We’ve put something in place there, which is a really important defence. But we have to make sure the old adage: you never know where the next crisis will come from. This is where Ireland has to ensure that its supervisory system is really focusing on the emerging risks, rather than what have been the risks in the past.

IK: What sort of emerging risks are you talking about? You have spoken before about technological risk?

MM: If you go back to the pre-financial crisis period, there was a huge amount of financial innovation, and new financial instruments. And what people didn’t necessarily recognize at that time was how much that financial innovation actually created a regulatory risk. Because regulators didn’t understand that, they weren’t necessarily on top of what was happening.

In exactly the same way the technological innovation that we’re seeing in the financial services sector at the moment also creates a huge regulatory risk. And to some extent, politicians can still live in a slightly old fashioned way, where they fear that a strong regulatory regime will stifle growth and innovation. I think we have to get ourselves into a different space, where regulators and innovators work together to create safe innovation. The delivery of financial services to the retail sector is completely transformed. And the products are transforming.

“We tend to assume a little bit that somebody else is taking care of this for us. And that assumption has not worked.”

IK: These are massive issues for the regulators and the system.

MM: They are massive questions. Insurance is transforming. Banking is changing radically; the payment system is diverging from the banking system. There are massive changes there. And I guess, one of the things that sometimes worries me about Ireland is the quality of debates around these topics.

One of my most depressing moments I ever had as a regulator was back in 2013, where I walked up to the to the Dail to watch the committee stage of a very large piece of legislation that was going through, which the Central Bank and the Department of Finance had been working on for 18 months or two years before that. It was a huge piece of legislation that was a compendium of the lessons learned from the financial crisis and how we’re going to change the system. But the Committee stage about this legislation was over in about three hours, three and a half hours. And there was really only one TD there who asked any really pointed questions.

In my book, the committee stage of that should have taken a couple of weeks. They should have walked through every significant choice that had been made by the department and by the Central Bank. And they should have asked the Department or the Central Bank, what did you leave out or what did you not put in? What choices did you make? What do you think the trade-offs are in relation to where you put it? But they didn’t. I don’t actually blame politicians for that. I think they don’t have the support and the framework to be able to ask those questions at the moment.

But that lack of a well-informed political debate in Ireland is actually a risk for us. We tend to assume a little bit that somebody else is taking care of this for us. And that assumption has not worked.

I think the Central Bank definitely should be part of a debate locally and we have done that on a number of occasions. For example, when we brought in those mortgage rules, we helped with a lot of research, we came to the choices we made as a Central Bank. You should do more of that.

People are talking about insurance, for example, as that political issue of controversy at the moment. The Central Bank should be weighing in with extensive research on the insurance cycle of where it is and so on and on the cost. When people make the assumption, which I’m not sure about, that the Irish courts are out of line in terms of how the awards they give to people for minor injury cases. They may well be out of line. But if somebody says to me, they’re out of line because they’re not doing the same thing as is done in other countries. That’s not to me, evidence based decision making. You should actually work off what are the costs within the Irish system for somebody who has a minor injury and not assume that it’s just the same as in other jurisdictions.

“So one of the outstanding questions in Ireland is how the tracker mortgage scandal happened?”

IK: There has been a reticence from central bankers, historically, in Ireland to get involved in those topics?

MM: There has it’s one of the areas in which I’d be a little bit critical of some of my colleagues because I think sometimes central bankers can fall into the trap of worrying how well developed analysis will be treated by the system.  To me, that’s the wrong way to approach it. One of the consequences of central banking is that it is now a very different animal than what it was 10 or 15 years ago. And we should reflect carefully on our place in society.

And there are a number of questions. One is, are we providing enough analysis and support to inform good public debate on the key issues like regulation, around things like competitiveness, and pricing and resilience within the system? We need to do a lot more, I think, in relation to that.

Secondly, we are now both representatives of the Irish people, part of the Irish state; but also, we are a key part of the sharing of sovereignty with the European Central Bank, and the Central Bank of Ireland needs to be willing to think about that. There should be some basic codes of practice, it seems to me, for senior central bankers on the work in Europe. One of the things I disagree a little bit with Patrick Honohan was he used to say there’s no conflict between his role in Europe and his role in the Irish Central Bank. I think there was a conflict. But I think it’s an entirely manageable conflict. So instead of saying there is no conflict we should say how we are managing that conflict and give people assurance that we’re doing that, that way. And I think the other thing we should do is we should, as central bankers, step up the level of public accountability for what they do. So one of the outstanding questions in Ireland is how the tracker mortgage scandal happened?

“We should have explained to people what the obstacles were in the system that prevented the Central Bank from acting earlier.”

IK: What do you mean by that?

MM: We have told the public, from the Central Bank perspective, that we have piles of information available in relation to the banks and that we had piles of information in 2012, 2013, 2014, and 2015. So one of the questions we need to explain is why notwithstanding all that, is how the tracker mortgage scandal happened? And at a point, actually, a lot of it happened after the Central Bank was aware that there was an issue. We should have explained to people what the obstacles were in the system that prevented the Central Bank from acting earlier.

And that gives the public a chance and the politicians a chance to think about whether they’re happy to leave those obstacles in place, or whether they want to remove them, or change the system in order to make it easier for supervisors to challenge financial institutions. So you deal with these problems upfront, rather than having to go through the kind of process that we have to go through and fixing it afterwards.

“One of the consequences of consolidating so much activity within a Central Bank structure, particularly financial regulation activity, is that it goes in behind the framework of independence of a Central Bank.”

IK: The public narrative is that the banks just did it and the Central Bank didn’t do anything. And it was up to Paschal Donohoe who eventually had to come in and step in.  That’s how the narrative played out.

MM: Yes and that narrative is not a correct narrative. So it is up to the Central Bank to put a more accurate narrative into the public domain. And that does involve us explaining where we made decisions, what those decisions were, we might have been right or wrong, and you open yourself up to criticism. One of the consequences of consolidating so much activity within a Central Bank structure, particularly financial regulation activity, is that it goes in behind the framework of independence of a Central Bank.

For some of the activity we do, that framework of independence is excessive, it’s more independence than you then you actually need. So one of the things central bankers can do is to voluntarily account for what they do, even if they can, you know, not do so under the law.

So if I give you another example, senior Central Bank of Ireland officials have the capacity to go out and compete for jobs in Europe. In my view, they should not do so without the prior approval of the Irish government. And they should actually say upfront, ‘I’m not going to do so without the prior approval of the Irish government”. Now that’s not me criticising Phillip Lane because actually his was a great appointment.
 
IK: You are not advocating for more outward looking Central Bank.

MM: Yes.

IK: That engages as opposed to just doing its statutory duties.

MM: Yes. I think so. I mean, you talked earlier about the global transparency agenda, for example. And that is part of trying to create a society that is talking to itself, where there is strong element of NGOs, and investigative journalists and concerned citizens able to engage in debate in a constructive way. For that you need information and analysis in the public domain. I think central banks have to be willing to do that.