Minister’s Brief June 2020

Prepared by Corporate Affairs, Department of Finance www.gov.ie/finance

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MINISTER'S BRIEF JUNE 2020

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Contents >

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1. INTRODUCTION TO THE DEPARTMENT 7

2. EXECUTIVE BOARD 8

3. DETAILED BRIEFING 13

3.1.2 ECONOMIC DIVISION 14 3.1.2.1 Macroeconomic analysis and forecasting 15 3.1.2.2 Fiscal and tax policy analysis 21 3.1.2.3 International economy, sectoral analysis, Exchequer Section and the Government banking service 25 3.1.2.4 Central Budget Office 29

3.1.3 TAX DIVISION 33 3.1.3.1 General income tax policy and reform 34 3.1.3.2 Business Taxation, International Financial Services Tax Policy and Tax Appeals 38 3.1.3.3 International and corporation tax policy 42 3.1.3.4 Excise duties, customs issues, value added tax, EU and national indirect taxes, and associated tax policy issues 45 3.1.3.5 Capital Taxes and EU State Aid Matters 51 3.1.3.6 Tax Administration, Revenue Powers, Local Property Tax, Pension Taxation and Stamp Duty 54

3.1.4 EU & INTERNATIONAL DIVISION 57 3.1.4.1 International Affairs and Brexit 58 3.1.4.2 EU-IMF Post Programme Monitoring & Surveillance/ EU Lending instruments & Programme Loans/ European Stability Mechanism Policy and EU Budget 61 3.1.4.3 EU strategy and co-ordination 66 3.1.4.4 Permanent Representation of Ireland to the EU 69

3.1.5 BANKING DIVISION 72 3.1.5.1 Policies on mortgage arrears, mortgage regulation, consumer issues SME credit & lending, the Strategic Banking Corporation of Ireland and the Credit Review Office 74 3.1.5.2 Financial Stability, Central Bank and NTMA policy section 80 3.1.5.3 Policies on EU Banking and Payments 85

3.1.6 FUNDS, INSURANCE, MARKETS & PENSIONS DIVISION 90 3.1.6.1 National and EU policy and legislation in relation to Insurance 91

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3.1.6.2 National and EU policy in relation to Anti-money laundering policy and legislation and oversight of the Financial Action Taskforce (FATF) country assessment 96 3.1.6.3 EU and national policy on Financial Markets, Funds Securities and Capital markets union. 100 3.1.6.4 Policy and legislation in relation to Pensions 105

3.1.7 SHAREHOLDING AND FINANCIAL ADVISORY DIVISION 107 3.1.7.1 State’s Banking Investments Overview 108 3.1.7.2 State’s shareholding in Allied Irish Banks 112 3.1.7.3 State’s shareholding in Bank of Ireland 113 3.1.7.4 State’s shareholding in PTSB 114 3.1.7.5 NAMA 115 3.1.7.6 IBRC (in special liquidation) 118 3.1.7.7 Home Building Finance Ireland (HBFI) 121 3.1.7.8 Credit Union Reform and Strategy 123 3.1.7.9 Management of all legal matters concerning the Shareholding and Financial Advisory Division 129 3.1.7.10 Financial Advisory Services 130

3.1.8 INTERNATIONAL FINANCE DIVISION 134 3.1.8.1 International Financial Institutions and Climate Action 135 3.1.8.2 International Financial Services, Department’s Risk Management and Compliance Functions 149 CORPORATE 156 3.1.9 CORPORATE AFFAIRS 157 3.1.9.1 Corporate Governance, Internal finance and budget management, Corporate Communications, ICT and Business Continuity Management, Freedom of Information, Parliamentary Questions, Print Room, Press Office, Facilities Management Unit & Finance Unit. 158

3.1.10 HUMAN RESOURCES UNIT 162

3.1.11 LEGAL UNIT 163 3.1.13 ACCOUNTANT’S BRANCH 164 3.1.13.1 Management of the Accountant's Branch 164

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1. Introduction to the Department

The purpose of this brief is to give the Minister a high level introduction to the Department and a selection of the issues that can be expected to require Ministerial attention. It is not and could not be a comprehensive treatment of each of the issues highlighted. It is expected that, in due course, the Minister will seek more in depth and detailed briefing as these issues arise. The briefing is set out by Division or functional area of the Department. It should be noted that the document reflects the structure of the organisation at time of writing. Work is currently underway on a reorganisation of the Department.

The Department is managed by the Executive Board and is organised into a number of Divisions and Units as follows:

Derek Moran Secretary General and Accounting Officer

Des Carville Lead Specialist Shareholding and Financial Advisory Division Emma Cunningham Assistant Secretary General Banking Division John Hogan Assistant Secretary General Tax Division (incl. Accounts Branch) John McCarthy Assistant Secretary General Economic Division Michael J. McGrath Assistant Secretary General Funds, Insurance, Markets and Pensions Division (incl. Legal Unit) Paul Ryan Director International Finance Division Gary Tobin Assistant Secretary General EU & International Division

Corporate Affairs and Human Resources report directly to the Secretary General and the heads of both units are ex-officio members of the Executive Board:

Niall O’Ceallaigh Principal Officer Human Resources Scline Scott Principal Officer Corporate Affairs (incl. Facilities Management Unit)

The biographical details of the members of the Executive Board follow below.

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2. Executive Board

Derek Moran Derek Moran is Secretary General and Accounting Office for the Department of Finance. He is responsible for all aspects of the work of the Department including economic, budgetary, fiscal, banking and financial services policy matters. He has previously been the Assistant Secretary General with responsibility for Fiscal Policy Division, Budget and Economic Division and led on tax policy issues between 2006 and 2014.

He is currently a member of the Board of the National Treasury Management Agency, Commission of the Central Bank of Ireland, the Civil Service Management Board, the Exchequer Board of Scotland and a Council Member of the Foundation for Fiscal Studies. He is Chairman of the Financial Stability Group.

Des Carville Des Carville is head of the Shareholding and Financial Advisory Division (SFAD), which is responsible for the completion of the restructuring of the banking system and managing the State’s shareholdings and investments in the banking sector.

He has previously worked for Davy Corporate Finance and KPMG. He is a member of Chartered Accountants Ireland (FCA), having trained with KPMG from 1994 to 1998, and is a Certified Bank Director with the Institute of Banking. He is a director of the European Investment Bank.

Emma Cunningham Emma is the Assistant Secretary General in the Banking Division. She leads a team responsible for the development of policy and legislation at domestic and EU level on issues such as banking regulation, the provision of credit, and consumer protection. The team is also responsible for policy development in relation to the powers and functions of the Central Bank and the NTMA.

Emma has held a number of positions in the Department throughout her career to date, including working in the International and EU Division and in Budget and Economic Division. She has also worked as Budget Counsellor in the Permanent Representation of Ireland to the European Union and at the International Monetary Fund.

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John Hogan John Hogan is the Assistant Secretary General with responsibility for Tax policy. He is responsible for the development of efficient and effective taxation policies.

John has held a number of positions in the Department throughout his career. He was previously Assistant Secretary General with responsibility for Banking Policy in the Financial Services Division of the Department.

He has worked as Financial Services Counsellor in the Permanent Representation of Ireland to the European Union and has held posts in a number of Government Departments

John McCarthy John McCarthy is an Assistant Secretary General and as Chief Economist has responsibility for the Economic Division.

He was previously a senior economist in the Department heading up the macro economic analysis unit. He is the chair of the Economic Policy Committee (EPC) output gap working group.

He is a member of the National Statistics Board and an adviser to the National Competitiveness Council. He is the Irish member of the Organisation for Economic Co-operation and Development's (OECD) Economic Policy Committee. Prior to joining the Department, he was a senior economist in the Central Bank.

Michael J. McGrath Michael J. McGrath is the Assistant Secretary General with responsibility, for the development of domestic and EU/International policy and legislation in relation to Insurance and Pensions, Funds, Financial Markets and Anti- Money Laundering policy. He also has management responsibility for the Department’s internal Legal Unit.

Michael is currently a member of the Board of the Pensions Authority, and the Vice-Chair of the EU Financial Services Committee. For a 3-year period (2014-2017) he was seconded to the International Monetary Fund (IMF) as Ireland’s Alternate Executive Director of the IMF Board. Prior to that, he was the A/Secretary General of the EU & International Division and between 2007 and 2012 he was the A/Secretary General with responsibility for the Economics & Budget Division. He also previously served on the National Economic and Social Council, National Statistics Board, and a range of senior EU economic and fiscal committees.

Niall O’Ceallaigh Niall O'Ceallaigh was appointed Senior Human Resources Manager in the Department of Finance in September 2011.

His brief is to modernise and professionalise HR services and is focused in the areas of human resource management, performance management, staff development and the driving forward of organisational change within the Department.

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Dr Paul Ryan Paul Ryan is the Director International Finance Division, which is responsible for developing international financial services through the Government’s Strategy IFS2020 and the management of Ireland’s relationship with international Financial Institutions (IFIs) such as the IMF, World Bank and EIB.

Previously, Paul was responsible for Civil Service-wide Shared Service Payroll and Banking Projects, which modernised and centralised these services across Government Departments and State Agencies. He also led the Department’s Finance & Corporate Directorate and previously worked on tax policy, budgetary policy and debt management issues with experience in a number of other Departments: Education & Science; Environment & Local Government; and Justice.

Scline Scott Scline Scott is Head of Corporate Affairs and is Secretary to the Executive Board.

She leads a team responsible for maintaining the Department’s Governance Framework, coordinating the development of and monitoring execution of strategy and divisional business plans, developing an internal control framework of oversight for Bodies under the Aegis and delivery of ICT solutions capability and systems and improved information management. Scline also has management responsibility for the Facilities Management Unit, Finance Unit and Press Office and supports the staff of the Minister’s office and the Minister of State’s office.

Gary Tobin Gary Tobin is the Assistant Secretary General with responsibility for EU and International Division. He is Ireland’s representative on the EU’s Economic and Financial Committee and on the Eurogroup Working Group. He serves as Ireland’s representative on the Board of Directors of the European Stability Mechanism and on the Board of Directors of the European Financial Stability Facility.

He was previously Assistant Secretary General with responsibility for Banking and Financial Stability and prior to that he was Assistant Secretary General in the Tax Policy Division. He is a Certified Bank Director with the Institute of Banking and is a member of the Irish Government Economic and Evaluation Service (IGEES). He edited and co-authored the book “Irish Tax Policy in Perspective”, which is published by the Irish Tax Institute.

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Key Administrative Statistics

In 2019, the Office of the Minister for Finance processed 3397 Parliamentary Questions, 3392 Ministerial Representations, 1043 Ministerial submission, 425 Freedom of Information requests, 74 Statutory Instruments and 6 pieces of Primary Legislation (published or enacted).

The Minister’s Diary for 2019 included 1,466 official entries as follows:

 Oireachtas Business (incl Leaders Questions) 141

 Cabinet Meetings 42

 Oireachtas Committee Meetings 23

 Conference calls (incl. EU Finance Ministers) 26

 Travel (National and International) 32

 Meetings (Internal and External) 832

 External Events (Speaking events/Conferences) 80

 Internal Events (Report launches/Business breakfasts) 24

 Media 146

 Other 120

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Human Resources

The Department has a total workforce of 324 staff, 306 based in Dublin and 18 in Tullamore. 14 staff members are based in the following EU and International Institutions:

 Brussels - 5 Permanent Representation to the EU and 3 European Commission  Berlin - 1 Embassy.  London - 1 Embassy and 1 UK Treasury  Paris - 1 Permanent Representation to the OECD  Washington - 1 World Bank and 1 IMF In total, the Minister for Finance nominates 4 officials to the Canada, Ireland, Caribbean constituency offices of these organizations; currently, two of these officials are from the Central Bank and Department of Foreign Affairs and Trade.

The addition of staff in overseas missions in London, Berlin, and Paris gives us a presence in the capitals of key economic partners. This has happened since the UK decision in 2016 to leave the EU.

We have a well-developed staff exchange arrangement with the Department of Foreign Affairs and Trade. Staff coming through that process are generally assigned to key missions abroad; the following are Diplomats currently on such assignments:

 Berlin – Embassy. In 2019, an Assistant Secretary General serving in this Department at the time was appointed Ambassador to Germany. The Deputy Head of Mission in Berlin Embassy served for a period in this Department under the exchange arrangement with the Department of Foreign Affairs and Trade.

 London - Embassy. Two diplomats in the London Embassy, the Deputy Head of Mission and a Counsellor, were previously assigned to this Department under the exchange arrangement with the Department of Foreign Affairs and Trade.

 Paris - Permanent Representation to the OECD. The position of Permanent Representative (Ambassador) to the OECD is filled from a competitive process between this Department and the Department of Public Expenditure and Reform (DPER). This ambassadorial position is currently filled from DPER.

Business Planning The Department implements a comprehensive business planning process. Details of the Business Priorities for 2020 agreed at the start of the year are available should you want them. While the core priorities remain broadly unchanged, the intervention of Covid-19 and change of Government will inevitably have shifted priorities.

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3. Detailed Briefing

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3.1.2 Economic Division

The briefing prepared by Economic Division provides a high level introduction to the issues relevant to the Division. More detailed and in depth analysis of any of the topics can be provided if needed.

DESCRIPTION: This Division is responsible for the provision of analytical support and policy advice to the Minister for Finance in the areas of economic (macro and micro) and fiscal policy. In the short-term, much of the work of the Division has pivoted towards addressing the Covid-19 shock to the economy and public finances and this is likely to continue for the foreseeable future. The Division produces macroeconomic analysis on a wide variety of domestic and international issues including two sets of short- and medium-term economic forecasts which underpin the medium term budgetary strategy and the annual budget.

The Division also deals with overall budgetary policy, including advising on the appropriate fiscal strategy, coordinating the budgetary process within the European Semester, the production of short- and medium-term fiscal forecasts, monitoring in-year budget performance, analysing the impact of policy on Government finances (including statistical issues) and liaising with the Irish Fiscal Advisory Council

The Division is responsible for managing the Exchequer Account a key part of the Government’s financial infrastructure. The Exchequer Section also manages the Government Banking Service.

Chief Economist/Assistant Secretary General - John McCarthy

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3.1.2.1 Macroeconomic analysis and forecasting

Principal Officer: Brendan O’Connor

John McCarthy Chief Economist

Brendan O'Connor Principal Officer Macroeconomic Analysis

Donal Smith Mike Fahy Cliona McDonnell John Harnett Assistant Principal Assistant Principal Assistant Principal Assistant Principal Supply- Labour Market Macro Research & Economic Analysis side,Modelling,Labour Analysis & Analysis/Macroecono & Forecasting & Productivity mic Imbalances Forecasting

KEY POINTS  The Department publishes two economic forecasts each year, one in the Spring as part of the Stability Programme Update, and the other in the Autumn alongside the Budget. These forecasts must be endorsed by the Irish Fiscal Advisory Council.  GDP is projected to decline by 10.5 per cent this year, with Modified Domestic Demand projected to fall by 15 per cent.  With the labour market bearing the brunt of the Covid-19 shock, currently there are approximately 1.1 million people (at 22 June) receiving some form of income support from the State.  While many of those out of work are not classified as unemployed by the CSO under international statistical conventions, the ‘effective’ unemployment rate appears to have peaked at 28 per cent in April, and is now on a downward trajectory, with an average rate of around16 per cent now expected for the year.  Absent a vaccine, the new economic ‘norm’ will be very different, with behavioural changes (firms, households) likely at work; the trend growth rate of the economy will likely be lower and the unemployment rate at which the economy ‘clears’ could be permanently higher than heretofore, i.e. ‘scarring effects’ are certain: the crisis is not just a short-run phenomenon.  An added complication is the uncertainty regarding the outcome of negotiations between the EU and the UK on the future relationship that will be put in place at the end of the present transition period.  A number of economic research projects are underway to provide the evidence base for policy decisions, including (but not limited to) the impact of Covid-19 and Brexit, as well as in-depth analysis of productivity trends.

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DETAIL:

Macroeconomic Forecasts: Stability Programme Update and Summer Economic Statement

 The Department publishes two economic forecasts each year. The first is set out in the Stability Programme Update (SPU), which is submitted to the European Commission and Council in April. Under EU law, these forecasts must be endorsed by the Irish Fiscal Advisory Council (IFAC) and, while there is always a risk that the IFAC will not endorse the projections, this has not occurred to date.  The Summer Economic Statement (SES) is published over the summer (usually in June). The SES, while not an EU requirement, it fulfils a number of functions including setting out the fiscal stance for the next Budget. It is followed by the National Economic Dialogue, which is organised by the Economic Division (the Dialogue is unlikely to proceed this year given the need for ‘social distancing’.  The Department subsequently publishes its second set of forecasts, alongside the Budget in October. Again these are subject to the IFAC endorsement process.  The Division will be heavily involved (alongside other Divisions / Departments) in the preparation of policies to support short-term economic stabilisation while ensuring fiscal sustainability.

Macroeconomic Outlook  The policy response to the spread of the Covid-19 virus both domestically and internationally, while necessary from a public health perspective, has resulted in a sharp contraction in global and domestic economic activity. The size and speed of impact unprecedented in modern times.  The Department is projecting that GDP will decline by 10.5 per cent this year with growth of around 6 per cent anticipated next year. The level of GDP recorded at the end of 2019 is not expected to be seen again until at least 2022. There is unprecedented uncertainty around the outlook.  The scenario underpinning this outlook for the Irish economy this year and next is one in which containment measures are assumed to remain in place for around three months, resulting in a very sharp contraction in the latter weeks of the first quarter and most of the second quarter this year. Thereafter, a very gradual recovery commencing in the third quarter is assumed; the pick- up is gradual, reflecting the fact that vaccination is not assumed to become available until next year at the earliest.  The crisis will leave permanent or scarring effects (without a vaccine) – households will behave differently (increased savings), companies will invest less (dampening the trend growth rate of the economy / productivity) and the equilibrium rate of unemployment will likely be higher.  The crisis is not a short-term phenomenon – and economic and budgetary policy must adapt accordingly.  Due to the scale and activities of the multinational sector in Ireland, the information content in GDP is more limited than elsewhere. Modified Domestic Demand, a better indicator of domestic economic conditions, is projected to fall by 15 per cent this year.  An added complication is the uncertainty regarding the outcome of negotiations between the EU and the UK on the future relationship that will be put in place at the end of the present transition period. An outcome that resulted in a WTO-type arrangement between the EU and UK would have a particularly detrimental impact on Irish-UK trade.

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 Estimates published by the ESRI and the Department of Finance in 2019 showed that over the medium-term (i.e. 5 years) the level of GDP would be 3.3 per cent lower, in a disorderly no-deal scenario, compared to a situation where the UK remains in the EU and 5 per cent lower over the long run, both of which assume some upside benefits from additional FDI. The impacts would be expected to be highly front-loaded.  Work is currently ongoing to update the Department’s macroeconomic assessment of Brexit.

Labour Market Conditions  At the start of this year the labour market was effectively at, or possibly beyond, most estimates of ‘full-employment’. Since 2013, employment had grown at approximately 3 per cent per year, driven by growth in full-time employment spread across all regions and sectors. By end-2019, total employment was above 2.3 million, unemployment was below 5 per cent, and average pay was growing at around 3½ per cent (with higher rates of growth in the private sector).  The reality of COVID-19 however has transformed the economy with the labour market bearing the brunt. Approximately 1.1 million people are currently receiving some form of income support from the State. A reported 465,900 are claiming the new Pandemic Unemployment Payment, with an estimated 410,000 workers currently being assisted by the Temporary Wage Subsidy Scheme with more than 220,000 on the ‘traditional’ live register (figures as per 22 June)  Adding in the c.400,000 public sector employees, this means that over 1.4 million (out of a labour force of c.2½ million) people are ‘on the books of the taxpayer’, a situation which is completely unsustainable beyond the very short-term.  It is likely that the ‘official’ unemployment rate, as published by the CSO will be below this, as many of the individuals on the various income supports may not be regarded as ‘unemployed’ from an international statistical perspective.  However, the ‘effective’ unemployment rate appears to have peaked at 28 per cent in April, and should continue to fall over the second half of the year, to average around 16 per cent for 2020. Next year as the economy gradually recovers, the unemployment rate will fall further as employment is expected to grow by c.5 per cent.  ‘Hysteresis’-type effects are likely to prevail in the labour market – scarring effects.  Over the short-to-medium-term, due to the significant impact of the COVID-19 shock on both employment and incomes, striking a balance between incentivising returns to employment and supporting incomes will be key to reactivating the labour market as public health restrictions ease.

Inflation  Consumer price inflation has been relatively subdued in Ireland since the global financial crisis. On a harmonised basis, annual inflation has been below 1 per cent since 2013, with annual HICP inflation of 0.9 per cent in 2019.  However, it is likely that headline consumer price inflation will be negative this year due to the unprecedented decline in economic activity and the large downward adjustment in the price of oil.

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Macro-economic forecasts, SPU 2020 (April), per cent change unless specified

2019 2020 2021 Real GDP 5.5 -10.5 6.0 Nominal GDP 7.2 -9.4 7.6 Inflation rate (HICP) 0.9 -0.6 0.4 Unemployment rate* 5.0 16.7 12.9 *Unemployment rate projection updated since SPU to included latest developments with the PUP

Balance of Payments / External Sector  An indicator monitored closely by the Department as a measure of the sustainability and competitiveness of the economy, as well as a potential signal of future crises due to the accumulation of imbalances, is the current account of the balance of payments.  A surplus on the current account indicates that a country is exporting more than it is importing, or alternatively, that the country as a whole is net lender to the rest of the world. A deficit means that the country is a net borrower from the rest of the world.  This is another indicator that is heavily distorted by the MNE sector; as such, the CSO publishes a modified current account (CA*).1  Ireland’s current account (both headline and modified) has posted a large surplus in recent years (CA* of 6.5 per cent of GNI* in 2018), indicating that Irish residents are saving more than they are investing (and hence are lenders to the rest of the world), largely due to the ongoing deleveraging amongst Irish households and businesses post-crisis. The magnitude of the surplus has been criticised in some quarters.  As COVID-19 is causing a broadly symmetric shock in the global economy, Ireland’s relative external position (and surplus) is not expected to change substantially this year.  The globalisation factors associated with the large MNE sector also mean that Ireland’s export figures are distorted (thus impacting GDP).  Exports are inflated by ‘contract manufacturing’, whereby exports are recorded as Irish despite not being produced or transported here. Imports are inflated by the on-shoring of intellectual property and activities in the aircraft leasing sector, whereby aircraft are shown as Irish imports despite never crossing the Irish border. Pharma is also playing a role. These issues are covered in the recent balance of payments paper, and further analytical work – including analysing the Irish trade performance – will be published later this year.  Ireland’s balance of payments position is far from an academic issue – the surplus is cause for much disquiet internationally.

Macroeconomic Imbalances Procedure  As part of the reforms introduced in response to the euro area crisis, Member States’ economic policies are subject to more in-depth surveillance by the European Commission.  Under the Macroeconomic Imbalance Procedure (MIP), the European Commission produces an annual scoreboard of macroeconomic economic imbalances, known as the Alert Mechanism

1 The Division published a paper in August 2019 explaining these issues and the usefulness of the balance of payments to better understand the Irish economy. See https://www.gov.ie/en/publication/7b9c21-balance-of- payments-in-ireland/ Page 18 of 166

Report (AMR). Based on the 2020 AMR, the Commission undertook a detailed review of Ireland, which it published in a country report on Ireland in February.  This year’s procedure found Ireland to have imbalances, which is the second of four possible categories (no imbalances, imbalances, excessive imbalances and excessive imbalances with corrective action). These imbalances generally relate to legacy issues from the crisis that are continuing to unwind, while some are as a result of distortions to national statistics from the large multinational sector. In light of the MIP, significant work has been undertaken in this unit on improving the understanding of legacy imbalances.

Economic research and modelling  The section has responsibility for providing technical economic support to the wider Department and to other Government Departments. As part of this role, a number of macroeconomic models are used (e.g. the ESRI COSMO model), and economists from the section are involved in joint work with the ESRI in developing and enhancing these models.  Some of the section’s technical work using the COSMO model has already been published. This work includes estimating the economic impact of Covid-19 for the SPU. The COSMO model has also been used in a number of research papers on Brexit. It is the intention that further technical work will be published in order to highlight the analytical base upon which policy recommendations are made to Government. This includes ongoing work to model the medium to long-term economic impact of covid-19.  The technical economic support this unit provides involves the flexible use of modelling to respond to immediate public policy challenges. Economic modelling and data analysis techniques were used to provide daily measures and estimates for covid-19, tracking the progress of the pandemic in Ireland in our main trading partners. This analysis was shared with the Department of Health. Macroeconomic models have been used assess the economic impact of changes in corporation tax receipts.  The section continuously works on reviewing and improving the robustness of its forecast methodologies. Recent work in this area includes development of “nowcast” models for real-time forecasting (current quarter), with a technical paper recently published.2 These nowcasts primarily focus on domestic economic indicators such as modified domestic demand, consumption, domestic GVA, and employment growth.

Productivity Analysis  Productivity measurement is a key element in assessing the technological advancement of countries. More importantly, living standards are ultimately enhanced through productivity gains and, for this reason, productivity is the single most important economic variable in the longer term. Internationally, there has been a structural slowdown in productivity growth and this is becoming one of the key global economic issues.  Research by OECD demonstrates that globally, “frontier firms” continue to experience strong productivity growth; however, this is not being diffused to “laggards” as quickly as expected.

2 Where are we now? Examining Irish Economic Developments in Real-Time. See https://www.gov.ie/en/publication/e6b3a7-where-are-we-now-examining-irish-economic-developments-in- real-time/ Page 19 of 166

 The productivity divergence between frontier and laggard firms is believed to be one of the factors behind rising income inequality and the fall in the labour share of income (analytical paper recently published).  Ireland has one of the highest levels of labour productivity among OECD countries, on a GDP per hour worked basis. However, the ‘FDI effect’ means that in GNI* terms, productivity levels are closer to the OECD average.  Ireland’s strong productivity performance, along with a number of other economic indicators, is built on a narrow base of highly productive, and mainly foreign-dominated, sectors such as pharmaceuticals and ICT, and within these a small number of firms. We must therefore treat such ‘aggregate measures’ with caution.  CSO data published last year showed that between 2000 and 2017, foreign-dominated sectors in Ireland experienced productivity growth of more than four times that recorded in sectors dominated by domestically-owned firms.  In line with international trends, Department of Finance research suggests that the gap between the most productive firms - many of whom are foreign owned - and the rest, is widening over time.3  In partnership with the Department of Jobs, Enterprise and Innovation, the Department of Finance is a member of the Steering Group of the OECD Global Forum on Productivity, a body tasked by the OECD to foster international co-operation between public bodies promoting productivity- enhancing policies.  Some of the Department’s productivity research has informed the development of Future Jobs, the successor to the Action Plan for Jobs, which inter alia aims to improve the productivity growth of Irish SMEs.

3 https://www.gov.ie/en/publication/975f17-patterns-of-firm-level-productivity-in-ireland/ Page 20 of 166

3.1.2.2 Fiscal and tax policy analysis

Principal Officer: Matt McGann

John McCarthy Chief Economist

Matt McGann Principal Officer Economic Strategy

Diarmaid Smyth Laura Weymes Assistant Principal Assistant Principal Macro-Fiscal Micro-Fiscal Analysis Analysis

KEY POINTS: Economic analysis of taxation policy, including distributional effects  This unit works closely with Tax Division in providing economic analysis of tax policy issues and evaluating tax expenditures.  In conjunction with Tax Division and the Revenue Commissioners, the unit is responsible for engaging with the OECD on the economic impact assessment of ongoing global tax reform proposals (‘BEPS’).  The unit has responsibility for a joint research programme which is underway with the ESRI, the aim of which is to improve the evidence base for decision-making in relation to macroeconomic, banking and tax policy issues.

Environmental Policy Analysis  The unit comprises a new environmental function assessing the macroeconomic and energy- related impacts of climate change and related policy actions, including carbon budgeting.  As part of the lead-up to Budget 2020, work focused on analysing the effects of a higher carbon tax rate trajectory (consistent with the May 2019 Climate Action Plan) using the ESRI’s energy- macro I3E model, and further work is possible in this space.

Public Finance analysis  The unit analyses and advises on the maintenance of sustainable budgetary policy, including in relation to the EU fiscal rules (the Stability and Growth Pact).  In this regard, the unit participates in the relevant EU working groups/committees, with the Principal Officer acting as EFC-Alternate.  The unit also analyses the wider sustainability of the public finances and produces the Department’s ‘Annual Debt Report’. This involves assessing debt dynamics in the short- and medium –term and explicitly factoring in likely impacts from COVID-19.

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 As regards long-term sustainability, the Unit participates in the European Commission’s Ageing Working Group (next report due in 2021) looking at issues such as better alignment of retirement age and life-expectancy to ensure fiscal sustainability.  The unit also publishes research on matters relating to fiscal sustainability.

DETAIL:

Taxation Policy Analysis  This section works closely with Tax Division in providing economic analysis of tax policy issues and evaluating tax expenditures. It is also responsible for analysis of the distributional impacts of tax policy changes as part of the Tax Strategy Group papers and publishes these alongside the Budget.  Tax expenditures – that is spending conducted through the tax system rather than directly through public expenditure programmes – have come under increased scrutiny in recent years. In the period preceding the economic crisis, tax expenditures led to a narrowing of the tax base and contributed to the over-heating of the property market.  The Department published guidelines for tax expenditure evaluation in 2014 to promote higher standards in this area. These are now being applied to proposals for new tax reliefs (ex ante evaluation) and to existing tax expenditures (ex post evaluation). Consideration was being given to evaluating the Guidelines themselves in 2020, but the advent of the COVID-19 crisis means that will have to be delayed until next year. Typically, tax expenditure evaluations conducted by the section are published on Budget Day each year.  Over recent years there has been an increased focus on the distributional impact of fiscal policy and the effects of tax and welfare measures on household incomes. This distributional analysis is carried out using the ESRI Simulating Welfare & Income Tax Changes (SWITCH) model. The model can be used to examine the impacts of COIVD response policy measures on household disposable income and employment incentives, including the pandemic unemployment payment (PUP) and the temporary wage subsidy scheme (TWSS). As these measures are tapered and various taxation options for Budget 2021 are developed, these proposals can be analysed using SWITCH and the results provided for review.  The unit was also due to begin collaboration with the ESRI this year to enhance the capacity of the SWITCH model to support Equality Budgeting objectives and deliver on the recommendations of the OECD for the publication of an Equality Budgeting Statement alongside the Budget (this is a cross Departmental multi-year project), but this work is likely to be delayed due to the COVID- 19 crisis.

Collaborative research with ESRI  The Department has worked to improve the evidence-base available to it on macroeconomic and tax policy changes with a view to improving the quality of its policy advice. To this end, a joint research programme on ‘The Macroeconomy Taxation and Banking’ was agreed with the ESRI in early 2015 and has run each year since.  2019 tax-related research topics included analysis of globalisation and fiscal policy, the estimation of fiscal multipliers in a small open economy, the responsiveness of corporate taxes to profits and

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taxable income, and the effect of carbon tax rate increases under selected revenue recycling options.

Economic Impact Assessment of OECD global tax proposals  Discussions are ongoing at the OECD to find an internationally agreed solution to the taxation challenges arising from the digitalisation of the global economy (detailed in the Taxation Policy Division section).  The unit has been working with the Revenue Commissioners and the OECD to estimate the impact of prospective international tax policy changes on the Irish economy and on the public finances  The Department had tentatively estimated that revenue losses from the proposals could be of the order €0.8 - €2 billion, consistent with assumptions driving both the January MTFS and the April 2020 SPU outlook.  OECD discussions have since substantially reduced the scope of Pillar 1 ambitions to now covering automated digital service and consumer facing businesses only and work is ongoing, in conjunction with Revenue, to assess the impact of these changes on estimated revenue losses.

Economic Analysis of Environmental Policy  The unit assesses the macroeconomic and energy-related impacts of carbon budgeting. Work-to- date has focused on analysing the effects of a higher carbon tax rate path (consistent with the May 2019 Climate Action Plan). Collaborative research with the ESRI outlined the distributional impacts of higher carbon taxes under a range of revenue recycling options. This work underpinned the revenue ring-fencing approach outlined in Budget 2020 and further work in this space remains a possibility under the Department’s Joint Research Programme with the Institute.  Given prospective European developments in the areas of green investment, green financing and environmental taxation, it is important that the macroeconomic impacts of developments in the area of climate action (beyond just the tax lever) are analysed and monitored by the Department. In particular, a detailed proposal from the Commission on the Carbon Border Adjustment Mechanism announced in the European Green Deal is expected in the second half of the year and will be examined in conjunction with tax-side.  There is scope for the Green Budgeting Initiative (on expenditure being implemented by DPER) to be rolled out more actively within the Department of Finance so that the costs of financing Ireland’s climate-related commitments and delivering a zero carbon economy become embedded in the wider budgetary framework. Consideration of how climate related issues impact the sustainability of the public finances in the longer term also warrants further analysis.

Public Finance Analysis  The unit analyses and advises on the maintenance of sustainable budgetary policy, including in relation to the EU fiscal rules, known as the Stability and Growth Pact (SGP).  In this regard, the unit participates in the relevant EU working groups/committees, with the Principal Officer acting as EFC-Alternate. Most recently this led to Ireland advocating for the activation (for the first time) of the SGP’s ‘general escape clause’ in response to the COVID-19 pandemic. This clause enables Member States to take all of the necessary expenditure and taxation measures in response to the crisis. In practical terms, Member States have been temporarily absolved of the annual requirement to be at, or moving towards, their Medium-term Budgetary Objectives (MTOs).

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 The unit has also recently begun to attend meetings of the SGP Like-Minded Group, an informal alliance of northern European Member States.  At end-2019, the stock of public debt amounted to €204 billion, equivalent to €41,500 for every resident. This level of (per capita) debt remains elevated and amongst the highest in the OECD. Annual interest costs are also a significant burden for the public finances at approximately €4.5 billion. These costs have, however, fallen sharply in recent years.  The Department’s third Annual Report on Public Debt was published last August. These reports serve to raise awareness about public indebtedness in Ireland, specifically in relation to the stock and composition of debt and associated burdens. The report highlighted the need to bring indebtedness down to lower levels particularly given the small and open nature of the economy. A draft of this year’s report is being prepared and will be more tailored to the costs associated with COVID-19 and broader issues around Irish Government debt.  Given the exposure of the public finances to corporation tax receipts and the high level of public debt, a target of 60 per cent for the ratio of debt-to-GNI* was previously announced, with an interim target of 85 per cent to be achieved by 2025. The Department is tasked with monitoring progress towards achieving these targets, with the analysis to be set out in the Annual Report on Public Debt. However, in light of the pandemic (and the activation of the general escape clause), these targets and timelines will need to be reviewed.  As regards long-term sustainability issues, at present there are 5 people of working age for each retiree; this figure will fall to 2 people of working age for each retiree by 2050. This will have serious implications for the public finances, with increased outlays on healthcare, pensions and long-term care.  By 2050, age-related expenditure will increase by around 6½ per cent of GNI* per annum – the equivalent of €13 billion each year in today’s terms – illustrating the importance of structural reforms to ensure fiscal sustainability. The most important reform is better alignment of retirement age with life expectancy.  The Unit participates in the European Commission’s Ageing Working Group. This involves preparing detailed projections of future age-related costs for Ireland. The next ageing report is due in 2021 and the Department will publish its analysis in the form of a working paper.  To ensure fiscal sustainability and inter-generational equity issues, policy must act to mitigate these huge costs and the Department will advise on this basis.

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3.1.2.3 International economy, sectoral analysis, Exchequer Section and the Government banking service

Principal Officer: Feargal O’Brolcháin

John McCarthy Chief Economist

Feargal O'Brolcháin Principal Officer International Economy, Construction & Exchequer

Gerard McGuinness Joanne Mulholland Thomas Sheeran Assistant Principal Assistant Principal Assistant Principal Construction International Economy Exchequer Section

KEY POINTS:

Analysis of international macroeconomic developments  This unit is responsible for the assessment of trends and developments in the international economy and produces macroeconomic analysis on a wide variety of international issues with a particular focus on the impact of COVID 19 on the global economy.  The unit also monitors developments in monetary policy, with a particular focus on the ECB’s policy which has direct relevance to Ireland’s economic performance.  The unit provides briefing on the macroeconomic impact of Brexit, and provides macroeconomic input to the Department’s position on negotiations of the future relationship with the UK.

Analysis of sectoral developments, including construction / housing  The unit undertakes sectoral analysis, most notably in relation to the construction and housing sector.  While not directly within the Department’s remit, developments in this sector have an impact on macroeconomic and budgetary developments.  The Division will continue to advise on the importance of ‘supply-side’ measures that address the root-cause of the under-performing housing market and will advise against ‘demand-side’ measures.

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Exchequer section  The unit includes the Exchequer Section which manages the Central Fund transactions – a key part of the Government’s Financial Infrastructure. The Exchequer section is also responsible for the Paymaster General (PMG) functions of the Department of Finance, which is essentially a banking service for all 44 Government Departments and Offices with Votes.

DETAIL:

International Economic Outlook  The Covid-19 pandemic is the most significant shock to the world economy since the global financial crisis and, indeed, the impact is likely to be more severe. It is an exogenous shock – completely unrelated to economic conditions – and is synchronised across almost all economies.

 Moreover, it occurs at a time of already weak global conditions – lingering trade tensions, uncertainty regarding the UK’s relationship with the European Union, rising geopolitical strains – and is likely to result in a significant decline in living standards almost everywhere this year.

 The pandemic and the recovery from it will have an impact on longer-term, more structural factors which are also shaping global economic activity.

 For instance, global investment has been weak for a number of years: firms in many countries have been increasing employment rather than investing in physical assets. While this has led to very low unemployment rates in several advance economies, future productivity growth (which drives wages and living standards) will suffer as a result.

 At the same time, global savings have surged with the result that global interest rates (which adjust to ensure savings and investment are equal) have fallen. Broadly speaking, this is referred to as ‘secular stagnation’.

 This means that standard monetary policy now has little room for manoeuvre; with inflation well below target (especially in the euro area) there is a risk that inflation expectations could become de-anchored, giving rise to Japanese-style deflation.

 Moreover, the decline in interest rates has prompted a ‘hunt for yield’ with investors pilling into riskier assets. This creates financial stability risks.

 Compounding these trends has been a move towards de-globalisation – the expansion of cross- border trade and financial flows since the 1980s has come to a halt and, on some measures, has gone into reverse. If sustained, this could be hugely problematic for Ireland, given our economic model. The global response to Covid-19 may see and acceleration of this trend.

Monetary Policy Developments  The unit also monitors developments in the monetary area. This is an increasingly important area given its inter-relatedness with fiscal policy (e.g. the non-standard monetary policies now being adopted have had a major bearing on debt service costs) and its role in addressing the Covid-19 pandemic.  In response to the Covid-19 pandemic – the ECB announced a series of measures including the Pandemic Emergency Purchasing Programme (PEPP) - which will be worth an aggregate of €1.35 trillion in asset purchases running until at least June 2021. This is in addition to temporary

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purchases of €120 billion running to the end of 2020 and the previously announced QE4 programme. Cumulative ECB net asset purchases from January 2020 to June 2021 are expected to be €1.84 trillion – a 39 per cent increase in the ECB balance sheet. Up to end-2019 the eurosystem had purchased €2.6 trillion of assets since 2015.  The ECB also launched additional refinancing operations to provide liquidity support to the Euro Area financial system. The first bridges the period until the new targeted longer-term refinancing operation TLTRO III begins in June.  The other, the non-targeted pandemic emergency longer-term refinancing operations PELTRO, starts in May and is due to mature in phases between July and September 2021 in line with the collateral easing measures.  Prior to the Pandemic - in response to the persistent low inflation in the euro area - the ECB implemented a substantial amount of non-standard monetary policy – notably with its Quantitative Easing programme introduced in March 2015, and the adoption of negative interest rates from June 2014.  The purpose of the ECB’s non-standard policy measures is to ensure price stability in the euro area.  Given the persistent low inflation – the current guidance from the ECB Governing Council is that ECB interest rates will remain at present levels for an extended period of time (‘lower-for-longer’).  As of end-May 2020, €33.8 billion worth of Irish debt is held by the ECB under the PSPP.

OECD Economic Review of the Irish Economy The OECD conducts a biennial review of member countries’ economies. The most recent review for Ireland was published in mid-February this year. The review was completed before the economic impact of the COVID 19 outbreak emerged. The next review is scheduled to take place in 2022.

Housing market/construction developments  It is beyond question that the root cause of current difficulties in the housing and rental markets is under-supply. Demand has increased rapidly on foot of the recovery in the economy; the price elasticity of supply (the supply response) has been very low.  Accordingly, correcting the imbalance in the housing market must – by definition – revolve around boosting supply and the Department will advise along these grounds.  The Department will advise against all proposed policy measures that simply boost demand.  Macro-prudential tools being deployed by the Central Bank are aimed at ensuring prudent lending and the Department will not seek to influence the Bank in this regard (see material from Banking Division).  The Executive Board has tasked a sub-committee on the construction and property sector to ensure a consistent view across the Department on the sector, with a view to advising on appropriate policies, and inputting into external fora.

Management of the Central Fund – Exchequer Section  The unit includes the Exchequer Section which is responsible for carrying out transactions on the Central Fund and produces the monthly Exchequer Statement and the annual Finance Accounts.  The Exchequer Section also transacts on a number of other Funds and accounts managed and controlled by the Department of Finance, and produces annual Accounts for most of these.  In 2019, the value of transactions processed by the Exchequer Section was in excess of €148 billion.

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 The Exchequer Section processes all requisitions for credits for expenditure which must be granted by the Comptroller and Auditor General before any disbursements are made from the Central Fund.  The Exchequer Section is also responsible for the Paymaster General (PMG) functions of the Department of Finance, which is essentially a banking service for all 44 Government Departments and Offices with Votes.  The Exchequer Section also manages the Government Banking Services Framework.  In October 2018, the PMG accounts transferred from the Central Bank of Ireland to Danske Bank under the Government Banking Services Framework. The transfer of each Department’s/Office’s transactional accounts to Danske Bank is ongoing with a view to completion by end 2020.

National Economic Dialogue  The unit leads the organisation of the annual National Economic Dialogue (NED) which is a key element of the annual budgetary framework. The objective of the dialogue is to facilitate open discussions on the competing economic and social priorities facing the Government. It usually takes place in late June/early July.  The Dialogue is hosted jointly by the Minister for Finance and the Minister for Public Expenditure and Reform. It is important to stress that the NED is not in any way a form of ‘social partnership’ and should not be seen in this context.  In light of the COVID 19 outbreak, this year’s NED has been deferred/cancelled.

Other issues  The unit leads the Department’s engagement with the National Economic and Social Council (NESC) including attendance at Council meetings. NESC advises the Taoiseach and Government on strategic policy issues relating to sustainable economic, social and environmental development.  The unit leads the Department’s response to litigation in the area of medical consultants contracts.

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3.1.2.4 Central Budget Office

Principal Officer: Niall Cassidy

John McCarthy Chief Economist

Niall Cassidy Principal Officer Budgetary Policy/Report

Robert McLaughlin Paul Cotter Stephen McDonagh Statistician Assistant Principal Statistician General Government Fiscal Policy & Tax General Government Statistics Forecasting Statistics

 KEY POINTS  The Irish economy is in a severe recession and fiscal policy is being used to compensate for the unprecedented reduction in private sector demand.  Fiscal policy must also be sustainable, with a credible path towards a more balanced budget essential in order to retain confidence in our economy and mitigate other risks.  Many other risks remain: public debt is one of the highest in the developed world and corporation tax receipts account for 1 in 5 of all tax receipts, a historically high share.  The budgetary position pre-pandemic – fiscal surplus, Rainy Day Fund and cash reserves provided Government with a fiscal buffer, allowing it to dedicate resources without the need to borrow.  Many of these tools have now been exhausted, meaning deficits will need to be entirely funded through borrowing.  The interest rate environment remains favourable, though debt will need to be rolled over at potentially higher rates in the future.  Deficits are likely over the short-term, primarily due to a lower level of tax revenue, and it will be necessary to set out a medium term trajectory towards correcting the ‘excessive deficit’ (enshrined in EU law) and eventually budget balance.  Irish debt – on a per capita basis – is amongst the highest in the developed world.

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DETAIL:

Budgetary position  Last year a general government surplus 0.4 per cent of GDP was achieved. The debt to GDP ratio, at 58.8 per cent, was below the Stability and Growth Pact threshold for the first time since the GFC, an important milestone. However, when expressed in relation to GNI*, is still in excess of 100 per cent. [At €43,500 for every man, woman and child in the country it is now among the highest in the world and with the Covid-19 fiscal support provided in recent months this figure is rising].  The Covid-19 pandemic has severely impacted the budgetary position. The economic impact and fiscal policy response will result in a significant deficit (7.4 per cent of GDP) and a sizeable increase in borrowings. The debt ratio will be close to 70 per cent by year-end.  The Commission has activated the General Escape Clause provision, suspending the requirements of the Preventive arm. Along with almost every other Member State, Ireland will breach the 3 per cent Treaty deficit limit, triggering an Excessive Deficit Procedure (EDP).  Corporation tax receipts are an exposure for the public finances: analysis published by the Department shows a potential loss of between €2-6 billion.  A return to surplus is unlikely over the short term; subject to the economic cycle, running budgetary surpluses into the future is of paramount importance to reduce Ireland’s fiscal vulnerabilities and rebuild fiscal buffers.  Windfall gains – including any receipts arising from disposal of the State’s equity in the Banks – should be used to retire debt. (acknowledging that asset disposal of banking equity may be unlikely in the short-term given current valuations).

Medium-term fiscal strategy  Under normal circumstances the SPU would set out fiscal policy over a five-year horizon. Given the high level of uncertainty in macro and fiscal forecasts during the current crisis, the SPU outlined a scenario over two years to end-2021.  The deficit in 2021 is forecast at 4.1 per cent of GDP. Preliminary internal work suggests the deficit will persist over the medium-term, even in the absence of additional expenditure measures.  The current package of fiscal support for individuals and businesses is unsustainable at existing levels. Policy supports in the next phase of the crisis should be more targeted and less generous in order to remain fiscally sustainable.  The possibility of the UK leaving the EU without a trade deal is a further significant risk to the public finances, compounding the current situation.  The Department’s tax forecasts assume a reduction in corporation tax revenue from 2022 onwards. Estimates of an initial €500 million impact that year, rising incrementally to a €2,000 million impact in 2025, are based on the best available analysis from the Revenue Commissioners. It should be noted that the impact analysis is preliminary and remains underway.

Fiscal Policy Framework/Governance  The Department has highlighted that the one-size-fits-all fiscal rules are ill-equipped to deal with the specifics of the Irish economy, especially at the current juncture.  This view is shared by the Irish Fiscal Advisory Council, European Commission and IMF.

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 As a result, a principles-based approach rather than a legalistic one, has been adopted over recent years. This aims to achieve a budgetary stance that is appropriate to the position the economy is at in the business cycle.  The Minister for Finance has responsibility for proposing the Government Expenditure Ceiling (GEC) to Government. Once the GEC is set, the Minister for Public Expenditure and Reform is responsible for proposing the Ministerial Expenditure Ceilings which cannot, in aggregate, exceed the GEC.  The Central Budget Office coordinates both the policy underpinning and preparations for the annual budget.  Euro area Member States are obliged to publish their draft budget and submit their draft budgetary plan for the following year to the Commission and the Eurogroup before 15th October.  The Summer Economic Statement (SES) is published over the summer usually in advance of the NED, thereby facilitating discussions. The SES is not part of the EU Semester however, from a domestic standpoint, it addresses budgetary policy issues, including the opening fiscal stance for the forthcoming Budget in October.

Role of the Irish Fiscal Advisory Council

 The Irish Fiscal Advisory Council is an independent body established as part of Ireland’s EU/IMF programme. Similar fiscal councils were established in other euro area Member States as part of legislative reforms adopted in response to the sovereign debt crisis.  The Council’s role is three-fold. Firstly, it endorses (or not) the macroeconomic forecasts of the Department of Finance that underpin the Budget and the SPU.  Secondly, it assesses compliance with the fiscal rules (both the Stability and Growth Pact and the Fiscal Compact). In this regard, it has a role in the correction mechanism if there was a deviation from the fiscal rules. Finally, it advises on the appropriateness of the fiscal stance.  The Council is required to produce a Fiscal Assessment Report (FAR) at least once a year but in practice has produced two reports per annum, one following the SPU and one following the Budget. During the passage of the Fiscal Responsibility Act (FRA) 2012, the Minister for Finance agreed to reply substantively to these reports. The Council also produces other publications, including a Pre-Budget Statement.  In terms of structure, the Council consists of five Members appointed for four-year terms. In addition, as appointments to the Council were initially staggered, two of the existing four Members, are due to complete their current terms at the end of this year, but only one of these two Members will be eligible for reappointment. This is because under the FRA 2012, Members currently serving their second consecutive term of office on the Board are ineligible for reappointment. A permanent chair will need to be appointed in the near-term (in the absence of decision, Sebastian Barnes is the ‘acting’ chair).

Other issues  The Central Budget Office produces the monthly Fiscal Monitor (the monthly ‘Exchequer Returns’) which outlines developments in relation to the Exchequer position. It is published on the Department’s website on the second working day of each month reporting on the preceding month’s developments.

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 The Department publishes an Annual Taxation Report, the purpose of which is to monitor more rigorously taxation revenue developments inter alia in order to assess whether imbalances are emerging.  The Statistics unit provides advice on the likely statistical treatment of policy proposals. As a general rule expenditure under State control for public policy purposes is classified as general government expenditure. Current issues include broadband provision and housing initiatives (Land Development Agency, cost-rental initiatives) and climate/green measures.  The classification of policy responses (expenditure, liability or contingent liability) as well as coordinated EU actions (e.g. guarantees related to the European instrument for temporary support to mitigate unemployment risks in an emergency, or SURE) will also be relevant.  More generally, the ‘off balance sheet’ approach creates contingent liabilities for the State and less transparent than the ‘on balance sheet’ approach.  The CSO is responsible for (and independent in) statistical classification decisions and the unit does not, and will not, seek to influence any of these decisions.  The Statistics unit publishes the Monthly revenues and expenditures of general government. This is part of the ‘six-pack’ requirements and provides an indication of the general government balance. A document is published on the website by the end of the month covering the previous month’s position.

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3.1.3 Tax Division

The briefing prepared by Tax Division provides a high level introduction to the issues relevant to the Division. More detailed and in depth analysis of any of the topics can be provided if needed.

DESCRIPTION This Division is responsible for all aspects of tax policy, domestic and international. It works closely with the Office of the Revenue Commissioners, OECD and the EU on tax matters. It analyses policy proposals and drafts and prepares legislation, including the Finance Bill.

Assistant Secretary General - John Hogan

Response to COVID-19 pandemic In general, all taxes and duties payable to the Exchequer are placed under the care and management of the Revenue Commissioners. Thus, the assessment, collection and enforcement of tax and duties set out in law are matters for Revenue. Revenue responded promptly and positively to difficulties faced by taxpayers in meeting their tax and duty compliance obligations arising from the COVID 19 emergency. The following actions have been taken in that regard:  The application of interest on late payments was suspended for January/February, March/April and May/June VAT and February – June PAYE (Employers) liabilities.  All debt enforcement activity is suspended until further notice and current tax clearance status remains in place for all businesses over the coming months.  The RCT rate review scheduled to take place in March 2020 was suspended.  Critical pharmaceutical products and medicines are given a Customs ‘green routing’ to facilitate uninterrupted importation and supply.  Put administrative arrangements in place to implement the European Commission’s decision to temporarily suspend customs duties and VAT on the import of personal protection equipment (PPE) as well as the application of zero rate of VAT to the domestic supply of personal protection equipment, ventilators, oxygen, hand sanitizers and thermometers.  Local Property Tax (LPT) March payment date in respect of Annual Debit Instruction or Single Debit Authority payments was extended from 21 March 2020 to 21 July 2020.  Stamp duty on credit cards has been deferred until 1 July 2020.  Suspended the requirement on the HSE to deduct PSWT on payments (to private hospitals) thereby improving the hospitals’ cash flow position.  The Temporary Wage Subsidy Scheme (TWSS) is continuing to play a vital role in supporting eligible employees where the employer’s business activities have been negatively impacted by the COVID-19 (Coronavirus) pandemic.  Arrangements for Accumulated Tax Liabilities (as announced on 2 May as part of suite of further measures to support businesses impacted by Covid-19)  In order to provide clarity to businesses, the Government announced that it will legislate to provide that Revenue will warehouse deferred tax debts associated with the Covid-19 crisis for a period of 12 months after a business resumes trading and the application of a lower interest rate of 3% per annum on the repayment of such ‘warehoused tax debts’ after that date.

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3.1.3.1 General income tax policy and reform

Principal Officer: Joe Cullen

John Hogan Assistant Secretary General

Joe Cullen Principal Officer Income Tax Policy

Patrick Brennan Mairéad Ross Assistant Principal Assistant Principal Income Tax Policy - Certain Income Tax Policy Incentive Schemes

 KEY POINTS  Income taxes are the largest annual source of revenue for the Exchequer, accounting for 40% of tax revenues forecast in 2020 (€23.9 billion total, c.€20 billion Income Tax, c.€4 billion USC).  It is very desirable that the income tax system should maintain the characteristics of stability in terms of its contribution to the total taxes collected by the State.  Changes to the entry points of either charge may also impact on the overall stability of the tax base, noting that in 2020 it is projected that 28% of income earners are exempt from USC and 34% are exempt from Income Tax.  Ireland has a competitive tax wedge for workers on average annual incomes and the highest marginal tax rate for incomes below €70,000 is 48.5%4. The highest marginal tax rate for incomes above €70,000 is 52%, rising to 55% in the case of self-employed individuals with annual incomes greater than €100,000.  The current structure of the income tax system operates as an effective means of income redistribution, helping to reduce the comparatively high levels of market income inequality to around the EU average.

4 Comprising Income Tax, USC and PRSI Page 34 of 166

DETAIL:

Current Income Tax Issues (May 2020)

Temporary Wage Subsidy Scheme The Temporary Wage Subsidy Scheme (TWSS) is continuing to play a vital role in supporting eligible employees where the employer’s business activities have been negatively impacted by the COVID-19 (Coronavirus) pandemic and in maintaining the link between employers and their employees.

Flat Rate Expenses The general rule set out in legislation (s.114 of the Taxes Consolidation Act, 1997) is that employees are entitled to claim a deduction for tax purposes for valid expenses incurred “wholly, exclusively and necessarily” in the performance of their employment duties.

Revenue are independent in the administration of the tax code and have been reviewing these arrangements in recent years to ensure that the expenses granted remain justified and appropriate to modern day employments and work practices.

Following an exchange of correspondence with Revenue in the second half of 2019, the finalisation of this review was postponed to allow time for examination of some policy matters that came to light in the course of the review by the Department.

USC rate band increase for NMW increase The decision on the NMW increase did not happen in time for the USC rate bands to be amended in Finance Act 2019 but it has been announced that it will be legislated for later this year as part of the regular Finance Bill 2020 process.

In the meantime, Revenue have agreed to implement the threshold increase on an administrative basis, increasing the ceiling of the 2% USC rate band by €610 from €19,874 to €20,484 for the 2020 tax year.

Potential areas for future reform of Income Tax Income Tax has historically allowed for a system of joint assessment of married couples, whereby one spouse may be assessed to the joint income of both individuals and tax credits and bands may be (partially) transferred between spouses. This is contrasted with USC and PRSI which are calculated and payable on an individualised basis, meaning that a person’s liability to these charges is determined on the basis of their own individual income and personal circumstances, thereby facilitating higher levels of precision in policies which seek to target different cohorts of taxpayers, and better data collection at the individual personal level. The main advantage of the joint system is that it gives additional flexibility to married couples as a whole but, the second earner faces the marginal rate of tax from the first euro of income they earn which acts as a disincentive to workforce participation for second earners.

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Policies that remove barriers to labour force participation by second earners may merit renewed analysis. This could include further examination of the Home Carer Credit (see more below) and also the completion of the individualisation of the income tax system.

In October 2019, the 2018 report of the Working Group on the Amalgamation of USC and PRSI was published. This report outlined the significant Exchequer costs and technical difficulties that would need to be overcome if such an amalgamation was to be pursued.

Income Tax Structure The Standard Rate Cut-Off Point is the maximum amount an individual can earn at the standard rate of Income Tax (20%) before entering into the higher rate of Income Tax (40%). The maximum level varies, depending on the personal circumstance of the taxpayer unit:

Married Married Single Single Parent 1 earner 2 earners Standard Rate 5 Cut-Off Point €35,300 €39,300 €44,300 €70,600

Income tax credits reduce the amount of income tax payable. The main income tax credits include:

Credit Value (€) Single Person 1,650 Married or civil partnership 3,300 Employee Tax Credit (PAYE) 1,650 Earned Income Tax Credit 1,500 Single Person Child Carer Credit 1,650 Incapacitated Child Credit (Max) 3,300 Age Tax Credit 245 (single), 490 (married) Blind Tax Credit 1,650

USC Structure

USC threshold: €13,000

Rate USC Bands Employees Self-Employed €0 - €12,012 0.5% 0.5% €12,012 - €20,484 2% 2% €20,484 - €70,044 4.5% 4.5% €70,044+ 8% 8% €100,000+ 8% 11%

Income Tax incentives policy

Housing Given the current focus on housing as a priority area for progress, the role that the tax system may play in support of this aim comes in for regular review each year in the context of the annual budget. The current income tax supports that apply in relation to housing are set out immediately below:

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Help to Buy Incentive (HTB) HTB was introduced in Budget 2017. It is designed to assist first-time buyers with obtaining the deposit required to purchase or build their first home. With a view towards increasing the supply of new housing, the relief is only available in respect of new builds. Initially intended to expire at the end of 2019, HTB was extended in Finance Act 2019 to the end of 2021.

Rent a Room Rent-a-room relief was introduced in Finance Act 2001 as an incentive to encourage individuals to let rooms in their principal private residence to increase the availability of rental accommodation. The measure provides an exemption from Income Tax, PRSI and USC on rent received from a room or rooms in an individual's principal private residence, where the total rent received does not exceed €14,000 per year (increased from €12,000 in Budget 2016).

Living City Initiative (LCI) LCI is a scheme of property tax incentives which applies in certain “Special Regeneration Areas” (SRA’s) in the historic centres of Dublin, Cork, Limerick, Galway, Waterford and Kilkenny. The LCI scheme was introduced to assist and encourage people to live in those historic inner city areas designated and to allow owners and investors to claim tax relief for money spent on refurbishment and/or conversion of residential property either as income tax relief (for owner-occupied residential) or capital allowance (for rented residential). It also focuses on the regeneration of retail and commercial districts by allowing owners to claim an accelerated capital allowance on money spent on refurbishment and/or conversion of commercial property.

SME Income Tax Measures A number of incentives exist in the income tax area in support of enterprise development, viz:  the Employment and Investment Incentive (EII) (€18.6m cost in 2017),  the Key Employee Engagement Programme (KEEP) (indicative €10m p.a. after a number of years),  the Special Assignee Relief Programme (SARP) (€28.1m cost in 2017), and  the Foreign Earnings Deduction (FED) (€3.2m cost in 2017).

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3.1.3.2 Business Taxation, International Financial Services Tax Policy and Tax Appeals

Principal Officer: Deirdre Donaghy

John Hogan Assistant Secretary General

Deirdre Donaghy Principal Officer Business Tax

Sorsha Foran Ian Kavanagh Fiona Mongan Assistant Principal Assistant Principal Assistant Principal International Financial International Financial Corporation Tax Services Tax Policy and Tax Services Tax Policy Appeals Commission

 KEY POINTS  Corporation tax (CT) receipts for 2019 were €10.9 billion which exceeded the target by €1.4 billion or 14.9%. This accounted for approximately 18.4% of all tax receipts in 2019. The long-run average for CT as a percentage of overall receipts in the period 2010 to 2019 is 14%.  A significant challenge exists in the concentration of CT receipts, with c.45% of 2018 receipts paid by the 10 largest multinational companies. Put another way, the corporation tax payments of these top ten payers accounted for approximately 8.5% of total taxation receipts for 2017.  The on-shoring of high-value Intellectual Property (IP) assets and consequential claims for capital allowances have become a feature of the Corporation Tax landscape in recent years. This on-shoring is driven in large part by global tax reform. The volume of on-shoring which took place in 2015 led to a significant distortion in Irish macro-economic indicators that year.  Notwithstanding the challenges ahead, Ireland’s core CT regime remains strong and competitive.

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DETAIL:

Corporation Tax

Overview Ireland’s corporation tax regime is a core part of our economic policy mix and is a long-standing anchor of our offering on foreign direct investment. Our 12.5% rate is internationally competitive; iconic from a policy point of view; and often the subject of comment and pressure on the international stage. This rate is applied to a broad base, a policy which is endorsed by the OECD as it is good for growth in our economy.

Ireland has a competitive corporation tax offering encompassing (i) a 12.5% rate for trading income, unchanged since 2003; (ii) a best-in-class research and development tax credit; (iii) a competitive regime for intellectual property; and (iv) a knowledge development box, offering an effective rate of 6.25% for certain income related to intellectual property.

Concentration and Sustainability of CT Receipts Corporation tax (CT) is performing strongly, driven by a number of factors including increased company profitability. CT receipts in 2019 of €10.9 billion exceeded profile by €1.4 billion or 14.9% and was ahead of the 2018 performance by €0.5 billion or 4.8. In 2018 about 43% of all corporation tax net receipts came from the top 10. In total, the multinational sector accounted for approximately 77% of CT receipts in 2018.

While there are variations from year to year, data shows that the proportion of receipts contributed by the top ten taxpayers has been relatively stable between 36% and 41% over the period 2013 to 2017. Furthermore, there is a churn of the companies who comprise the Top 10 taxpayers.

Corporation Tax Reliefs

Research and Development (R&D) Tax Credit The primary policy objective behind the R&D Tax Credit is to increase business R&D in Ireland, as R&D can contribute to higher innovation and productivity. The R&D Tax Credit provides a 25% Tax Credit for qualifying R&D expenditure. The latest annual cost available is for 2018 at €355 million. The cost of the R&D Tax Credit was higher in recent years (e.g. €553 million in 2014, €708 million in 2015, €670 million in 2016 and €448m in 2017) and, due to the project-driven nature of the credit, it is anticipated that it will increase again in the future.

Knowledge Development Box (KDB) The KDB is the first patent box of its kind to be compliant with the OECD ‘modified nexus’ standard. It is an innovation incentive with the purpose of encouraging companies to carry out their substantive activities in Ireland. Uptake of the KDB has been relatively low to date with provisional figures for 2017 of 10 claimants and a cost of €13.9 million.

Capital Allowances for Intangible Assets Section 291A of the TCA 1997 provides capital allowances (or “wear and tear” allowances) against taxable income for expenditure on the provision, for trading purposes, of specified intangible assets by companies. Among the qualifying intangible assets are: patents, designs, brands and copyright. Page 39 of 166

Claims under section 291A have increased from €2.7 billion in 2014 to €38.3 billion in 2017. However, this increase is not unexpected given the significant on-shoring of intellectual property that took place in 2015, evidenced in the spike in 2015 GDP, and due to further on-shoring that has occurred since then. This on-shoring of IP assets has largely been driven by global tax reform.

Film Relief The film relief scheme provides direct support to film producer companies in the form of a tax credit. The certification process is split between the Revenue Commissioners and the Department of Culture, Heritage and the Gaeltacht (DCHG). Film production companies are now required to apply to the DCHG before commencement of Irish production to have the film certified as a qualifying film. This allows for earlier engagement between DCHG and the producer company with regard to training requirements and an applicant company is required to sign an undertaking of compliance with all relevant employment legislation.

Recent Changes – Global Tax Reform The corporation tax system is undergoing a period of significant change, primarily as a result of an international focus on the taxation of multi-national enterprises. This includes changes to specific domestic provisions in addition to the implementation of multi-laterally agreed reforms. Significant recent changes include changes were made to our corporate tax residence rules in 2013 and 2014 to prevent Irish incorporated companies from being stateless for tax purposes; two Anti-Tax Avoidance Directives (ATADs) with Controlled Foreign Company rules and a new Exit Tax introduced in Finance Act 2018; Anti-hybrid rules introduced in Finance Act 2019. A new interest limitation ratio is due to be introduced in Finance Act 2020 with anti-reverse-hybrid rules are due to be introduced by end-2022.

At EU level a number of measure were introduced to enhance transparency. A Directive on Administrative Cooperation was introduced in 2011 and has applied since 2013. This Directive has been updated and expanded a number of times most recently through DAC 6 which introduces mandatory disclosure rules. The Directive also provides for a variety of exchanges of information between tax authorities, such as country by country reporting, and obligations to disclose beneficial ownership information.

The OECD BEPS Multilateral Instrument has been signed and ratified by Ireland with 93 other counties having also signed and either ratified or being in the process of so doing. This provides an overarching instrument for implementing the OECD BEPS changes across the international tax treaty network.

Brexit Since 2010, the UK have competed strongly on corporation tax to attract foreign investment. This had included plans for the lowering of the corporate tax rate to 17% by 2020. However, this plan was reversed by the new Tory government and the rate currently remains at 19%. While the UK would have more scope to introduce certain tax measures post-Brexit, it will not change their ability to set their own tax rate. Additionally, the UK are likely to remain committed to OECD BEPS project and therefore not engage in harmful tax practices. Brexit could potentially have an impact on a number of

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sectors of the economy, and any economic impact is likely to see a reduction in corporation tax collected.

Tax Appeals Commission The Tax Appeals Commission (TAC) was established on 21st March 2016 under the Finance (Tax Appeals) Act 2015, taking over from the former Office of the Appeal Commissioners. As of 30 November 2019, there were 3,505 appeals on hand with a quantum of tax under dispute amounting to €3.9 billion. Of this quantum, c.€2.5 billion is comprised in 28 appeals and c.€1.7 billion is comprised in 3 appeals on hold pending a High Court decision before they can be progressed by TAC.

Due to the growing backlog of appeals and a request for considerable extra administrative resources, in June 2018, Minister Donohoe appointed Ms. Niamh O’Donoghue to carry out an independent review of the staffing structure, governance and operation structure of the TAC. The resulting report made a number of recommendations and the following key actions have taken place to date:

 A near doubling of the Commission’s budget for 2019 to accommodate the recommendations of the review. This budget has been maintained for 2020.  The appointment of three additional Temporary Appeal Commissioners.  The recommended additional administrative and technical posts were sanctioned and the TAC is approaching a full complement of staffing as recommended.

The Finance (Tax Appeals and Prospectus Regulation) Act 2019 created the role of and responsibilities of a Chairperson of the TAC and the recruitment process has been completed with the new Chairperson due to take up their position from July 1.

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3.1.3.3 International and corporation tax policy

Principal Officer: Brendan Crowley

John Hogan Assistant Secretary General

Brendan Crowley Principal Officer Business Tax Team

Vacancy Ciarán Conroy Assistant Principal John Murphy Assistant Principal Corporation Tax Policy Assistant Principal EU/International Tax Policy (including International EU/International Tax Policy Financial Services)

 KEY POINTS  The International tax policy section represents Ireland’s interests in a variety of international fora, primarily at the EU and the OECD.  A series of proposals are currently being discussed at the OECD with a view to further amending the international tax system to provide for the challenges brought about by the digitalisation of the economy. The OECD work is currently progressing on a without prejudice basis and this work will continue over the coming months with a view to reaching political agreement in October 2020, although the impact of the pandemic may cause this timeline to be extended.  The European Commission are expected to present a Communication on Business Taxation for the 21st century, focusing on the taxation aspects relevant in the Single Market in the coming months which will outline the direction of the new Commission over its tenure.

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DETAIL:

International Taxation The OECD BEPS (Base Erosion and Profit Shifting) reports aimed at tackling aggressive tax planning and harmful tax practices were agreed in October 2015. The majority of BEPS recommendations have been implemented by Ireland with interest limitation rules (see corporation tax section above) the only significant commitment yet to be incorporated into Irish law.

While the BEPS project can be seen as largely completed, concerns around the taxation of digital companies led to a focus on digital tax, including proposals at EU level for a new tax. It has since been agreed globally that a broader approach to reform is needed through work at the OECD and this project has been dubbed BEPS 2.0.

BEPS 2.0 – Addressing the Tax Challenges of Digitalisation The BEPS 2.0, project currently being discussed at the OECD BEPS Inclusive Framework (which Ireland is a member of) with a view to further amending the international tax system.

There are two proposed pillars to this work – Pillar One and Pillar Two. The work under Pillar One focuses on the distribution of taxing rights in respect of highly digitalised and consumer facing activities. Under the current international tax framework, international business can escape taxation in a market country if they operate without a physical presence in that country. Pillar one seeks to review these rules with the primary objective of increasing the profits allocated to, and therefore tax paid in, market jurisdictions. In practice it is likely to redistribute a portion of the profits currently being attributed to intellectual property by highly profitable multinationals from the place the IP is located to the place where goods or services are sold. Any agreement under Pillar One would eventually be implemented by of a new international tax treaty. While there were calls to look at all multinationals Redacted the focus now is on digital only companies. There are many open issues under Sections 29(1)(a) and 33(1)(d) of the . In June, the US asked for a pause in the OECD process to FOI Act 2014. allow countries to focus on the broader challenges associated with responding to the COVID 19 emergency.

Pillar Two is focussed on minimum effective taxation. The ultimate design and impact of any outcome will depend on certain critical features The tax rate that would be applied under any minimum tax Redacted under Sections rules has not been formally discussed, although France and others have publicly suggested using a 29(1)(a) and 12.5% rate. 33(1)(d) of the FOI Act 2014.

A deadline has been set for agreement on the broad design features to be agreed by October 2020. It is intended to have a meeting of Ministers in Berlin in early October although remains questionable in light of the current travel restrictions. The timing is intended to provide an agreed solution for acceptance at the G20 Finance Ministers meeting in November. This would appear ambitious in the

Page 43 of 166 current climate but technical work will likely continue beyond the end of 2020, particularly in respect of how any agreement can be implemented.

Ireland’s position to date has been to accept the inevitability of change under Pillar One despite a likely cost to Ireland estimated at between €800 million and €2 billion per annum6 in reduced corporate tax revenues (if any new rules apply to all large multinationals). This has boosted our ability to credibly shape the proposals in international discussions. We have expressed scepticism towards the need for Pillar Two proposals, particularly to the extent that they seek to eliminate or minimise legitimate tax competition between jurisdictions. Redacted under Sections 29(1) (a) and 33(1)(d) of the FOI Act 2014.

Failure to reach agreement will lead to alternative proposals being made by the European Commission which are likely to focus on minimum taxation.

European Commission tax plans The new European Commission will lay out its tax plans in a roadmap to be published in the coming months. Redacted under Section 33(1)(d) of the FOI Act If this is an outcome under Pillar 2 at the OECD, then this is likely to form the basis of a 2014. draft Directive on minimum taxation.

If the work at the OECD is not successful in reaching agreement, we expect the Commission to relaunch the Digital Services Tax Directive which seeks to tax the revenues of large digital companies. On 28 April, Commissioner Gentolini re-affirmed his intention to propose a new EU levy on digital services and a minimum corporate tax rate in 2021, if global negotiations fall short.

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3.1.3.4 Excise duties, customs issues, value added tax, EU and national indirect taxes, and associated tax policy issues

Principal Officer: Gerry Kenny

John Hogan Assistant Secretary General

Gerry Kenny Principal Officer Indirect Taxes

Ciarán Denny Niall O'Sullivan Alan Hall Assistant Principal Assistant Principal Assistant Principal Value Added Tax Excise Duty Brexit & Customs

KEY POINTS  Indirect taxes made up 36% of all taxes collected in 2019. Indirect taxes such as VAT and Excises have been favoured across Europe for revenue raising purposes as they are seen as being less harmful to economic growth than Direct taxes. Recent Budgets have provided for increases in VAT rates (9% to 13.5%), Betting Taxes 1% to 2%, as well as annual increases in tobacco products tax.  The increased focus on climate change, with the publication of the Climate Action Plan 2019 and the report of the Joint Oireachtas Committee on Climate Action has placed a greater emphasis on targeted tax measures to effect changes in behaviour to decarbonise the economy and to meet our binding 2030 targets. Budget 2020 brought about an increase in the rate of carbon tax from €20 to €26 per tonne of CO2, while also announcing a trajectory of increases of €6 annually to reach a rate of €80 by 2029.  This climate action focus is mirrored at European level with the European Green Deal, a set of policy initiatives brought forward by the European Commission with the overarching aim of making Europe climate neutral in 2050.

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DETAIL:

Indirect Tax Policy

2007 2010 2013 2015 2016 2017 2018 2019 Tax Head (€m) (€m) (€m) (€m) (€m) (€m) (€m) (€m) VAT 14,519 10,103 10,325 11,938 12,440 13,278 14,207 15,234 Environmental taxes 2,204 2,278 2,421 2,537 2,603 2,485 2,597 2,599 Alcohol 1,130 826 1,002 1,137 1,207 1,220 1,240 1,232 Tobacco 1,192 1,160 1,064 1,082 1,098 1,397 749 1,137 VRT 1,406 383 437 650 814 840 885 941

VAT - Revenues, rates and structure VAT amounted to approximately €15 billion in Exchequer receipts in 2019, or some 26% of total tax revenue. The increase in receipts in recent years reflects growth in consumer confidence and the economy, as well as the increase in the rate from 9% to 13.5% in the hospitality sector in Budget 2019. Ireland applies reduced rates of VAT to an extensive range of activities relative to other Member States, including the application of the zero rate. VAT on goods and services is subject to EU VAT law, with which Irish VAT law must comply. The VAT Directive governs large portions of VAT policy, and proposals which alter the Directive are subject to discussion at EU Council level.

Ireland applies a standard VAT rate of 23% (cars, petrol, diesel, alcohol, tobacco, electrical equipment and CD/DVDs); two reduced rates (i) 13.5% on domestic fuel, construction, housing and labour intensive services, etc. including the hospitality and tourism sector, and (ii) 9%, which applies to newspapers and admission to sporting facilities; the zero rate applies to basic foodstuff, children’s clothes and shoes and oral medicines and a 4.8% rate applies to the supply of live animals; while services such as transport, education, financial services, schools and hospitals are exempt from VAT.

The EU Commission published an Action Plan for VAT on 7 April 2016. The Action Plan focuses on four main strands: (i) efforts to reduce VAT fraud through enhancing cooperation amongst revenue collection agencies in the different Member States; (ii) simplifying VAT compliance for SMEs; (iii) moving further towards the definitive regime of applying VAT in the Member State of consumption; and (iv) reviewing the rules relating to reduced VAT rates and considering whether e-products which are similar to their traditional alternatives (books & e-books) should be liable to the same rate of VAT.

The first two issues have been successfully completed. The files on the definitive regime and VAT rates are currently under discussion at Working Party level and while Ireland is broadly supportive of the proposals in principle there are a number of concerns that require our attention.

Energy & Environmental Taxes

Background The main environmental taxes are fuel excises, carbon tax, vehicle registration tax and electricity tax. In addition, there are environmental levies, motor tax and there was previously an air travel tax. Total

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receipts from environmental taxes and levies, including VRT and motor tax, amounted to some €5 billion in 2018. Fuel excise receipts in 2019 were €2.1 billion, while VRT and motor tax combined contributed close to €2 billion, while carbon tax receipts were €430 million. The CSO estimates that potentially environmentally damaging fossil fuel subsidies amounted to €4.1 billion in 2016. The reduced excise rates on auto diesel, marked gas oil, kerosene heating oil, as well as the excise exemption on aviation fuel, is responsible for €1.36 billion of this total.

Issues The Climate Action Plan contains commitments to increase the carbon tax to at least €80 by 2030, to equalise petrol and diesel excise rates over an appropriate period of time, to ‘green’ the VRT and motor tax regimes and to increase electricity tax.

In Budget 2020 the rate of carbon tax was increased from €20 to €26 per tonne of CO2, with all additional receipts being ring-fenced for energy poverty, climate action and ‘just transition’ measures. Budget 2020 also announced a trajectory of increases of €6 annually to reach a rate of €80 by 2029. It is anticipated that the increased carbon tax will yield an additional €90 million in 2020, and €130m in a full year, reflecting the fact that the increased rate for all non-auto fuels is not being applied until 1 May.

Heavy oils are responsible for the bulk of fuel excise receipts reflecting, in particular, the dominance of auto diesel. Excise rates on petrol and diesel are 54.1 cents and 42.5 cents respectively and have remained the same since 2012.The excise gap of 11.6 cents between petrol and diesel has been the subject of criticism from an environmental health perspective. There is no such excise gap in the UK, resulting in diesel being cheaper in the South and excise receipts have been boosted by some level of fuel tourism.

Electricity Tax is an excise duty that is charged on supplies of electricity. There is currently no electricity tax for the residential sector (who instead pay a public service obligation levy). In line with the recommendation of the Climate Action Plan, Budget 2020 increased the business rate to €1 from 50 cents per megawatt hour (MWh), bringing it into line with the non- business rate (broadly applicable to non-commercial entities such as public authorities). The average household consumption of electricity is approximately 4.2 MWh annually.

The European Green Deal sets out the policy and legislative agenda for climate and the environment in the new Commission’s term. The Green Deal includes a proposal for revision of the Energy Taxation Directive (including the examination of fossil fuel subsidies). The Energy Tax Directive sets out excise duty rules covering all energy products used for heating and transport, as well as electricity. The Directive sets out minimum levels of taxation applicable to these energy products but also allows exemptions and reduced rates of taxation in specific areas.

VRT

Introduction Vehicle Registration Tax (VRT) is a tax chargeable on the registration of motor vehicles in the State, and has been in place since 1993, when it replaced the Motor Vehicle Excise Duty. VRT is levied as

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a percentage of the open market selling price (OMSP) of a passenger motor car. Since 1 July 2008, both VRT and Motor Tax on private motor cars have been calculated on the basis of CO2 emissions, so that motor cars with higher emissions attracted a higher tax liability. Car registrations and VRT receipts are, to a large extent, driven by the strength of the economy.

Revenues collapsed from a high of €1,406m in 2007 to a low point of €379m in 2012, before a recovery in the economic cycle allowed receipts to pick up in 2013 and grow to €941m in 2019.

VRT reliefs are applied for battery electric (€5,000), plugin-in hybrid electric (€2,500) and hybrid electric (€1,500) vehicles (subject to emission levels) as well as for members of the Disabled Drivers Scheme.

Due to the introduction of a new EU vehicle emissions testing procedure (Worldwide Harmonised Light Vehicle Tests Procedure), a decision is required in the upcoming Budget / Finance Bill process on how to ensure a level playing field between cars tested under the new WLTP test and (used) cars tested under the old NEDC test. On average, CO2 values are about 21% higher under WLTP than under the old NEDC test.

Motor Tax For cars registered post July 2008, motor tax is applied based on CO2 emissions. On average, motor tax is much higher for pre-July 2008 cars than cars subject to the CO2 regime. Accordingly, with no rate increases since 2013, receipts have experienced a structural decline from €1,137m in 2013 to €964m in 2019. Aside from any consideration to increase rates to address the structural decline in receipts, changes to the motor tax regime will be required to address the following: commitment in the Climate Action Plan 2019; the introduction of the EU WLTP emissions test; and an issue regarding the current low rates for HGVs which has come to the attention of the European Commission.

Alcohol and tobacco General excise tax policy is influenced by public health policy which has been driven by high rates of excise on both alcohol and tobacco products. This includes targets to reduce consumption of alcohol to average OECD levels of around 9%, and to reduce smokers to 5% of the population by 2025. While consumption trends for alcohol have been steadily declining since 2000, in recent years it has held steady at around 11%. Smoking prevalence has fallen from 28% in 2003 to its current level of 20%.

Alcohol Products Taxation Receipts from alcohol products tax have been very consistent in recent years at about €1.2 billion per annum. Excise is levied at a rate of €0.54 on a pint of beer (4.3% ABV), €3.19 on a bottle of wine and €11.92 on a bottle of spirits (40% ABV). The Alcohol Products Tax Directive mandates that beer and spirits are excised in accordance with the strength of alcohol whereas wine and cider, to all intents and purposes, are not.

Tobacco Products Tax Tobacco Products tax accounted for some €1.1 billion in revenue in 2019, 22% of total excise. Regular increases in the rate of tax has ensured that the tax revenues from TPT have remained consistent across the years. Ireland currently has the second highest rate of duty in the EU (behind

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the UK) and this provides an opportunity for a relatively high rate of consumption of illicit tobacco products and non-Irish duty paid tobacco products in the State. It is estimated that some 13% of tobacco consumed in Ireland in 2018 was illicit, and a further 9% was non-Irish duty paid.

Betting Duty and other taxes The Betting Amendment Act 2015 brought remote bookmakers and remote betting intermediaries within the scope of the licensing regime in Ireland from August 2015, thus allowing for a levelling of the playing field with regard to tax.

In Budget 2019 the betting duty rate for retail and online operators was increased from 1% to 2% and the duty on betting exchanges increased from 15% to 25% of commissions earned on a bet. A breakdown of betting duty receipts in 2019 shows a total yield of €95 million (€51 million traditional. €41.4 million remote and €2.5 million in intermediary commissions).

The Disabled Drivers and Disabled Passengers Scheme The Disabled Drivers and Disabled Passengers Scheme provides relief from VAT and VRT, an exemption from motor tax and a grant in respect of fuel expenditure, on the purchase of an adapted car for transport of a permanently and severely disabled person. Excluding the cost of the exemption from motor tax, the Scheme cost €72 million in 2019 (VRT €35.3m, VAT €26.4m and fuel grant €10.3 million), supporting the purchase of over 5,700 vehicles.

It is necessary for an individual to obtain a Primary Medical Certificate (PMC) to become a member of the Scheme. A PMC can be obtained following an assessment by a Senior Medical Officer of the HSE or, in the event that this is unsuccessful, on appeal by the Disabled Drivers Medical Board of Appeal. The Revenue administers the Scheme on behalf of the Department, however the Department is responsible for the payment of the fuel grant and funding/oversight of the Disabled Drivers Medical Board of Appeal.

Brexit Up to now, customs has been viewed largely as an operation issue falling within the competency of the Revenue Commissioners. However, with the advent of Brexit, customs issues are firmly back in the policy sphere. The outcome of the EU-UK trade negotiations will determine the level of checks required when UK goods enter Ireland. This Department has and will continue to work with the Revenue Commissioners and other Departments to find and implement workable solutions in the context of the EU/UK trade negotiations.

Issues The UK and the EU have both ratified the Withdrawal Agreement allowing for the UK to leave the EU. Currently, the UK is in a transition period where there will be no customs or checks between the EU and UK. This transition period ends on 31 December 2020 unless an extension is requested by mid- 2020. The UK and the EU have commenced trade negotiations and work on the Future Relationship Agreement. The UK and the EU have agreed to the Ireland/Northern Ireland Protocol in order to avoid a hard border on the island of Ireland. The detail of a number of operational aspects of the Protocol will be clarified during the transition period by the EU and the UK, working together, in the Joint Committee. The Joint Committee was set up, under the Protocol, to work out the practicalities of ensuring no hard border on the island of Ireland. Page 49 of 166

Tax Division will work closely with the Revenue Commissioners to address any legislative issues arising from the Future Trade negotiations and to address issues that may not be comprehended by the negotiations.

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3.1.3.5 Capital Taxes and EU State Aid Matters

Principal: Pat Leahy

John Hogan Assistant Secretary General

Pat Leahy Principal Capital Taxes; Apple State Aid case

Aileen Gleeson Mary Dalton Assistant Principal Assistant Principal State Aid Apple State Aid CAT CGT

KEY POINTS  Capital Gains Tax (CGT) and Capital Acquisitions Tax (CAT) make up 3% of the estimated tax yield for 2019.  CGT/CAT: standard rate is 33% for CGT and CAT. Covid 19 impacts, Brexit state aid issues, the differential treatment of income and capital for tax purposes, the rates, thresholds, reliefs, and the operation of the revised CGT entrepreneur relief are significant policy issues.  DIRT: current rate is 33%, reduced on a staged basis from 41% in 2016.  Exit tax: current rate 41%.  Apple Case: work is ongoing on the legal case, with a judgement awaited from the GCEU and ongoing management of the Escrow Fund with the NTMA.

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DETAIL:

Brexit; Capital Taxes; Apple State Aid case

Brexit and State Aid One of the significant dimensions to the current EU-UK negotiations is the concept of the level playing field (LPF). This aims at ensuring a common set of rules and standards to prevent unfair competition particularly given the proximity of the UK to the single market. State aid is part of the LPF. Redacted under Sections 29(1)(a) and 33(1)(d) of the FOI Act 2014. Resolving this may prove difficult.

Capital Taxes

Capital Gains Tax (CGT) CGT is charged on the value of the capital gain made on the disposal of most property and equity assets, whether by sale or gift. CGT rates increased progressively from 20% in 2008 to the current level of 33%. The most significant policy issues are (i) whether the 33% rate of CGT should be amended and (ii) possible changes to the CGT revised entrepreneur relief. In terms of the latter issue, the options are to amend and make it a serial investment relief, retain and time limit or abolish. Main exemptions: disposals to spouses/partners, principle private residence relief, business retirement relief, entrepreneur relief, property purchased between December 2011 and end-2014 and held for 4- 7 years. The first €1,270 of gains in a tax year are exempt. CGT yielded €1,075 million in 2019.

Capital Acquisitions Tax (CAT) CAT includes gift tax and inheritance tax. The tax is charged on the amount gifted to, or inherited by, the beneficiary. There is a tax-free threshold (referred to as a ‘group threshold’), based on the relationship between the person making the gift/leaving the inheritance (the disponer) and the beneficiary. Previous gifts/inheritances in the relevant group are taken into account when calculating the taxable amount over the threshold. The balance of the gift/inheritance above the threshold is taxable, currently at a single rate of 33%. The three group tax-free thresholds post Budget 2020 are based on the relationship between the disponer and the beneficiary and are:

Category Relationship Current threshold Group A Parent/Child €335,000 Group B Brother/Sister/Niece/Nephew €32,500 Group C All others €16,250

These thresholds can be claimed in conjunction with other available reliefs. Main exemptions: Small gifts of up to €3,000 per annum, spouses/partners, dwelling house exemption, agriculture/business relief. CAT yielded €533 million in 2019.

Domicile Levy The Domicile Levy was introduced in Finance Act 2010 and its purpose was to ensure that individuals with substantial income and assets located in the State contributes to the Exchequer. The levy is currently set at €200,000 per year and applies to Irish domiciled individuals, wherever they are resident, who have a world-wide income greater than €1 million, own Irish property greater than €5 million and pay €200,000 or less in Irish income tax Page 52 of 166 Deposit Interest Retention Tax (DIRT) DIRT is deducted from deposit interest paid to the accounts of Irish residents. The basic rate is 33% (which was reduced in stages from 41% in 2016). DIRT is deducted at source by deposit takers (e.g. banks, building societies, Credit Unions, Post Office Savings Bank, etc.) from interest paid or credited on deposits of Irish residents. Exit taxes; apply to payments and deemed payments from life assurance and funds products. The current rate of Exit tax is 41%. The life insurance industry has been seeking a reduction in the 41% rate to 33%.

State Aid Investigation regarding Apple The Government decided in 2016 to appeal the Commission Decision in respect of alleged state aid given to Apple to the European Courts seeking its annulment. Following written submissions to the Court by Ireland and Apple and the Commission there was an oral hearing in September 2019 before the General Court of the European Union. The General Court will issue their judgement on the case, possibly this year but the timing of which is entirely at their discretion. Further decisions by Government may be required on foot of this judgement.

The State recovered the alleged State aid of €14.3bn from Apple in September 2018 and it was placed in an Escrow Fund. The Office of the Comptroller and Auditor General (C&AG) audits the Fund and the Public Accounts Committee examines the Fund annually. At 31 December 2018, the assets in the fund were €14.271 billion and were €14.025 billion at the end of 2019. The decrease in the value of the fund was the result of changes in the value of financial assets, interest expenses, operating expenses and a third country adjustment in favour of Apple of c. €209m.

Interventions/Appeals in other State aid cases All Member States have standing to intervene in cases that go before the European Courts where relevant. Ireland has intervened in a number of State aid cases in the General Court of the EU (GCEU) as these cases are relevant to Ireland’s annulment application in the Apple State aid decision, most recently Fiat (Luxembourg), Belgian Excess Profits, Starbucks (the Netherlands), Amazon (Luxembourg) and Engie (Luxembourg).

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3.1.3.6 Tax Administration, Revenue Powers, Local Property Tax, Pension Taxation and Stamp Duty

Principal Officer: Anne-Marie Walsh

John Hogan Assistant Secretary General

Anne-Marie Walsh Principal Officer Tax Administration

Brian Fee Pat McColgan Kevin Nolan Assistant Principal Assistant Principal Assistant Principal Tax Administration and Stamp Duty, Political Party Local Propert Tax and Revenue Powers (including Costings and Tax Vacant Property Tax Finance Bill process) Expenditures Report

KEY POINTS

Stamp Duty: Stamp Duty yield for 2019 was €1.5bn including over €700m in respect of property transactions, over €400m from share transactions, €150m in respect of the ‘Bank levy’. Work is ongoing with Revenue and Euroclear Bank to implement new solution for collection of stamp duty on share transactions post-Brexit; associated amendments to the Stamp Duties Consolidated Act will also be required in Finance Bill 2020.

Local Property Tax: An urgent decision is required whether to proceed with revaluation of residential properties this November or, given the likely market property volatility that will arise from the Covid-19 emergency, to defer revaluation by ministerial order. In the absence of a deferral and any amending legislation, LPT liabilities for 2021 would be calculated based on1 November 2020 values using current tax rates and valuation bands.

Finance Bill: Arising from EU “two pack” Regulations, Budget Day must be on or before 15th October each year and the Finance Bill must be enacted before end of the same year.

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DETAIL:

Stamp Duty Stamp Duty is generally a tax on documents or instruments. The main Stamp Duties are:  residential property (1% on values up to €1 m and 2% on any balance over €1m)  Non-residential property (7.5%)  Transfers of shares in Irish registered companies (1%) o Financial cards: Credit cards (€30 per year); Combined ATM/debit cards (12c per ATM withdrawal subject to a maximum of €5 per year)  Cheques or “Bills of Exchange” (50c per cheque)  Levies on (i) non-Life Insurance (3%; there is also a non-tax “Insurance Compensation Levy” of 2%); (ii) Life Insurance (1%), introduced in 2009 and (iii) Health Insurance (charge is per person insured and varies according to age and the type of health insurance policy – this levy is transferred directly into the Risk Equalisation Fund, rather than into the Exchequer)

Issues:

Stamp Duty on Shares: Ireland is the only MS of the EU that does not currently have its own CSD (Central Securities Depositories) and we currently use CREST in London to settle securities and collect the stamp due on shares traded on the Irish Stock Exchange. Post-Brexit, it will no longer be possible to collect much of the 1% stamp duty levied on the acquisition of the stocks and marketable securities of Irish incorporated companies.

A proposal for a new stamp duty collection process has been agreed, and work is ongoing between Revenue, this Department and Euroclear Bank to have the necessary systems, procedures and legislative changes in place to allow for the switchover to take place in early 2021.

Non-residential property: The Stamp Duty rate on a transfer of non-residential property is 7.5% for instruments executed on or after 9 October 2019, having been 6% since 11 October 2017 and 2% prior to that (since December 2011).

Provisional receipts for 2019 show a total yield of €716m of which 537m came from non- residential property transactions.

Exemptions/Reliefs from stamp duty: Certain types of instrument which are being used in certain specified circumstances, are exempt from Stamp Duty or benefit from a relief, subject to conditions stipulated in the legislation establishing them.

Amongst the most well-known of these that apply to the acquisition/development of property are:  Transfer of a site to a child  Transfers between spouses and civil partners  Young Trained Farmer Relief  Farm Consolidation Relief Page 55 of 166

 Refund scheme where land used for residential development

Local Property Tax

LPT yield 2013-date Annual 2013 2014 2015 2016 2017 2018 2019 yield (€m) (€m) (€m) (€m) (€m) (€m) (€m) LPT 316 493 475 463 477 482 473.4

An interdepartmental review of the Local Property Tax was completed and the report was published in April 2019.

The Review Group found significant but geographically uneven increases in residential property price levels which made it difficult to identify a scenario that would deliver on the condition the previous Minister set that there should be relative stability for all taxpayers in their LPT liabilities and that any increases should be modest, affordable and fair.

Having considered the findings of the review report, the previous Minister decided to defer the valuation date from 1 November 2019 to 1 November 2020, and this was effected by ministerial order (S.I. No. 166/2019 - Finance (Local Property Tax) Act 2012 (Section 13(3)) Order 2019). This allowed time for the Budgetary Oversight Committee to consider the review report. The Committee published their scrutiny report on the LPT review in September 2019 (https://data.oireachtas.ie/ie/oireachtas/committee/dail/32/committee_on_budgetary_oversight/reports/2 019/2019-09-17_scrutiny-report-on-review-of-local-property-tax_en.pdf).

Issues: A decision on the whether to defer revaluation or, if it is to proceed, what amending legislation will be brought forward.

Finance Bill process There is a statutory requirement that the Finance Bill is enacted 4 months from Budget day. However, under the EU regulations a common budgetary timeline was introduced for all Euro area Member States and provided that the draft budget for central government and the main parameters of the draft budgets for all the other sub-sectors of the general government must be published by the 15th of October each year and the budget for the central government must be adopted or fixed upon and published by the 31st of December each year. Consequently, from 2013 onwards, Budget Day has been on or before the 15th of October and the Finance Bill also completes its passage through the Oireachtas by the 31st of December each year.

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3.1.4 EU & International Division

The briefing prepared by EU & International Division provides a high level introduction to the issues relevant to the Division. More detailed and in depth analysis of any of the topics can be provided if needed.

DESCRIPTION EU & International Division deals with the development and implementation of strategies at EU/Euro area level, internationally in relation to economic, fiscal and financial policy formulation and the cross- Departmental coordination of EU policy. Currently, the Division is heavily focussed on managing Ireland’s involvement in the EU response to the Covid-19 pandemic, and in supporting the recovery. The Division manages the EU budgetary process which includes leading Ireland’s negotiations on the Annual EU Budget, forecasting Ireland’s contributions and processing Ireland’s payments to the EU Budget. The Division has joint responsibility with the Department of Foreign Affairs and Trade on leading Ireland’s participation in the current negotiations on the Post 2020 Multiannual Financial Framework (MFF) and proposed Recovery Fund,

The Division also manages Ireland’s participation in EU economic governance including ECOFIN and Eurogroup meetings and the development of Departmental policy advice on issues relating to UK/EU relationship. It also builds relationships through Ireland’s diplomatic network and ensures that the Minister and Department is fully appraised of EU and international developments.

Assistant Secretary General: Gary Tobin

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3.1.4.1 International Affairs and Brexit

Counsellor: Gerard Keown (secondment from Department of Foreign Affairs and Trade)

Gary Tobin Assistant Secretary General

Gerard Keown Counsellor Brexit and International Relations Unit

Anthony Maloney Assistant Principal International Relations Unit

KEY POINTS:

Brexit The Unit provides policy advice and analysis, and coordinates the Department’s input to whole-of- Government preparations for the UK withdrawal from the EU. The Unit is charged with providing a clear focus on Brexit within the Department and liaising with the Central Bank of Ireland and Revenue Commissioners. The Unit also works closely with the Departments of the Taoiseach, Foreign Affairs and Trade and Department of Finance staff in the Permanent Representation in Brussels.

International Relations The main objectives of the Unit are to manage outward and inward engagement at Ministerial and senior official levels; coordinate dialogue with EU Finance Ministries and drive alliance-building work, including in a post-Brexit context; develop and deepen engagement with UK, US and other partners, and provide analysis and advice on external developments relevant to the Department’s EU and international goals.

The Unit also acts as a policy level liaison between the Department and the Department of Foreign Affairs and Trade and Ireland’s network of Embassies and Missions abroad.

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DETAIL:

The UK’s relationship with the EU post Brexit The Unit co-ordinates the Department’s preparations for UK withdrawal from the EU and the negotiation of the future EU-UK relationship. The primary objective of the Department’s work in this area is to defend Ireland’s economic and financial interests. The key priorities are developing and advancing negotiating positions to defend our economic interests, to protect financial stability and the financial services sector, to protect our interests in relation to taxation and customs, including level playing field issues, in close liaison with the Revenue Commissioners. Our work with the Revenue Commissioners also includes the negotiations to agree operational arrangements under the Protocol to the Withdrawal Agreement on Ireland/Northern Ireland.

While Brexit issues are mainstreamed across the Department, the Unit leads on the preparation of analysis and overall coordination of the Department’s Brexit positions. The Unit chairs a Core Brexit PO Group consisting of lead Brexit PO coordinators from Tax, Economics, Budget, Financial Services, Financial Stability and EU Budget sections. For 2020, the focus of the group is on the Future Relationship negotiations. The Unit will also be monitoring the work of Joint Committee on the implementation of IE-NI Protocol, and supporting the work of the Revenue Commissioners on elements covering Customs and Taxation.

The Unit acts as a key liaison point for the Department into whole of Government Brexit coordination and policy preparation, as well as preparedness actions, in particular through the Departments of the Taoiseach and Foreign Affairs and Trade, and with our staff in the Permanent Representation in Brussels. The Unit also supports coordination with the Revenue Commissioners via Tax division, the Central Bank and the NTMA via a Brexit Contact Group, as well as relevant Departments.

Brexit Preparedness and Contingency Planning In 2019, the Brexit Unit coordinated the Department’s input to the Brexit Omnibus Act and put in place preparations for a Brexit Situation Room (BSR) in the event of a no deal Brexit. Preparedness and contingency planning is continuing; in Q1 the Unit undertook a review of the Department’s Brexit- related legislation requirements for 2020. In Q2/3 a review of contingency preparations will be undertaken, including in relation to potential activation of preparations for the BSR, in light of progress in the EU-UK negotiations.

International Relations The Unit supports inward and outward visits at both Ministerial and official level, with the objective of deepening engagement with key EU and international partners. At Ministerial level, this can include bilateral visits, as well as meetings in the margins of the ECOFIN and Eurogroup meetings and other international gatherings.

Discussions on the economic response to the Covid 19 pandemic have reinforced the importance of engaging with a wide range of Member States. However, the pandemic has interrupted regular channels of bilateral engagement at Ministerial and official levels, while video and teleconferences mean en marge conversations are not possible. New ways of conducting bilateral engagement remotely will be important while restrictions remain in place.

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Redacted under Section 33(1)(d) of the FOI Act 2014.

The Unit acts as a policy liaison with the Department of Foreign Affairs & Trade, and Ireland’s network of Embassies and diplomatic mission abroad, to ensure the Minister and staff in the Department are briefed on EU and international developments, and to support economic messaging abroad. This includes reporting on the economic response and step down measures taken by EU Member States and key other countries in response to the Covid-19 pandemic.

The Unit also works closely with the Department’s officers posted to the Permanent Representation to the EU in Brussels; the Embassy in London; the Embassy in Berlin and the Permanent Mission to the OECD in Paris.

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3.1.4.2 EU-IMF Post Programme Monitoring & Surveillance/ EU Lending instruments & Programme Loans/ European Stability Mechanism Policy and EU Budget

Principal Officer: Marianne Nolan

Gary Tobin Assistant Secretary General

Marianne Nolan Principal Officer EU Budget, Post Programme & Central Unit

Seán Brennan Assistant Principal Vacancy Post programme (PP) policy. Mgt of PP Assistant Principal relations with EU, IMF, ECB, ESM and EU Budget analysis, payments & bilateral lenders. Mgt of membership of ESM forecasting, EU Budget fraud & EFSF. ESM Policy

KEY POINTS:

This Unit manages our relationship with the IMF, ECB and European Commission in the context of our post programme responsibilities arising from our EU/IMF programme, of financial support. In addition, the unit functions as Irelands ESM desk with responsibility for contributing to policy development regarding the ESM and supporting Irelands members of the ESM Governing Boards. The Unit also manages the EU budgetary process which includes leading Ireland’s negotiations on the Annual EU Budget, forecasting Ireland’s contributions and processing Ireland’s payments to the EU Budget. The Division has joint responsibility with the Department of Foreign Affairs and Trade on leading Ireland’s participation in the current negotiations on the Post 2020 Multiannual Financial Framework (MFF) and proposed Recovery Fund.

Current Issues:

EU Funding Mechanisms and Policy/ Programme Loans The European Stability Mechanism (ESM) is the EU’s €700 billion financial assistance fund, of which the Minister is the Irish representative on the Board of Governors. • Ongoing management of EU Funding Mechanisms & Programme Loan conditions. • Participation on the Task Force for coordinated Action (TFCA), working on the implementation of the agreement “in principle” in relation to ESM reform reached by the Eurogroup in December 2019 (meetings every 2-3 weeks).

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• A final political agreement regarding ESM reform is expected in the first half of 2020. Following that, Member States will commence ratification procedures in each of the 19 national parliaments of the euro area. It is anticipated that primary legislation will be required in order to ratify the Treaty amendments in Ireland. Supporting Ireland’s members of the ESM governing boards in the implementation of the ESM Pandemic Crisis Support instrument, which is effective from 15 May 2020 until 31 December 2022.

The Unit is currently preparing for Ireland’s 13th Post Programme Surveillance Mission

EU Budget Reaching agreement on the Multiannual Financial Framework (MFF) 2021-2027 will be the key priority this year as well as agreeing an annual budget for 2021. The MFF will play an important role in supporting the economic recovery of Member States following the COVID-19 pandemic crisis. A revised MFF proposal, incorporating a Recovery Instrument: “Next Generation EU”, “Needs Assessment,” and a revised Own Resources proposal to fund the increased needs arising from the pandemic, was published on the 27 May 2020. The total amount being proposed for the period 2021- 2027 is €1.85 trillion in commitments (2018 prices) - €1.1 trillion for the MFF and €750 billion for “Next Generation EU”. The proposals will require careful examination in consultation with relevant Government Departments to assess the implications for Ireland’s priorities at an overall and sectoral level.

DETAIL:

Post Programme Surveillance (PPS) Following exit from the EU-IMF Programme of Financial Support in December 2013, Ireland is now subject to Post Programme Surveillance (PPS). Post-programme surveillance (PPS) is conducted by the European Commission and the ECB. PPS review missions are held twice a year and normally take place in April/May and again in November/December with the objective of assessing Ireland's capacity to repay the programme loans and to monitor the economic, fiscal and financial situation. Due to the current Covid crisis, the 13th PPS planned for May 2020 is being rescheduled to take place in September.

Based on current maturities, post programme surveillance will continue until 2031. Following the repayment in full of Ireland’s Programme loans to the IMF during December 2017, the IMF no longer conduct post-Programme monitoring (PPM) but participate, at Ireland’s request, in the winter PPS reviews once a year on the footing of a staff visit and will continue to do so until the end of the originally envisaged PPM period (December 2021).

EU Funding Mechanisms/ Programme Loans Ireland’s EU/IMF Programme Loans With the final disbursement from the EFSM in March 2014, Ireland had drawn down the full €67.5 billion in external funding available under the EU/IMF Programme.

In December 2017, Ireland repaid early and in full €22.5 billion of loans drawn down from the IMF and replaced it with cheaper, market based funding. In addition, Ireland made full early repayments on loans from Sweden (€600 million) and Denmark (€400 million) in December 2017. The interest savings Page 62 of 166

resulting from these early repayments were estimated at circa €1.65 billion over the remaining lifetime of the loans.

The Programme loan amounts outstanding as of year-end 2019 were €43.3 billion are as follows: EFSF €18.4 billion; EFSM $22.5 billion; UK €2.4 billion.

EU Funding Mechanisms: The Unit supports the Minister as a Governor of the ESM fund and the Assistant Secretary General as a Director of the ESM. It manages policy aspects of EU-IMF Programme loans, in conjunction with the NTMA; it also ensures that loan facility conditions continue to be observed. It implements the General Government Secured Borrowings Order (S67 CIS Act 2010) which requires ministerial consent from time to time. It also manages the Greek Loan Facility, under which Ireland made €347 million available to Greece.

ESM Policy: The Unit provides advice to the Minister in relation to ESM policy matters. The recent focus has been on reforming the ESM as part of the wider agenda of deepening Economic and Monetary Union. The reforms of the ESM include the introduction of the common backstop for the Single Resolution Fund (SRF), with the ESM lending the necessary funds to the Single Resolution Fund. The ESM precautionary financial assistance instruments are also being reformed to enhance their effectiveness for countries with sound economic fundamentals. Another key reform element is to strengthen the role of the ESM in future financial assistance programmes to Member States. In collaboration with the European Commission, the ESM will design, negotiate and monitor future assistance programmes. The final element of the package of reforms relates to improving the debt sustainability framework in the context of ESM financial assistance programmes

ESM response to COVID-19: During May 2020, euro area Finance Ministers agreed the features and standardised terms of the ESM Pandemic Crisis Support instrument.

The instrument, which is available until 31 December 2022, is based on the existing Enhanced Conditions Credit Line (ECCL), but has been tailored to meet the challenges of the COVID-19 crisis. This facility will be available to all Euro Area Member States for amounts of 2% of the respective Members’ GDP as of end 2019, as a benchmark, to support domestic financing of direct and indirect healthcare, cure and prevention related costs arising from the Covid-19 crisis - thus providing a credit line of circa €240bn for the entire euro area.

Individual decisions to grant financial assistance under the facility will be taken by the ESM Board of Governors.

EU Budget The Treaty on the Functioning of the EU (TFEU) provides for a European Union budget to finance the various activities which underpin its policies. These include agriculture (through the Common Agricultural Policy or ‘CAP’ ), structural and cohesion funding, research, education, competitiveness for SMEs and a range of other activities. Ireland has been a significant net beneficiary from the EU Budget since accession in 1973. However, Ireland became a net contributor in 2014.

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The EU Budget section deals with the analysis, negotiation, payments, and forecasting of the Multiannual Financial Framework (MFF) and annual budgetary processes. The section also acts as Ireland’s Anti-Fraud Coordination Service (AFCOS) and deals with other EU Budget fraud related matters. The work of the EU Budget Section is to ensure the outcome of the negotiations on the MFF and annual budgets reflects Irish policy priorities, whilst simultaneously protecting and advancing our national interests. The annual (Ecofin) Budget Council generally takes place in November, with a view to securing agreement on the annual budgetary package. Ireland is usually represented at Minister of State level.

In 2018, Ireland contributed c. €2.5 billion towards the financing of the EU budget and received €1.8 billion (excluding Horizon payments). The vast majority of Irish receipts (c. €1.2 billion in 2018) are direct payments to Irish farmers. The EU budget section has responsibility for executing Ireland’s bi- monthly national EU Budget contributions in an efficient and timely manner.

Multiannual Financial Framework 2021-2027 The MFF is the long term budget of the EU, agreed by unanimity, which lays down the maximum annual amounts that the EU may spend. The next MFF, which will cover the period 2021-2027, is currently being negotiated.

The Commission’s revised proposal for the 2021-2027 MFF, published in May 2020, proposed a total of €1,850 billion in commitments (2018 prices) - €1,100 billion for the MFF and €750 billion for “Next Generation EU”. The Commission published their original proposals for the 2021-2027 MFF in May 2018, and proposed an overall level of expenditure of €1,134 billion. In February 2020, President of the European Council, Charles Michel, proposed an overall level of expenditure of €1,087 billion. No final agreement has been reached on the MFF, with the latest proposals creating divisions between some Member States on the proposed level of grants versus loans under the Commission’s “Next Generation EU”.

“Next Generation EU” financing will be raised by “temporarily” increasing the Own Resources ceiling to 2.00% of EU Gross National Income (GNI) allowing the Commission to borrow €750 billion on the financial markets to fund measures over the period 2021 - 2024. €500 billion of “Next Generation EU” financing will be in the form of grants to Member States, with the remaining €250 billion as loans. This additional funding to be channelled through EU Budget programmes, will be repaid back between 2028 and 2058 drawing on future EU Budget contributions from Member States or the Own Resources of the Union.

Amendment to the current MFF (2014 – 2020) is also proposed to make an additional €11.5 billion available in 2020.

Ireland has broadly welcomed publication of the Commission’s proposals coming on top of the three safety nets of up to €540 billion already agreed by EU leaders to support citizens, businesses, and countries. However, the proposals are detailed and will require careful examination in consultation with relevant Government Departments to assess the implications for Ireland’s priorities at an overall and sectoral level and to assess the implications for Ireland’s contributions to and receipts from the EU Budget as well as for the domestic budget.

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Ireland has not yet finalised our position on what the appropriate overall level of expenditure (incl. special instrument) should be, however, CAP is one of our national priorities and we wish to see its budget maintained at current levels. We recognise and agree that all policies must receive adequate support – this includes the long standing policies of Agriculture, Cohesion, Research and Innovation, Erasmus and External Aid, and the new priorities of climate and migration. The MFF will play an equally important role in the economic recovery from Brexit, especially as the possibility of a no deal Brexit becomes closer to reality.

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3.1.4.3 EU strategy and co-ordination

Principal: Pat Casey

Gary Tobin Assistant Secretary General

Pat Casey Principal Officer EU Strategy Unit

Alan Zambra Aideen Foley Assistant Principal Assistant Principal Ecofin/Eurogroup - EFC/EWG, EPC, European Semester and EU/SOG,Legislative Analysis, Future of EMU, SURE, SNE EU Legislative Compliance policy Divisional Coordination

KEY POINTS  This Unit manages the Department’s engagement at high level EU fora including ECOFIN, Eurogroup, Economic and Financial Committee (EFC)/Eurogroup Working Group (EWG), EFC-Alternates (and in Euro Area formation), Economic Policy Committee (EPC) (and in Euro Area formation) and the European Council/ Euro Summit.  The Unit acts as a focal point both internally and externally on EU Developments, and is currently managing Ireland’s involvement in several aspects of the EU response to the Covid- 19 pandemic.  The Unit supports the Minister’s appearance, as requested, at the Joint Oireachtas Committee on Finance and Public Expenditure and Reform to discuss matters pertaining to the ECOFIN agenda.  The Unit manages the Department of Finance involvement in the European Semester process of economic governance and also coordinates the Department’s response to the deepening EMU agenda at EU level.

DETAIL:

The EU Strategy and Coordination Unit manages the Department’s engagement at a number of key EU Council formations and Committees, primarily the Eurogroup and ECOFIN (Ministerial level) and the European Council/Euro Summit (Heads of State level). The Unit also coordinates briefing for the Department’s officials/delegates (official level) to the Economic and Financial Committee (EFC) and the Eurogroup Working Group (EWG) (which prepares ministerial meetings)

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Covid-19 response

The Unit acts as a focal point both internally and externally on EU Developments, and is currently managing Ireland’s involvement in several aspects of the EU response to the Covid-19 pandemic, including the temporary Support to mitigate Unemployment Risks in an Emergency (SURE), one of three safety nets agreed by the European Council on the 23rd of April (the other two are the EIB Guarantee Fund and the ESM crisis support instrument) in a comprehensive package worth almost €540bn. Ireland’s involvement in some of these, most notably the SURE and EIB Guarantee Fund, will require primary legislation to give effect to our participation in the guarantee schemes they contain, and the Unit is liaising and co-ordinating with relevant Sections and Departments to progress this issue.

Eurogroup and ECOFIN meetings are convened monthly, except August. At ECOFIN level there are nine formal Councils (7 in Brussels with June and October being in Luxembourg) and two Informal Meetings in April and September based in the Member State that holds the rotating six monthly EU Presidency. The Eurogroup meets formally on eleven occasions during the calendar year. There can also be special Eurogroup meetings called, as needed, to deal with specific issues such as the consideration of the Draft Budgetary Plans of Eurozone Members (usually in October/November) and specific country issues.

Following the outbreak of the Covid-19 pandemic, the Working Method of the Council was amended by agreement with the Council Rules of Procedure being relaxed in response to the unfolding crisis The practical implications of this can be summarised as:

- no physical Council meetings envisaged for set periods; - no formal Council meetings envisaged for set periods; - videoconferences at ministerial level to take place as needed, with informal status; - relevant decisions to be adopted by written procedure; and - preparation and follow-up of videoconferences to take place in Coreper (meeting of EU Ambassadors).

This change has impacted both the scheduling of meetings and their scope and workload, with meetings being more frequent, and with smaller, more focussed agendas. This reflects the difficulty of achieving consensus on sensitive matters in these formats, and the time overhead involved with many items now being agreed by written procedure.

EU Ministerial meeting Priorities Presently, Croatia holds the role of EU President (to be followed by Germany for H2 2020). The Croatian economic and finance priorities are (i) The importance of strengthening Economic and Monetary Union (EMU); (ii) Agreement on the Reform Support Programme (RSP); (iii) Further deepening the Banking Union; (iv) Continued discussion on the European Deposit Insurance Scheme (EDIS) and Non-Performing Loans (NPLs); and (v) The Action plan to build a Capital Markets Union.

At Eurogroup, the focus is on issues affecting specific countries, structural reforms and the economic situation within the Eurozone. Mário Centeno, Portuguese Finance Minister, is the current President of the Eurogroup (current term expires July 2020). The work programme for H1 2020 includes (i)

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Economic policy coordination; (ii) Post-programme surveillance (Ireland was discussed at the meeting of 17 February) and (iii) Deepening of EMU (dealt with in Inclusive Format)

Domestic Engagement The Unit prepares material for the Minister for engagement with the Cabinet Sub-Committee on EU Affairs, and manages the Departments domestic engagement with the Oireachtas on behalf of the Minister, which comprises of a number of elements.

Oireachtas briefing material includes: - Briefing on the monthly ECOFIN agenda items to the Joint Committee on Finance and Public Expenditure and Reform. - Producing six monthly reports on EU Developments, published on the Oireachtas website. - Providing Information Notes on draft EU legislative proposals to the Oireachtas.

The Unit also acts as first point of contact for EU Enlargement Matters and Trade Agreements where departmental issues may arise.

EU semester process, EU economic governance issues and EU strategy

EU Strategy and EPC section is responsible for four main areas of work: 1. European Semester; 2. the Future of Europe, including proposals to deepen the Economic and Monetary Union; 3. attendance and management of the Department’s engagement at EPC (Economic Policy Committee) and EPC- EA (Euro Area formation); and 4. Management of the strategic element of Seconded National Expert (SNE) policy in the Department.

At national level, the EU Strategy and EPC section is responsible for managing the Department’s engagement in the EU semester process, the process of economic policy coordination for EU Member States, which is overseen by the Department of the Taoiseach. Following Ireland’s successful Programme exit, Ireland participated in the Semester cycle for the first time in 2014, under which we received a range of Country Specific Recommendations (CSRs) covering public finances, financial sector issues and structural reforms. The 2019 CSRs addressed tax policy, healthcare, training, productivity, sustainability and energy transition. The 2020 CSRs are expected to be presented in May 2020. The section also manages Ireland’s intervention in EU groups discussing a range of EU Semester documents, draft conclusions and contributes to the development of the EU Semester process.

At EU level, the EU Strategy and EPC section is responsible for managing the Department’s engagement on the Future of Economic and Monetary Union file. EMU encompasses the Banking Union and Capital Markets Union projects, reform of the European Stability Mechanism (ESM) and various fiscal issues which are all under the remit of other Units in the Department. This work follows on from the ‘Five Presidents’ Report’ (June 2015) and the ‘Reflection paper on deepening EMU’ (March 2017). Since then significant progress has been made, with Finance Ministers reporting to EU Leaders on progress every six months at the Euro summit.

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3.1.4.4 Permanent Representation of Ireland to the EU

Financial Counsellor – Susan O’Reilly

Gary Tobin Assistant Secretary General EU & International Division

Susan O'Reilly Counsellor Permanent Representation to the EU (Brussels)

Ambrose Murray Susan Evans Fiona Ralph Vacancy Financial Services Fiscal Attaché Budget Attaché Brexit Attaché Attaché

KEY POINTS

Five Department of Finance officials are seconded to Ireland’s Permanent Representation in Brussels with responsibility to:

• support the Minister and officials in the discharge of strategic objectives;

• monitor and advance, as appropriate, the Irish policy agenda across all dossiers of relevance to the Department of Finance;

• participate in meetings at Council (ministerial level), Coreper (Ambassador level) and Working Group level as appropriate;

 The team is also supplemented with a financial services attaché from the Central Bank.

DETAIL: The Permanent Representation in Brussels is dedicated to pursuing, securing and protecting Ireland’s interests and objectives in the EU. At the highest level is the European Council, a meeting of leaders, either Heads of State or of Government (HOSG), which sets EU strategic direction. The Taoiseach attends these meetings, which take place about six times a year. In addition, HOSG also meet in Euro summit format (EU27 or Euro area 19 format). The Euro summit provides guidance to ensure the smooth functioning of the Economic and Monetary Union.

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The Council of the European Union (‘the Council’) are meetings at ministerial level which take place in various formations i.e. finance, agriculture, justice etc. Matters related to Economic and Financial Affairs are discussed at the monthly meeting of ECOFIN attended by Ministers for Finance/Economy. Member States whose currency is the Euro meet in advance of ECOFIN, in the formation known as Eurogroup. The current president of Eurogroup is Mr. Mário Centeno, Finance Minister of Portugal. Ministers may also meet in Eurogroup Inclusive format i.e. EU27 Finance/Economy Ministers. This grouping is also presided over by Minister Centeno.

On a day to day basis, the Department is represented in Brussels by Perm Rep officials, supported as necessary by colleagues travelling from Dublin. Ireland is thus represented at every meeting, at every level in the Council, to make Ireland’s case and strengthen alliances to influence EU policy. One such example is the “Hansa” alliance – an informal network of small, similarly-minded, export oriented countries. Hansa is comprised of Ireland, Netherlands, Baltics (Estonia, Latvia, & Lithuania), and Nordics (Finland, Sweden, & Denmark). Meetings have been taking place at ministerial and senior official level for over two years. On the EU budget our alliance with net contributors (Austria, Belgium, Denmark, Finland, France, Germany, Netherlands and Sweden) is useful strategically and in terms of information-sharing.

The Department of Finance has a team of five staff who are seconded to the Permanent Representation. The team consists of a Financial Counsellor, one financial services attaché, one EU budget attaché, one fiscal (tax) attaché and a Brexit attaché.

On the instruction of the Minister, and in close consultation with the Department, the team in the Permanent Representation negotiates and lobbies on behalf of Ireland to ensure that Ireland’s interests are reflected in EU laws and decisions. In order to deliver this, the staff work closely with all other Member States in the Council, with the Commission, the European Parliament in particular Irish MEPs, other institutions, the Council Secretariat, and a wide variety of other stakeholders.

EU Policy Priorities The staff in the Permanent Representation take policy direction from the Minister. The relevant line Divisions in the Department have responsibility for proposing policy choices with respect to the above policy priorities, to the Minister. The team in the Permanent Representation provides early warning and intelligence to assist in the formulation of policy and participate in negotiations, as appropriate, to advance Ireland’s interests.

The current focus of the Department’s EU policy, as outlined above, is directed at promoting and protecting Ireland’s position in the following six areas, including managing the detailed negotiation of certain COVID related instruments;

•COVID-19: Represent Ireland at negotiations on new pandemic response instruments (including SURE and Recovery Fund and Reform Support Programme)

• EU/UK: Strategically manage the EU-UK agenda as it impacts on the Departments responsibility for economic and financial matters.

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• Governance: Ensuring that the outcome of the debate on the future of the Economic and Monetary Union (EMU) is aligned with protecting Ireland’s interests.

• Taxation: Protecting our national interests on Direct and Indirect EU taxation policy.

• Financial Services/Banking: Completing Banking Union, progressing the Capital Markets Union and European Fund for Strategic Investments, advancing Sustainable Finance and Fintech.

• EU Budget: Promoting and protecting our key national interests on the budget, in what we receive, what we contribute and how the budget is managed. Finalising the negotiations on the Multiannual Financial Framework 2021-2027, and ensuring a robust agriculture budget.

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3.1.5 Banking Division

The briefing prepared by Banking Division provides a high level introduction to the issues relevant to the Division. More detailed and in depth analysis of any of the topics can be provided if needed.

DESCRIPTION: This Division deals with policy for the banking sector, credit and payments regulation, financial services consumer protection policy, small/medium business access to credit and mortgage arrears. The Division is also responsible for the Department’s work on financial stability, Central Bank powers and functions, and NTMA managed State funding and investment strategies (e.g. NewEra, ISIF).

Assistant Secretary General – Emma Cunningham

Irish Banking Sector The Division as a whole works to monitor the performance of the Irish Banking sector and the challenges facing the sector. The size and complexity of the Irish banking landscape materially changed in light of Brexit, with the increase in sector size primarily driven by the expansion of international banks – Irish banks’ balance sheets stand at €535bn at end Q3 2019.

Impact of Covid-19 Resolving the impacts of Covid-19 is the most immediate and significant challenge facing the Irish Banking sector, which at a high level includes:  Transitioning customers from payment breaks [over 190,000 to date] back to sustainable repayment terms; and  Providing credit to support economic recovery across the economy.

Forbearance measures The bank and non-bank sector acted in a coordinated and proactive manner to provide payment breaks to customers in difficulty. This has allowed customers to defer payments without negative Central Credit Register impacts or the classification of their loans as non-performing. In time, the customer must pay the full principal and related interest costs. This forbearance approach ensures that scarce resources are focused on those that have experienced significant income shocks.

The Central Bank, Department of Finance, and the financial sector are fully aware that the extension of these payment breaks is comparatively straightforward relative to their unwinding in due course. Based on experience over the past decade, returning borrowers to paying their loans following income shocks is very difficult but learning from the past, a condition of these payment breaks is a high degree of communication between the lender and borrower.

Economic Recovery The ability to return as many customers as possible to sustainable repayment terms will directly impact on banks’ ability to support economic recovery. To date, the bank (and non-bank) sector have strongly signalled their intention to support economic recovery and to utilise Government supports to assist their customers (e.g. credit guarantees, SBCI schemes, with more detail below). Legislation is required Page 72 of 166

to deliver the recently announced €2billion Covid Credit Guarantee Scheme and will be brought forward by the Minister for Business, Enterprise and Innovation. In parallel with the drafting of the legislation and its passage through the Houses of the Oireachtas, the Department of Business, Enterprise and Innovation, the Department of Agriculture, Food and the Marine, the Departments of Finance and Public Expenditure and Reform, and the Strategic Banking Corporation of Ireland will work to put in place arrangements to ensure that the Scheme can be implemented as soon as possible after the enactment of the legislation.

Other challenges to the banking sector The immediacy and significance of the impact of Covid-19 on the bank sector should not distract from other interlinked challenges also facing the sector, including:  Lower for longer interest rate environment;  Geopolitical and macroeconomic uncertainties, including Brexit;  Ever greater competition from Fintech companies;  Increase in cyber risks; and  Digitisation-cost of technology transformation.

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3.1.5.1 Policies on mortgage arrears, mortgage regulation, consumer issues SME credit & lending, the Strategic Banking Corporation of Ireland and the Credit Review Office

Principal Officer: John Palmer

Emma Cunningham Assistant Secretary General

John Palmer Principal Officer Consumer Protection Policy and SME Access to Credit

Clare O'Brien Richael Duffy John Fitzpatrick Eric Gargan Gráinne Goggin Assistant Assistant Assistant Principal Assistant Assistant Principal Principal Principal Principal SME Credit Financial Mortgage Services and SME Access Mortgage Arrears and Lending - non bank Regulation Consumer to Credit funding Issues

 KEY POINTS  Ensuring that the appropriate structures and protections for consumers are in place is an ongoing challenge. Consumer protections are vital to equalise the advantages that financial services firms have relative to retail consumers. However, it is important to get the balance right as excessive and inefficient levels of consumer protection could lead to consumers paying higher costs for financial services (in terms of interest rates and charges). It could also lead to unequal access to financial services (as risk averse firms will only extend credit/services to wealthy or less risky consumers thus impeding social mobility).  Residential mortgage new lending continues to grow – from €8.7 billion in 2018 to €9.5 billion in 2019 - though Covid-19 will have an impact on mortgage lending in 2020. The Central Bank’s macro prudential rules are now a permanent feature of the mortgage market and, in recent years, the Bank has also made a number of changes to its Consumer Protection Code in order to improve lender transparency in setting variable mortgage rates and to help consumers make savings on their mortgage payments, particularly through measures to promote switching.  Legacy consumer protection failings are still relevant; for example, while the Central Bank has produced its final report on the supervisory phase of the tracker mortgage examination, complaints are still being processed by the Financial Services and Pensions Ombudsman (FSPO) and there are still outstanding enforcement investigations. Also, newer forms of consumer finance (such as PCPs) are becoming increasingly popular and it will be important

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to ensure that the consumer protection framework also applies to these new and evolving areas of consumer finance.  SME access to credit from bank and non-bank sources remains important for economic recovery. The key objectives for 2020 in relation to SME Credit and Lending/Finance for Growth are to ensure that viable SMEs continue to access appropriate finance at a reasonable cost from both bank and non-bank sources and to put in place appropriate supports to assist SMEs deal with the Covid-19 crisis as well as to ensure that we continue to prepare for the impact of Brexit on SMEs access to credit.

DETAIL:

This section is largely focused on ensuring that the consumer’s interests are protected in the financial services industry. The main issues arising in this area are as follows:

Consumer Protection Policy The focus is on promoting consumer protection in financial services at domestic and EU level. The Department maintains close links with the Financial Services and Pensions Ombudsman (FSPO) and the Central Bank – both of these bodies have a role in consumer protection and are bodies under the aegis of this Department. The Competition and Consumer Protection Commission under the Department of Business, Enterprise and Innovation, has a broad mandate for the enforcement of competition and consumer protection law and its remit includes financial education.

Residential mortgage market and other issues New mortgage lending The level of new residential mortgage lending, which reached an annual low of €2.5bn in 2013, continues to increase. From a level of €5.7bn in 2016, it has increased to €8.7bn in 2018, and €9.5bn in 2019. However, Covid-19 will likely have an impact on the scale of mortgage lending in 2020 - the quarter 2 mortgage lending data will help form a view of the likely scale of the impact.

Mortgage interest rates For some time now, Irish mortgage rates have been higher than the Eurozone average. The latest available published Central Bank data (which is for March 2020) indicates that the weighted average interest rate on all new mortgages agreed in Ireland stood at 2.80%; while this was down 20 basis points on the same point in 2019, the average rate for the euro area was 1.31%. (This is a differential of circa 1.5%; however, if the comparison is made on an APRC basis, which seeks to capture all the costs associated with taking out a mortgage, the differential between the Irish and euro area average is smaller at circa 1.15%).

Setting mortgage (and other) interest rates in individual markets is a complex matter influenced by various factors and characteristics of the various national mortgage, banking (including capital requirements), housing and credit markets (other factors, such as demographics and Eurozone monetary policy, will also be relevant) and how they evolve over time.

From a legislative and regulatory position, there are no controls on the setting of mortgage interest rates in Ireland and it is a matter for individual lenders to determine their own interest rates having

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regard to their costs, competitive situation, level of demand and other relevant considerations. Nevertheless, the Central Bank has, without interfering with the market mechanism for determining interest rates, introduced a number of regulatory measures in its Consumer Protection Code over recent years that are designed to improve the variable interest rate setting process by making it more transparent and by also helping consumers make savings.

While the exit of some lenders from the market in the wake of the financial crash has resulted in a more concentrated mortgage market, there are nevertheless an increasing number of mortgage options now available for new borrowers and for existing variable rate borrowers who are considering switching their mortgage, in particular if they are willing to consider switching to a fixed interest rate option. The level of switching in the market has increased in recent years from around 5% of mortgage drawdowns in 2015 to around 12% in 2019.

Under the EU Bank Restructuring Plans, AIB and PTSB had to provide funding for public awareness campaigns (facilitated through the Department of Finance) to raise awareness and promote customer switching of financial products. Two phases of a Switch Your Bank campaign have been delivered to date, with advertisements running on TV, radio and online supported by a dedicated website, switchyourbank.ie. It is proposed that the remaining funds (approx €280,000) will be used to carry out research on identifying and developing tools which will result in higher levels of switching.

Macro prudential policy on residential mortgage lending In February 2015, the Central Bank introduced macro-prudential rules with loan-to-value (LTV) and loan-to-income (LTI) limits on residential mortgages provided by regulated financial service providers. The Central Bank conducted an extensive review of these rules and decided to make no adjustment to the current measures in its most recent annual review at the end of last year.

Tracker mortgage examination The final report of the supervisory phase of the Central Bank Tracker Mortgage Examination was published in July 2019. It outlined that over 40,000 customer accounts were impacted by lender failings and that almost €700 million of redress and compensation was paid to impacted borrowers. The Central Bank is continuing to work on enforcement investigations and action arising from the tracker issue.

The Financial Services and Pensions Ombudsman (FSPO) has 1,205 tracker complaints on hand (end of March 2020).

Directive on Credit Servicers, Credit Purchasers and the Recovery of Collateral (NPL) Directive The Consumer Protection (Regulation of Credit Servicing Firms) Act 2018 expanded the definition of a ‘credit servicing firm’, in the 2015 Act, to include entities that hold the legal title to credit. As of June 2020, 33 firms are listed as having transitional authorisation by the Central Bank, in addition to 7 fully authorised credit servicing firms. The 2018 Act brought entities that acquire legal title into the regulatory framework.

At a European level, Council agreement was reached late last year on the proposed Directive on Credit Servicers, Credit Purchasers and the Recovery of Collateral (“NPL Directive”). However, the Page 76 of 166 agreed text by the Council is not consistent with the Consumer Protection (Regulation of Credit Servicing Firms) Act 2018. The Directive’s requirement that the purchasers of performing credit must be regulated is consistent with 2018 Act but the lack of a requirement for the regulation of purchasers of non-performing credit is not consistent with the 2018 Act. Trilogues with the European Parliament are due to commence later this year but based on the current text, the 2018 Act will need to be amended when we transpose the Directive.

Mortgage Arrears There has been an overall decline in mortgage arrears in recent years but there was a continuing significant portion of accounts classified as being in long-term arrears.

On 18 March 2020, members of the Banking and Payments Federation Ireland (BPFI) introduced a 3- month payment break, since extended to 6 months, on mortgages and other loans for personal borrowers and business customers directly impacted by Covid-19. At end May, 78,000 such payment breaks had been granted to mortgage holders. The Central Bank has communicated its expectations to the BPFI outlining that at the end of the agreed payment break, borrowers should be given the option to either (i) repay the loan within the remaining term or (ii) extend the term of the loan. It has stated that this choice should apply for all loans, including mortgages, and the impact of both options on the overall cost of credit and monthly repayments should be fully explained to the customer, noting that borrower circumstances and the appropriateness of each option will differ. As part of their supervisory work, the Central Bank will monitor compliance with this expectation and take action, where their expectations are not met.

The impact of Covid 19 on arrears will only become apparent when the payment breaks begin to expire in September.

Moneylending Moneylenders are licensed and regulated by the Central Bank under the Consumer Credit Act 1995. Unlicensed moneylending is an offence subject to investigation and summary prosecution by an Garda Síochána, or on indictment by the DPP.

In May 2019, the Department of Finance launched a Public Consultation process seeking views from stakeholders. The submissions received are broadly in favour of introducing an interest rate restriction.

Department officials have reviewed the submissions and are in the process of completing a policy Redacted proposal under Section 29(1)(a) of the FOI Act 2014. Central Credit Register The Central Credit Register (CCR) was established under the Credit Reporting Act 2013. It is operated by CRIF Ireland Ltd, on behalf of the Central Bank. Following an amendment contained in the Markets in Financial Instruments Act 2018, a difficulty in relation to finance houses engaging with the CCR was rectified. In relation to Covid-19, the Central Bank has indicated that any payment break agreed with the lender will not be reported to the CCR.

Page 77 of 166 Personal Contract Plans (PCPs) PCPs have become an increasingly popular form of asset-based finance used for the purchase of motor vehicles. Legislation is currently being drafted to provide that all the providers of credit, hire purchase, PCP and consumer hire agreements will have to be authorised by the Central Bank.

SME Access to Credit Policy in relation to SMEs is led by the Minister for Business, Enterprise and Innovation. However, this Department works very closely with the Department of Business, Enterprise and Innovation in relation to SME access to credit. This will be a central issue as SMEs recover from the Covid pandemic. To 12 June, nearly 36,000 SMEs have availed of payment breaks on their loans and have been supported by the range of Government supports, such as the Temporary Wage Subsidy Scheme, tax measures and rates forbearance. However, it is anticipated that businesses will require credit as they reopen following Covid-related closures and also face the challenges of Brexit.

Strategic Banking Corporation of Ireland (SBCI) The Strategic Banking Corporation of Ireland (SBCI) was established by the Strategic Banking Corporation of Ireland Act 2014. The Strategic Banking Corporation of Ireland (SBCI) delivers financial supports to Irish SMEs and seeks to address failures in the Irish credit market. The SBCI does not lend directly to SMEs, but rather provides funding through its finance partners (known as ‘on-lenders’) both bank and non-bank.

The SBCI began lending in March 2015. To the end of December 2019, there has been €1,435 million of SBCI supported lending. The SMEs who received SBCI finance are from all sectors of the Irish economy and have a wide geographical spread.

It was announced on the 2 May that a revised Credit Guarantee Scheme would be developed, to make €2bn worth of guarantees to support lending to SMEs for terms ranging from 3 months to 6 years available to SMEs. Legislation is being prepared for this Scheme.

In recent years, a key focus has been the provision of credit though risk sharing schemes. A €300 million Brexit Loan Scheme was launched by SBCI in March 2018, funded by the Department of Business, Enterprise and Innovation (DBEI) and the Department of Agriculture, Food and the Marine (DAFM), uses a partial counter guarantee from the European Investment Fund (EIF). It has been repurposed as the Covid-19 Working Capital Scheme and it is in the process of being expanded by €125m.

The €300m Future Growth Loan Scheme, which also benefits from an EIF counter-guarantee, was developed by the SBCI in conjunction with DBEI and DAFM. The Scheme provides loans for eight to ten years through BOI, AIB, Ulster Bank and KBC. 804 SMEs have progressed to sanction at finance provider level to a total value of €157m. Due to its success, BOI and AIB have exhausted their allocation of funds. While a €200m increase in the Scheme was announced in April, it was subsequently agreed with the EIB that it would be increased by €500m. However, a change to the European Investment Fund Act 2018 is required for any increase beyond €200m and the Department of Business, Enterprise and Innovation says that the necessary legislation will be available for passage through the Oireachtas at the first opportunity.

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In relation to risk sharing schemes work is underway to address a legal ambiguity. One on-lender asked if SBCI requires authorisation as an insurer to offer guarantees. The AGO advised that an amendment to Insurance legislation is required. This amendment is currently being drafted.

Credit Review Office The Credit Review Office provides an independent review process for SMEs, sole traders and farm enterprises that have had requests for credit refused or had existing credit facilities reduced or withdrawn in respect of loans up to €3 million. AIB, BOI, Ulster Bank and PTSB are the participating institutions.

The Credit Reviewer, a Government appointee (currently Mr John Trethowan), provides annual reports to the Minister containing commentary on the SME credit and lending environment. Since its inception in April 2010, the CRO has overturned over €57.8m of bank refusals (representing over 54% of cases that have been appealed to the office) and protecting or creating over 3,939 jobs. Mr Trethowan has indicated that he is to step down from the role at end of 2020.

Credit Review Office Legislation The CRO gets its powers under the NAMA Act 2019 and SI 127/2010. Upon the advice of both the Attorney General’s Office and the Department’s Legal Unit and the previous Minister’s approval, work has commenced to draft Heads of a Bill to put the CRO on a more stable statutory footing due to the limited scope of the SI. New legislation will also allow the Department the possibility to adapt the CRO as necessary in changing operating environments

Access to Credit and Credit Demand Since 2012, the Department has commissioned biannual SME credit demand surveys. Key trends evidenced by the survey show that the demand for credit remains moderate with the main reason for low demand is that credit is not required reflecting the strong financial performance of SMEs. AIB and BOI agreed to extend funding of this for a further 3 years in 2019.

Other non-bank finance initiatives Crowdfunding A draft EU Regulation to regulate crowdfunding (currently unregulated in Ireland) was agreed at a political level in December 2019, and it is expected that it will be published in the Official Journal of the European Union in Q3 2020, meaning the Regulation would take direct effect in Ireland twelve months later. The aim is to ensure regulatory consistency across the EU and to help improve access to alternative forms of finance, while it is expected that investors will benefit from greater consistency in rules and protections. The Regulation seeks to protect consumers who invest via crowdfunding platforms. This Regulation establishes a European label for investment and lending-based crowdfunding platforms that enables cross-border activity.

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3.1.5.2 Financial Stability, Central Bank and NTMA policy section

Principal Officer: Eoin Dorgan

Emma Cunningham Assistant Secretary General

Eoin Dorgan Principal Officer Financing the State

Brendan Coogan Fidelma Cotter Bláithín nic Giolla Rua Assistant Principal Assistant Principal Assistant Principal Financing the State. NTMA Central Bank Policy and Financial Stability Liaison Legislation

KEY POINTS  Monitoring and analysing risks to financial stability, including the operation of the Financial Stability Group’s Covid-19 Crisis Coordination Group.  Relationship with the Central Bank, including financial regulation levies.  Drafting Central Bank (Amendment) Bill – To implement improvements in Banking Culture.  Rapid increase in the State’s already high debt levels.  NTMA related functions including National Debt management policy, Ministerial consents/guarantees for State borrowing, and Irish Sovereign Green Bonds.  Administration of the Rainy Day Fund – Drawdown and future contributions.

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DETAIL:

FINANCIAL STABILITY

Role in Financial Stability While the Central Bank has statutory responsibility for safeguarding financial stability, the Department supports the Minister by monitoring and analysing risks to financial stability and assisting in the development of mitigants and policies to address potential financial stability risks. As part of its role, the Department serves as Secretariat to the Financial Stability Group (FSG - see below). The FSG and its Covid-19 sub-group has coordinated financial sector policy responses to Covid-19 between the Department, the Central Bank, and the NTMA.

Financial Stability Group (FSG), including the Department, the Central Bank, and the NTMA The core objective of the FSG is to monitor and assess economic and financial stability risks and oversee financial crisis management. The FSG membership includes:  Department of Finance - Secretary General, Assistant Secretary for Banking and Financial Stability, Assistant Secretary for Funds, Insurance, Markets and Pensions and the Head of the Shareholder and Financial Advisory Division.  Central Bank of Ireland – Governor, Deputy Governor Central Banking, and Deputy Governor for Financial Regulation  NTMA - CEO and Director, Funding and Debt Management

In normal times, the FSG meets on a bi-monthly basis and is chaired by the Department but it is currently meeting fortnightly. The FSG allows for coordination, sharing of information and joined-up thinking across the three agencies to manage policies and risks to the State’s financial stability.

Crisis Coordination Framework – Covid-19 and Brexit A Crisis Coordination Framework was developed by the FSG and it details procedures for responding to a potential or actual crisis event. The Framework has been invoked into “Activation” to coordinate policy actions and share information between the three bodies on the impacts of Covid-19 on the financial system and the wider economy. In 2019, the Framework was invoked on two occasions into its initial “Readiness state” in response to a heightened risk of a sudden no-deal Brexit.

International Monetary Fund – Financial Sector Assessment Programme The IMF was scheduled to conduct a Financial Sector Assessment Programme (FSAP) on Ireland commencing in Q3 this year – this will likely begin next year depending on Covid-19 developments. The FSAP is a standard in-depth assessment of the financial sector, which primarily focuses on risks and vulnerabilities and occurs every 4/5 years. The Department has been working with the Central Bank to adopt a common position on the areas of focus.

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Central Bank Policy and Legislation Central Bank Policy The Department is responsible for advising the Minister on his/her powers and functions as set out in the Central Bank Acts. In practice, this means preparing submissions on Ministerial consents, approvals and consultative functions. It should be noted that the Ministerial powers are relatively limited given the independence of the Central Bank under national legislation and more importantly, under EU Treaties.

A Ministerial decision that will arise in the short term will be appointments of new members to the Central Bank Commission (a Public Appointments Service selection process has concluded on which Ministerial decisions are required – a submission will be made to you on this matter).

Central Bank and Covid-19 Similar to the Civil Service, the Central Bank is primarily working remotely, which naturally presents challenges. The majority of the Department – Central Bank interaction on Covid-19 takes place via the FSG sub-group set out above. Overall, the Central Bank and the Department have been working well together in response to the Covid-19 crisis, which has led to positive initiatives such as payment breaks for those in need, EBA rules on such forbearance measures that do not disadvantage Irish customers or banks, and the identification and resolution of emerging issues.

Central Bank – Stakeholder Interaction Similar to many other jurisdictions, there is a natural tension between the regulator and regulated firms. The Department encourages the Central Bank to engage with its key stakeholders such as the Oireachtas, the public and regulated entities, as although independent in its functions, the Central Bank should be accountable for its actions. In recent years, the Central Bank has increased these engagements and further increases are to be encouraged.

Central Bank (Amendment) Bill – Banking Culture Following approval by the previous Government, Heads of a Central Bank (Amendment) Bill are currently being drafted. The Heads of the Bill will provide for the introduction of an Individual Accountability Framework (including the Senior Executive Accountability Regime) to drive a better culture in the financial sector. The Department is engaging with the Attorney General's Office in order to prepare the draft Heads for submission to Government and to ensure they strike the correct balance between additional powers for the Central Bank and the protection of individuals' constitutional rights. A Ministerial submission will be made to you in due course in order to ensure the proposals are in line with Government policy and your approval has been received.

Industry funding of the costs of financial regulation The Central Bank raises revenue for its financial regulation activities through levies on financial services firms, with the remainder coming from the Central Bank’s surplus income (which would otherwise go to the Exchequer). In 2015, a joint consultation undertaken between the Department of Finance and the Central Bank aimed to examine the appropriateness of implementing a funding model that would move from partial funding (which existed at the time) to a model that covered the full cost of regulation. The then Minister for Finance agreed (Minister Noonan in 2017) to a phased move towards 100% industry funding contingent on the Bank agreeing to cost control measures and greater

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transparency. Most financial institutions with the exception of Credit Unions (which will move to 50%) will achieve 100% contribution by 2025.

The move towards 100% industry funding of financial regulation, is in line with many other jurisdictions and regulatory bodies, and is in line with the user pays principle. However, concerns have been raised by the representative bodies of the Credit Unions in relation to the levy on their members, which led to the decision to only apply 50% industry funding to the sector.

Financing the State and NTMA liaison

Role in Financing the State The Department deals with high-level National Treasury Management Agency (NTMA) policy matters, including monitoring the operation of the NTMA and its constituent entities (National Development Finance Agency, State Claims Agency, NewEra, and Ireland Strategic Investment Fund) and advises the Minister on the use of his/her powers under the NTMA Acts. Since inception, the NTMA has operated under a Ministerial delegated function in managing the National Debt but the Minister can also issue guidelines on matters such as debt management and directions on specific issues such as the use of the proceeds from the disposals of the State’s shareholdings in Banks. Proceeds from previous disposals have flowed to the Exchequer to reduce the State’s debt levels.

Focus of Debt Management Policy While significant progress has been made over the past number of years in bringing the public finances onto a more sustainable footing, the absolute level of debt remains high at over €200 billion, and is increasingly rapidly in order to respond to Covid-19. The current debt levels (relative to GNI*) are high relative to our EU peers. This level of debt leaves the State exposed to future increases in interest rates, which would be a first draw on Exchequer funds and thus impact on the amount of Exchequer funds available for public expenditure and tax rate decisions.

Ireland Strategic Investment Fund – Pandemic Stabilisation and Recovery Fund As part of the previous Government’s preparation for the recovery from Covid-19, ISIF’s remaining uncommitted resources of €2 billion were allocated to a Pandemic Stabilisation and Recovery Fund. The Fund will invest in strategically important medium and large enterprises to assist them meet the challenge of Covid-19 and it will invest:  on a commercial basis for an economic return (in line with statutory requirements);  across a range of instruments from senior debt, hybrid instruments to equity; and  to leverage additional capital from existing shareholders and banks, from potential new co- investors and from European sources (such as the European Investment Bank).

National Surplus (Exceptional Contingencies) Reserve Fund (Rainy Day Fund) Following a transfer from the Ireland Strategic Investment Fund under the above Act in November last year, the Rainy Day Fund is currently valued at €1.5 billion. As part of the response to Covid-19, the previous Government agreed to drawdown these funds to the Central Fund; i.e. they have already been factored into the budget numbers. The formal drawdown of these funds will require a Government decision and resolution of Dáil Eireann – for which a submission is already prepared for your approval.

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Under the Act, the Minister for Finance is required to pay €500 million from the Exchequer into the Fund in each of the years: 2019, 2020, 2021, 2022 and 2023. However, a Dáil Resolution in December 2019 authorised the Minister for Finance not to pay the 2019 contribution by reason of the exceptional circumstances which the UK’s exit from the EU presented. Government must consider whether payments should be made this year and in the coming years in light of Covid-19.

Borrowing, guarantees and shareholding functions Financing the State section is responsible for the preparation and submission to you, as Minister for Finance, of consent requests from State Bodies for (i) borrowing and (ii) state guarantees that are required under statute. The State Bodies covered are extensive and these requests will likely increase significantly given the impact of Covid-19 on these bodies.

A key borrowing request currently being dealt with (that predates Covid-19) is Irish Water. This follows on from the previous Government’s decision to replace Irish Water’s more expensive commercial borrowing with capital from the Central Fund. The Department completed phase 1 of this replacement through a capital contribution of €758 million in December 2019. Phase 2 of the replacement is a facility agreement between the Minister for Finance and Irish Water for existing and future borrowing related to non-domestic sector capital investment (approx. €1.02 billion to cover 6+ years). Phase 2 is ongoing with an intention to transfer €282 million by end-June. Phase 3 requires an amendment to the NTMA Acts to provide a Working Capital facility to Irish Water under the NTMA’s Central Treasury Service (CTS), which is being advanced through an amendment in a Department of Communications, Climate Action, and Environment Bill which is awaiting publication.

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3.1.5.3 Policies on EU Banking and Payments

Principal Officer: Barry Harrington

Emma Cunningham Assistant Secretary General

Barry Harrington Principal Officer EU Banking and Payments

Matthew Jones Timmy Hennessy Deirdre Nic Ginnea Assistant Principal Assistant Principal Assistant Principal Banking Union - Resolution & Banking Union - Capital Recovery; Depositor Requirements; Covered Payments Policy Protection Bonds; Banking Analysis

KEY POINTS  Banking and Payments policy is increasingly determined at an EU level. In the payments policy area, a significant EU Directive substantially transposed in 2018 is still taking effect. The revised Payment Services Directive (PSD2) brings new services under regulation and requires stronger security standards for accessing accounts and making payments. The real effects are expected to be seen over the course of 2020.  In the EU Banking policy area, the ‘Risk Reduction Measures’ Package is currently being transposed into national law. This is a package of reforms proposed by the Commission in November 2016 aims to update and amend CRR, CRDIV and BRRD. Member States are required to transpose the Directives by 28 December 2020.  In response to COVID-19, the European Commission published a “Quick fix” Capital Requirements Regulation on 28 April 2020 which includes some targeted changes to maximise the capacity of credit institutions to lend and to absorb losses related to the Coronavirus pandemic, while still ensuring their continued resilience.  Also in the EU Banking policy area, negotiations continue on the development of European Deposit Insurance Scheme (EDIS) to protect depositors, and a backstop to the Single Resolution Fund (the ‘Common Backstop’).  Finally, the Covered Bond Package is currently being transposed, which will for the first time introduce a common framework for covered bonds across the EU.

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Payments Policy

Payments Policy The Department is primarily responsible for the legislation governing payments. As the EU continues to create a single market for payments, this includes negotiating and transposing EU Directives and Regulations on payments. The payments policy section also ensures that the role of the Minister is acquitted in respect of commemorative and collector coins. An Indecon report commissioned by the Department of Finance and published last year shows that Ireland has made very significant progress in recent years in moving from a cash-intensive economy, with a rapid increase in electronic payments. There has been a significant increase in the number of payment companies doing business here in recent years.

Payment Accounts Directive The EU Payment Accounts Directive was transposed in September 2016. It facilitates comparison of fees on payment accounts and payment account switching. It also introduced payment accounts with basic features for consumers. These accounts are aimed at anyone who does not already have a payment account in the State and are free of charge for everyday banking for the first year. They remain free of charge on a year-by-year basis for up to 5 years where lodgements to the account do not exceed the minimum wage rate for a full time worker. An overdue Commission report on the application of the Payment Accounts Directive is expected later this year, which may be accompanied by a legislative proposal.

Payment Services Directive The revised EU Payment Services Directive (PSD2) was transposed in January 2018. PSD2 contains rules for payment services, which are intended to make payments within the EU easy, efficient and secure. PSD2 enhances consumers’ rights by refining standards for service provision, complaints handling, and provision of information on payments.

In addition, PSD2 extends the already existing provisions by opening the EU payment market to companies offering consumer or business-oriented payment services based on access to payment accounts (sometimes known as Open Banking). Two new categories of payment services came under regulation from September 2019; payment initiation services and account information services.

The other major change is that, when accessing a payment account or making an electronic payment, payers will be required to establish their identity through two-factor authentication. Two-factor authentication means two of the three elements of knowledge, possession, and inherence; a combination of something you know, something you have and something you are. The standards for what is known as ‘strong customer authentication’ came into force for accessing payment accounts on 14 September 2019.

In response to industry concerns about the readiness to apply strong customer authentication to e- commerce transactions, the European Banking Authority allowed additional time for firms to implement strong customer authentication for e-commerce card-based payment transactions. The final deadline for compliance is now 31 December 2020. Redacted under Section 33(1) (d) of the FOI Act 2014. Page 86 of 166 EU Consultation on a future Retail Payments Strategy On 3 April, the European Commission launched a consultation on a retail payments strategy for the EU. It is open for views until 26 June 2020. The outcome of the consultation will help the European Commission prepare a retail payments strategy to publish in Q3 2020. This will most likely result in a new legislative proposal on payments.

An Post An Post is authorised by the Minister for Finance under section 67 of the Postal and Telecommunication Services Act 1983 to offer specified banking and financial services. It provides payment accounts, foreign exchange and some other payment services under this authorisation.

Redacted under Sections 36(1) (b)&(c) and 40(2)(e) of the FOI Act 2014.

EU Banking Policy In response to the financial crisis, the European Commission pursued a number of initiatives to create a safer financial sector for the Single Market. These initiatives form a Single Rulebook for all financial actors in the EU Member States. Specifically, its rules include capital requirements for banks, rules for managing failing banks and improved deposit guarantee schemes: • Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD IV) • Bank Recovery and Resolution Directive (BRRD) • Deposit Guarantee Schemes Directive (DGSD) and European Deposit Insurance Scheme (EDIS)

The EU institutions agreed to establish a three-pillared Banking Union compromised of: • a Single Supervisory Mechanism (SSM) • a Single Resolution Mechanism (SRM) including a Single Resolution Fund (SRF) • European Deposit Insurance Scheme (EDIS)

While the first two pillars are already in place, are fully operational and are underpinned by the Single Rulebook, a common system for deposit protection has not yet been established. These policy areas are frequently the subject of discussion at Eurogroup and Ecofin level.

Risk Reduction Measures - transposition Currently one of the main areas of work in the EU Banking Policy Unit is the transposition of the ‘Risk Reduction Measures’ (RRM) Package. These measures amend the Capital Requirements Directive

Page 87 of 166 IV and Capital Requirements Regulation as well as the Bank Recovery and Resolution Directive and the Single Resolution Mechanism Regulation. The deadline for transposition is December 2020.

Regulatory treatment of Non-performing loans post COVID-19 There is a detailed regulatory framework at EU level in place for the banking sector which establishes how to classify non-performing loans and the capital that must be set aside for loans that turn non- performing.

In response to COVID 19, the European Central Bank and the European Banking Authority issued statements which allow limited regulatory flexibility to ensure that the banking sector can support their customers who experience repayment difficulties due to the COVID-19 Pandemic.

This is an area that will require close attention due to the volumes of payment breaks granted to mortgage customers and the likely increase in non-performing loans that will emerge.

European Deposit Insurance Scheme In November 2015, the Commission proposed to set up a European Deposit Insurance Scheme (EDIS) for bank deposits in the euro area. The EDIS proposal builds on the system of national deposit guarantee schemes. Negotiations to establish EDIS have been ongoing since 2015 with limited progress.

At December 2019 Eurogroup meeting, Ministers reviewed a roadmap for the completion of Banking Union, requested that more detailed work be carried out on the mutually acceptable elements of the roadmap, and to move towards a completed Banking Union in the new institutional cycle. Eurogoup established a High Level Working Group (HLWG) on EDIS to progress negotiations. The HLWG on EDIS is attended by EFC members, in Ireland’s case Mr Gary Tobin (Assistant Secretary, EU and International Division)

Redacted under Section 33(1)(d) of the FOI Act 2014. Common Backstop to the Single Resolution Fund (SRF) The Single Resolution Fund (SRF) is a fund established by the EU for resolving failing banks in the context of the Banking Union. It is funded by credit institutions (banks) and certain investment firms in the 19 participating Member States within the Banking Union.

The SRF will be built up over eight years (2016-2023) and shall reach the target level of at least 1% of the amount of covered deposits within the Banking Union by end 2023. In the event that the SRF is depleted, the European Stability Mechanism (ESM) can act as a backstop and lend the necessary funds to the SRF to finance a resolution. Redacted under Section 33(1) (d) of the FOI Act 2014.

Page 88 of 166 It is possible that primary legislation would be needed to give effect to some of the necessary amendments which would allow for the early introduction of the common backstop. This is being coordinated as part of a wider package of ESM reforms which is being undertaken by the EU and International Division.

Liquidity in Resolution (LIR) Negotiations are also ongoing on how to manage liquidity needs in the event of bank resolution. If an institution is resolved, it may have sufficient capital to operate, but insufficient liquidity to fund its day- to-day operations. Redacted under Section 33(1)(d) of the FOI Act 2014. Covered Bonds Covered Bonds are debt securities which are collateralised against or "backed" by a pool of assets (called a cover pool) such as residential mortgages, commercial mortgages or public sector loans. Covered Bonds are generally referred to in Ireland as Asset Covered Securities (ACS), and are legislated for by the Asset Covered Securities Act 2001 and the Asset Covered Securities (Amendment) Act 2007.

At EU level, agreement was agreed on a Covered Bond Package in late 2019. It is currently being transposed by the Department. Ireland’s ACS legislation is well developed however, industry participants have requested that amendments be made to the existing ACS primary legislation, these will be considered during the transposition process.

Page 89 of 166 3.1.6 Funds, Insurance, Markets & Pensions Division

The briefing prepared by Funds, Insurance, Markets & Pensions Division provides a high introduction level to the issues relevant to the Division. More detailed and in depth analysis of any of the topics can be provided if needed.

DESCRIPTION:

The Funds, Insurance, Markets & Pension (FIMP) Division is responsible for the development of domestic and EU/International policy and legislation in relation to the financial services sector, with the exception of the banking sector, and manages the transposition of the non-Banking EU legislation. The primary functions relate to Funds, Insurance, Markets, Pensions policy and Anti-Money Laundering/Combating the financing of terrorism and the proliferation of weapons of mass destruction (AML/CFT) policy.

A significant amount of the financial services legislative and regulatory framework is at an EU level. The Division engages at different EU committees and the Department has two Financial Services Attachés in the Permanent Representation in Brussels. There is extensive engagement with DG FISMA (the EU Commission Directorate-general for Financial stability, financial services and capital markets union), the European Supervisory Authorities and other member State Finance Ministries and Central Banks/National Regulators. Assistant Secretary General Michael J. McGrath is the vice-Chair of the European Council’s Financial Services Committee (FSC) and is also a member of the Pensions Authority.

Some of the policy issues that are handled by the Division also rely on the active engagement of other Government Departments such as Business, Enterprise and Innovation (DBEI), Employment and Social Protection (DEASP), and Justice and Equality (DJE), especially so in matters of Insurance and pensions policy, matters relating to the markets and a range of matters relating to AML/CFT.

Assistant Secretary General – Michael J. McGrath

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3.1.6.1 National and EU policy and legislation in relation to Insurance

Principal Officer: Cathal Sheridan

Michael J McGrath Assistant Secretary General

Cathal Sheridan Principal Officer Insurance

Michael Taggart Shauna Preston Assistant Principal Assistant Principal Insurance Insurance

KEY POINTS

 Covid 19 – continuity in the provision of insurance and other associated issues  Brexit – Continuity of insurance policies at the end of transition period  Cost of Insurance Working Group (CIWG) – currently chaired at Ministerial level by the Minister of State at the Department of Finance (In order to make progress in this area, buy in at Departmental and Ministerial level with DJE and also the Judiciary will be essential.)  Flood Insurance - The availability of flood cover remains a challenge. However, where areas benefit from OPW schemes, there has been an increase in the provision of flood insurance cover.  Consumer Insurance Contracts Act 2019 – this legislation was signed by the President in December 2019 and is subject to Ministerial Commencement Orders (yet to be signed)  EU Insurance Issues (Solvency II and Motor Insurance Directive (MID))

DETAIL:

Covid-19- Overview of Insurance Policy Implications The ongoing Covid-19 pandemic has the potential to significantly disrupt the insurance and reinsurance industry, globally and in Ireland, as there is the possibility for an increased volume of higher value business interruption claims being made. However, there is no certainty at this stage as to the impact such claims might have on insurers, as this will depend largely on the way such policies have been underwritten, and what the position of insurers is in relation to their coverage of pandemics. It seems that most business policies do not have such cover, thus industry impacts may not be as severe as originally anticipated. However individual insurers may find themselves in difficulties. It is

Page 91 of 166 likely that market conditions on the whole will be considerably more difficult post Covid-19 and businesses are starting to cite insurance issues as a barrier to re-starting of activity.

Immediate Response to Crisis The Department has engaged with the insurance industry, the Alliance for Insurance Reform and the Central Bank of Ireland (CBI) on Covid-19 issues and facilitated an agreement through Insurance Ireland with most of major insurers in the Irish market on a number of key issues. The agreement covered, amongst other things, a commitment by insurers to reduce premiums for business customers to reflect reduced level of exposure as a result of COVID-19 restrictions for Employer Liability/ Public Liability and Commercial Motor as well as a commitment to maintain cover for unoccupied commercial buildings/ premises not in use due to COVID-19 restriction (for a maximum of 90 days). Reflecting the reduction in motor claims, the Department also facilitated an agreement on motor insurance premium relief with many major insurers.

Financial Position of Insurers In terms of the financial position of the insurance sector, the CBI is monitoring the solvency position of insurers in Ireland as a result of the pandemic. At the beginning of May, the CBI provided the Department with information on the sector in Ireland stating that it is too early to say for certain what impacts COVID-19 will have on Irish insurers due to high levels of uncertainty. However, they note that EIOPA believes the European industry as a whole has sufficient capital to handle severe stresses, but that individual insurers may still face problems. The CBI in Ireland and EIOPA, at EU level, will continue to monitor the financial position of insurers, and have certain powers to intervene in the market under Solvency II if needed.

Business Interruption Insurance Business interruption insurance has been the most topical issue since the outbreak of Covid 19. Since the start of the pandemic, it has appeared that industry worldwide took a view that such claims were not covered, even where businesses contested that infectious diseases were covered in their policy. This reaction has led to considerable political debate with insurers being accused of interpreting policies to their own advantage and not acting in the interests of their customers.

Business interruption is generally a feature of standard business insurance policies, however whether a business can make a claim in relation to loss of earnings because of closure due to COVID-19 will depend on the specifics of each policy. Insurers have argued that most policies they have written do not cover the risk as COVID-19 has either not broken out on the premises of the business or it was not a listed infectious disease. There are however other policies where there appears to be a level of ambiguity and in which we believe businesses have a strong case for cover. In this case, it is believed that insurers should not attempt to reject claims on the basis of interpreting policies to their own advantage. Engagement at ministerial and senior level within the CBI has taken place with the insurance industry and it has been made clear that insurers should engage with impacted businesses honestly, fairly and professionally to honour those elements of the policies covered, in line with the Central Bank’s Consumer Protection Code. It has also been pointed out, that where there is ambiguity in policies they should be interpreted to the benefit of the customer. The CBI is monitoring the industry’s response to ensure it meets its expectations. Neither the Minister for Finance, nor the CBI can adjudicate where there is a dispute over a claim. Instead, complaints must be channelled through the Financial Services and Pensions Ombudsman (FSPO) or the litigation process. Page 92 of 166

Brexit – Continuity of Insurance Policies at end of Transition Period At present, the provisions of the Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Act 2019, as passed by the Oireachtas last year, have not been required to be enacted. In relation to insurance, Part 8 of that Act would have created a ‘run-off’ regime to allow UK-based insurers to carry out their existing contractual obligations in Ireland, but not to write any new business. Officials, along with the Central Bank, are currently reviewing the run-off period and they may need to be an amendment to this provision. The Act was not commenced and a new legislative vehicle will be needed to mitigate this and other issues that were mitigated by the above 2019 Act. DFAT is in the lead on delivering on the Brexit Omnibus legislation but we are of the view that it should be agreed by Government and considered quickly by the Oireachtas.

Cost of Insurance Working Group (CIWG) – The Cost of Motor and EL/PL Insurance The cost and supply of insurance remains a very topical issue, particularly employers’ liability and public liability (EL/PL) insurance. While the Department’s immediate focus is on ensuring a functioning insurance sector during the COVID-19 pandemic, it is important that the reform agenda continues at a pace. The Department continues to engage with other Departments on implementing outstanding recommendations (most of which are outside this Department’s remit) and intends publishing further updates on a biannual basis. While undoubtedly there has been some improvement in the motor insurance market arising from the CIWG’s work - the latest CSO data (April 2020) shows that motor insurance prices have decreased 29.2% since peaking in July 2016 - the position in relation to the availability and cost of public liability insurance has not appeared to improve for certain sectors, particularly where children and high footfall are involved.

The key outstanding issue in this regard is in relation to the need to address award levels in Ireland, which the Personal Injuries Commission (PIC) found to be 4.4 times higher than in England and Wales in terms of soft tissue award levels alone. The CIWG continues to monitor the work of the Judicial Council on replacing the Book of Quantum with new Personal Injuries Guidelines. It is hoped these Guidelines will be agreed by the Judicial Council later this year.

The CIWG is also monitoring the Law Reform Commission’s study on the possibility of capping personal injury award levels. This work is also important as it may mean that the Government could legislate to cap personal injuries awards, which would in itself recalibrate award levels. It is expected that the LRC’s report will be completed and published by the middle of 2020. Note: any such legislation would come under the auspice of the Department of Justice and Equality.

Insurance Reform – potential other areas for consideration Many of the key issues which stakeholders highlight at this point as necessary to further improve the situation go beyond the original mandate of the CIWG and also this Department as they deal with wider fundamental legal reforms. For example, while the CIWG has been successful in terms of being able to lay the foundations for such reform, like through the establishment of the Personal Injuries Guidelines Committee within the new Judicial Council. Other areas of legal reform such as duty of care and legal costs, both of which are the responsibility of the Department of Justice and Equality are issues which has been raised by businesses. Any further reform of the legal sector would most likely

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be seen to go beyond the mandate of the CIWG and require the strong support of the Attorney General, the Minister for Justice and the Judiciary.

Recovery and Resolution framework for Insurers Ireland does not have a recovery and resolution framework and this is a matter that the Central Bank has recently engaged with the Department on. We are currently considering the matter and if merit is seen in bringing in such a regime, legislation would be required.

Flood insurance The availability of flood cover remains a challenge. Prioritising spending on flood relief measures by the Office of Public Works (OPW) is central to policy. There is a Memorandum of Understanding between the OPW and Insurance Ireland, which provides for the exchange of data in relation to completed flood defence schemes, however it is recognised that the availability and transparency of flood insurance statistics could be improved. Overall, there has been an increase in the provision of flood insurance cover observed in areas protected by these schemes over the period 2015 to 2019, according to Insurance Ireland Flood Survey Results.

However, despite flood protection schemes in place in some areas, and particularly where demountable7 rather than permanent defences are in place, the level of flood coverage remains lower than it should be considering the money invested by the State. Fianna Fáil’s Flood Insurance Bill 2016 has sought to address this issue. However, the Department identified a range of legal and practical concerns with the Bill and notified them to the Joint Oireachtas Committee. The challenges of flood insurance and possible responses is one of the Department’s actions under the Climate Action plan.

Consumer Insurance Contract Act 2019 The purpose of the Act is to reform and modernise the law of consumer insurance contracts and is based on the 2015 Law Reform Commission Report on Consumer Insurance Contracts. The scope of the Act is wide ranging and covers many issues that have caused an immense amount of frustration for many policyholders, including SMEs, when dealing with insurance companies.

The decision was taken that the matter of when to commence the Act should be taken by the Minister after the formation of the new Government. The background to this decision was a series of meetings with the major insurers where significant concerns were expressed about the early implementation of particular sections of the Act (Sections, 8 and 12), and a general view that they needed a number of months to prepare themselves for the implementation of the other provisions. Sections 9 (Proportionate remedies for misrepresentation) and 14 (Duties of consumer and insurer at renewal) are sufficiently interrelated with Section 8 that their concerns also apply to these sections. Otherwise insurers may curtail services, particularly impacting the employer/public liability side of things. While the Act has yet to be commenced, officials have impressed upon Insurance Ireland that the sector should be preparing for the Act to be commenced in either a phased basis or in full shortly after the formation of the new Government.

7 Demountable protection is a system of flood defences that require action to be taken in advance of a known flooding event so as to ensure that the flood protection system is therefore temporarily installed. As such it requires human intervention in order to be effective. Page 94 of 166

EU Issues - Solvency II Review A key issue over the lifetime of the new Government is the review of the Solvency II Directive. This Directive provides the framework for insurance legislation in the EU. It contains minimum capital, supervisory and reporting requirements, which ensure the solvency of the insurance market, while protecting policy-holders across the Union. It came into effect in 2016 and requires a substantive review to be completed by the Commission by the end of 2020. However, with the COVID-19 pandemic now dominating most public policy, this deadline has been pushed back to early 2021.

The Department has engaged already with the CBI and Insurance Ireland on this review, and participates in expert EU working groups. While this work is at an early stage, the Insurance Policy Section will need to prioritise this work more as it evolves, given the fundamental role that Solvency II plays in the day-to-day running of insurance companies.

EU issues – Motor Insurance Directive The Department is also currently engaging at EU level on the Motor Insurance Directive (MID) the purpose of which is to improve consumer protection by ensuring that injured parties of motor vehicle accidents receive full and prompt compensation when an insurer becomes insolvent. In the particular case of Freedom of Services/Freedom of Establishment businesses, it proposes that initial responsibility for compensation of injured parties falls to the Member State (MS) of residence of the injured party however ultimate responsibility will rest with the MS of establishment of the insolvent insurer (‘Home’ MS). This is different to the Host based system that operates in Ireland whereby our insurance compensation fund covers all risks insured inside the State but importantly does not cover risks outside the State.

Council negotiations concluded in December 2019 and the Croatian Presidency is engaged with the European Parliament. However, progress has somewhat stalled given Covid-19.

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3.1.6.2 National and EU policy in relation to Anti-money laundering policy and legislation and oversight of the Financial Action Taskforce (FATF) country assessment

Principal Officer: Brenda McVeigh

Michael J McGrath Assistant Secretary General

Brenda McVeigh Principal Officer Anti-Money Laundering/Countering Terrorist Financing

Sinead Reynolds Anne Marie McNulty Assistant Principal Assistant Principal Anti-Money Anti-Money Laundering/Countering Terrorist Laundering/Countering Terrorist Financing Financing

KEY POINTS:

Overall transposition of 5AMLD is dependent on a number of parties, including the Department of Justice and Equality, the Office of Parliamentary Council, the CBI, D/BEI and Revenue. 5AMLD is mostly being transposed by the Department of Justice and Equality as it largely falls under criminal justice legislation. The Department of Finance is transposing the Articles which call for the creation of Registers of Beneficial Ownership for corporate entities, for trusts, and for bank accounts respectively.

Financial Action Task Force (FATF): Ireland is a long-standing member of the FATF, which is the global standard-setter in AML/CFT. We contribute to international AML policy development through FATF. Every Member’s system is periodically evaluated and Ireland underwent a Mutual Evaluation Review (MER) by the FATF in 2017 and two Follow-up Reviews (FUR), one in 2018 and in 2019.

EU AML Policy: We also actively engage at EU level in developing AML policy and are currently contributing to discussions around further strengthening the EU AML framework, including the consideration of the creation of a Central EU AML supervisor and follow-on legislation such as an EU Regulation.

UN and EU Sanctions: Ireland’s implementation of international sanctions is kept up to date as the UN and EU’s lists of sanctioned individuals are regularly updated. In terms of UN matters, DFAT is the lead department and the Department of Finance engages with that department and a number of others including DBEI on the issue of international sanctions.

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DETAIL:

Anti-Money Laundering Directives (AMLD)

4th Anti-Money Laundering Directive (4AMLD) The AML policy lead is with the Department of Finance, but does not have a supervisory remit. The Department of Justice and Equality (DJE) is the lead Department in terms of the transposition of the Anti-Money Laundering Directives. DJE is also an AML supervisor for a range of entities, as is the Central Bank of Ireland and the Revenue Commissioners.

The Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Act 2018 transposed most of the Fourth Anti-Money Laundering Directive (4AMLD) into law on 26 November 2018. Ireland was the subject of unique infringement proceedings by the European Commission for failing to notify on transposition measures by the deadline of May 2017. The case was heard by the European Court of Justice in December 2019 and based on the Advocate General’s assessment, Ireland faces a reduced fined of about €1½m. This matter was largely handled by DJE with external Legal Counsel.

5AMLD A package of amendments to 4AMLD known as 5AMLD was agreed in 2018. Most elements of this directive were expected to be transposed into Irish law by the Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Bill 2019. As this Bill has now fallen, it will need to be reintroduced in the Oireachtas. As noted, responsibility for transposition rests with the DJE. The Department of Finance is providing support and input to this process, including requesting the inclusion of provisions in the Bill for the supervision of Virtual Asset Service Providers. Discussions on this are ongoing. The transposition deadline for the general provisions was 10 January 2020. The Commission has now initiated infringement proceeding against a number of Member States, including Ireland and we have until the autumn to respond. Transposition is a key priority, as it is hoped that the Redacted necessary primary and secondary legislation can be in place by the autumn under Section 29(1)(a) of the The Department of Finance is transposing the beneficial FOI Act 2014. ownership provisions contained in Articles 30, 31 and 32a. These measures will improve transparency of ownership of corporate vehicles and legal arrangements, as a means of tracing criminals who might hide their identity and assets behind such structures.

Article 30 (Central Register of Beneficial Ownership for Corporates) requires the establishment and maintenance of, in the first instance, "information", and then "central registers" of beneficial ownership of corporate entities. The information on these registers must be adequate, accurate and current, to enable the determination of the natural persons who are the real owners/controllers of a company. This should assist designated persons, such as banks and other regulated bodies, to conduct appropriate due diligence in relation to legal entities.

A Register of Beneficial Ownership (RBO) for corporate entities began to accept filings in July 2019. This will be the register for the vast majority of relevant entities. The Statutory Instrument which establishes the Central Bank of Ireland as the Registrar for those entities not yet required to file with

Page 97 of 166 the RBO, including Irish Collective Asset Management Vehicles, Common Contractual Funds and some Credit Unions is scheduled to be signed by end-June 2020. We have also requested that the RBO accept filings in relation to State bodies that are incorporated in the State.

Article 31 (Central Register of Beneficial Ownership for Trusts) requires the trustees of express trusts to hold “adequate, accurate and up to date information” on their trusts’ beneficial ownership and to file this to a “central register” which can be accessed by competent authorities. Revenue will be the Registrar of Trusts and we are actively engaging with the AGO & the Office of the Parliamentary Counsel on the transposition of Article 31. The deadline has passed (10 March 2020), matters are complex involving the Attorney, but we remain hopeful that matters can be conclude shortly.

The scope of this register is challenging as trusts are much more widely used in Ireland, as they are common law structures, than other Member States and for a wide variety of purposes. Our concerns over the disproportionate impact of this register and over access to it, were raised during the negotiation of 5AMLD but unfortunately it proved difficult to garner support from other Member States as the issues primarily relate to the common law countries. Redacted under Sections 29(1)(a), 33(1) (d) and 35(1) of the FOI Act 2014.

Article 32a (Central Register/ retrieval mechanism for Bank/ payment accounts and safe deposit boxes) requires the establishment of a central register, or data retrieval system, for payment and bank accounts and safe-deposit boxes to be created by 10 September 2020. This register will be maintained Redacted by the CBI. Work is underway on a Statutory Instrument and the Department is working with the CBI under Section on what will be a significant project, 29(1)(a) of the FOI Act 2014. Related amending legislation is included in the ILP Bill, details of which are elsewhere in this brief.

Financial Action Task Force (FATF) The FATF is an international organisation for promoting AML standards and has 40 Recommendations for AML/CFT measures which form the standard for MSs. FATF conducts Mutual Evaluation Reviews (MER) and rates MSs on the Technical Compliance and Effectiveness of their measures. Ireland’s MER was in 2017 with a follow-up in October 2019. The outcome was largely positive but nonetheless Ireland was placed in FATF’s Enhanced Review Process. The follow-up review upgraded our Technical Compliance ratings on 11 of the FATF Recommendations, moving us from the Enhanced Review Process into the Regular Review Process. We are now rated as compliant or largely compliant with 33 of the 40 Recommendations.

We chair the Anti-Money Laundering Steering Committee (the AMLSC) which is attended by the DJE, DBEI, the CBI, Revenue, the DPP, the Criminal Assets Bureau, the Defence Forces and An Garda Síochána. Through the AMLSC, we coordinate execution of an Action Plan to further enhance our AML/CFT framework in accordance with FATF recommendations. We monitor progress and aim for further upgrades at our next follow-up review in 2022.

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International Sanctions concerning repressive regimes/terrorism The Minister is regularly required to sign Statutory Instruments to create offences and penalties for breaching EU Sanctions. SIs are created as soon as possible after the relevant EU Regulation has been passed. DBEI shares the drafting of these SIs and this has been the subject of discussion over the last year with DBEI, DFAT, which chairs the Cross Departmental International Sanctions Committee (CDISC). We believe a review of the framework is timely.

Other Issues

PEPs – Politically Exposed Persons 4AMLD extended the necessity for institutions to apply enhanced due diligence to Irish Politically Exposed Persons (PEPs) and their immediate families on the grounds that they constitute a higher risk category regarding money laundering. The Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 previously applied this only to ‘foreign’ PEPs. Irish banks are compelled to have details on the sources of funds in PEPs accounts and seek that information if necessary. Article 20a of 5AMLD also requires each MS to maintain a list of roles which constitute PEP status. DJE chaired a subgroup of the AMLSC and its findings were accepted by the AMLSC and submitted to the Minister for Finance for approval. We subsequently wrote to D/JE requesting that their Minister progress with the implementation of same.

Beneficial Ownership Requirements Some businesses raised concerns about the Registrar of Beneficial Ownerships (RBO) for Corporate Entities before the 22 November 2019 deadline on the grounds that the Companies Registration Office already had the details it required, as well as technical issues regarding filing. The Department’s position at the time was to keep to the original deadline for compliance.

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3.1.6.3 EU and national policy on Financial Markets, Funds Securities and Capital markets union.

Principal Officer: Oliver Gilvarry

Michael J McGrath

Assistant Secretary General

Oliver Gilvarry Principal Officer Markets Securities, Funds & CMU

Valerie Robinson Louise Heenan Vacancy

Assistant Principal Assistant Principal Assistant Principal Funds and Asset Funds & Investment Markets Securities and Management Limited Partnership CMU

KEY POINTS

Markets & Securities Brexit Issues: - Central Securities Depositories (CSD) Migration and Part 7 of the Brexit Omnibus Act, 2019 Capital Markets Union (CMU) - A flag ship EU project which Ireland broadly supports Various EU files – Investment Firm Review (IFR/IFD); Markets in Financial Instruments Directive/Regulation (MiFID/MiFIR); European Market Infrastructure Regulation (EMIR)/Central Counterparties (CCPs).

Funds Amendment of Investment Limited Partnership (ILP) Act 1994 and Irish Collective Asset-management Vehicle (ICAV) Act 2015

Other Sustainable finance transparency (SFT) Cross-Border Distribution of Funds Review of the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation The Investor Compensation Company DAC (ICCL)

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DETAIL:

Markets & Securities - Brexit Issues:

CSD Migration Central Securities Depositories (CSDs) are specialist financial institutions that hold securities and facilitate trading between market operators. CSDs are a vital and systemic part of market infrastructure that enable the effective functioning of settlement systems. By holding shares or bonds in a CSD, investors can easily transfer ownership via an electronic mechanism, avoiding the need for physical delivery of paper certificates.

The Irish market is reliant on a UK CSD based (Euroclear UK) which operates the CREST settlement system. Once the UK becomes a third country, under European legislation, the Irish market will no longer be able to access the CREST settlement system and it may not be possible to trade Irish shares post-Brexit. It is important to note that the migration of an entire market, as will be undertaken by the Stock Exchange (Euronext Dublin) and Euroclear Bank, is without precedent and poses unique operational and legal risks. It is also important to note that significant market disruption could also endanger the ongoing collection of Stamp Duty on Irish trades which is estimated by Revenue to be approximately €384 million in 2019.

The migration of the market must now be completed before March 2021, the date set by the EU Commission for the expiry of its temporary equivalence measures adopted in December 2018 for UK based CSDs. Part 7 of the Brexit Omnibus Act, 2019 supports the implementation of the Commission’s temporary equivalence measures. In the event of a no-deal Brexit further legislation will be required to support any updated EU temporary equivalence measures for UK based CSDs.

The Migration of Participating Securities Act 2019, has been put in place to aid the migration process, which was a priority piece of legislation in the last Dáil term and was passed with broad support. Redacted under Sections 29(1)(a), 30(1) (a)&(c) and 40(1)(a) of the FOI Act 2014. Capital Markets Union Capital Markets Union (CMU) is a flagship project of the European Commission which aims to deepen Europe’s capital markets, support growth and enhance the resilience of the financial system. In the context of post Covid19 EU recovery, CMU has an important role to play.

The creation of a deeper and more integrated capital markets across the European Union. Ireland has been a strong supporter of CMU from the start due to the potential benefits for Irish SMEs and also for the large financial services sector that operates from here. An EU Commission High Level Forum was set up last year to develop policy recommendations for the next phase of CMU. The Forum has broad representation and published its recommendations in June, which we and most other MSs broadly support. Ireland attaches particular importance to the following issues: (i) Enhancing participation of retail investors; (ii) Transparency / Supervisory convergence; (iii) Review of SME

Page 101 of 166 supporting measures; (iv) Single Pan-European Consolidated Tape Provider; and (v) Sustainable Finance.

Various EU Files - Investment Firm Review (IFR/IFD)

The current prudential regime for investment firms is provided for by the Capital Requirements Directive and Regulation (CRDV/CRR). This prudential regime is primarily designed for banks but is seen as overly complex and burdensome on investment firms and doesn’t address specific risks.

The high level objective is to ensure that investment firms are subject to a more proportionate prudential regime. This means bringing large systemic investment firms under the remit of the European Central Bank and the Single Supervisory Mechanism while providing a less burdensome regime for smaller non-systemic investment firms. The Investment Firm Directive (IFD) must be transposed into national law by July 2021 and in preparation of doing so, we have initiated a 2-month public consultation process on the Member State discretions.

Markets in Financial Instruments Directive / Regulation (MiFID/ MiFIR) MiFID 2 aims to build upon MiFID 1 (2004/39/EC) by strengthening investor protection rules and making financial markets more efficient, resilient and transparent. The framework regulating investment firms, stock exchanges and related activities will also increase the supervisory powers of regulators and provide clear operating rules for all trading activities including new industry innovations such as algorithmic and high frequency trading.

The Commission is now considering what changes could be made to MiFID 2 to support SMEs recovery post the Covid-19 impact. These changes will focus on making it easier for business to raise funding from capital markets via reducing regulatory burdens and making it easier for people to invest in capital markets in Europe.

Central Counterparties CCP European Market Infrastructure Regulation (EMIR) Central Counterparties (CCPs) are financial infrastructure that sits in the middle of a trade and ensure that the trade is completed even if one side defaults. CCPs are the buyer to every seller and the seller to every buyer. Not all trades are centrally cleared, however some instruments including most derivatives are required to use CCPs under European Market Infrastructure Regulation (EMIR). Due to the systematic nature of central clearing, the Commission proposed a Recovery and Resolution regime for CCPs modelled on a similar Banking regime (BRRD).

While Ireland doesn’t have a CCP, we do have members called General Clearing Members (GCMs) that use central clearing. We have concerns that some of our systemic banks, being clients of GCMs, could be locked out of decisions that could affect the financial stability of the State. During negotiations our position was to argue for “meaningful input” for National Competent Authorities of O-SIIs (Other Systemically Important Institutions defined under CRD). The Presidency brought forward a compromise on the Regulation which we and all other MSs supported. Political Trilogues commenced this year but are now on hold due to the COVID-19 situation and are not expected to resume in the near future, but technical work continues.

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Funds

Ireland is an important global domicile for the international funds industry, and is the second largest European domicile for investment funds. In particular, Ireland is the main location in the EU for Money Market Funds (“MMFs”) and Exchange Traded Funds (“ETFs”). The Department closely coordinates with the Central Bank of Ireland on national and international developments in this regard and with Irish Funds and other market participants.

Investment Limited Partnership Act Amendments

The Investment Limited Partnerships (ILP) Act 1994 provides for investment funds to be structured as partnerships where "limited partners" (investors) have the benefit of limited liability while "general partners" do not. The 1994 Act has had limited uptake, with only 6 ILPs currently authorised by the Central Bank. An ILP is a regulated common law partnership structure that does not have a separate legal personality. It is regulated and authorised by the Central Bank of Ireland.

Legislative changes to update the existing legislation to provide a modernised and internationally attractive regime for investors wishing to use a partnership structure for regulated investment funds has long been sought. The rationale for proposed legislative changes is to support the development of the private equity fund industry by making Ireland a more attractive domicile for such funds and to align the beneficial ownership obligations on Ireland’s fund vehicles offering with best EU and international practice. The objective of updating the Investment Limited Partnership Act 1994 (or ILP) has been included in the Government’s strategic priorities in the “Ireland for Finance – the strategy for the development of Ireland’s international financial services sector to 2025” (Action Measure 20 – Ireland as a global location for private equity funds). The proposed legislative changes will also take account of more recent EU developments and address AML beneficial ownership concerns. An earlier version of the Bill was published and passed all stages in the Dáil before the election. A revised draft, taking account of key beneficial ownership requirements is now advanced and, subject to Government approval, can be published shortly.

The Irish Collective Asset-management Vehicle (ICAV) Act 2015 introduced a new funds structure that streamlines the way in which funds are established and operated. Efficiency adjustments to the Act are required and amendments could be included in the ILP legislation.

Cross-Border Distribution of Funds (CBD)

The new regulatory framework for the Cross-Border Distribution of Funds (CBD) agreed in 2019 forms part of the goal to develop a Capital Markets Union in order to mobilise capital in the EU. The CBD package, consisting of a Directive and a Regulation is aimed at improving transparency, reducing regulatory and administrative barriers, removing inefficiencies and thereby reducing costs to the Cross-Border Distribution of Investment Funds within the EU thus promoting cross-border activity. The Directive must be transposed by August 2021.

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Sustainable finance transparency (SFT):

Sustainability related disclosures in financial services sector (“SF Disclosures”) Regulation The Sustainability related disclosures in the financial services sector (“SF Disclosures”) Regulation is ‐ part of a package of three legislative proposals put forward by the European Commission in May 2018. ‐ These form part of the European Action Plan on Sustainable Finance and the broader initiative to facilitate investment in sustainable projects and assets across the EU. The Disclosures Regulation proposal aims to include environmental, social and governance (ESG) considerations in the decision- making process of investors and asset managers in a consistent manner across the EU financial services sector. This should ensure that financial market participants that receive a mandate from their clients or beneficiaries to take investment decisions on their behalf would integrate ESG into their internal processes and inform their clients in this respect. The SF Disclosures Regulation will generally apply from 10 March 2021. Certain articles apply from end December 2019 and the final articles will apply from 1 January 2022.

EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks (“SF Benchmarks”) Regulation The Sustainable Finance Benchmarks (“SF Benchmarks”) Regulation introduces rules establishing and governing the provision of two new benchmarks – EU Climate Transition and EU Paris-aligned Benchmarks. The aim of the proposal is to enhance the environmental, social and governance (ESG) transparency of benchmark methodologies, thus it includes requirements for making these new categories of benchmarks transparent, and standards so as to make them more comparable and to enable better decision making by portfolio managers. The Regulation, which amends the Benchmarks Regulation, applies from 10 December 2019.

Investor Compensation Company DAC (ICCL) The Investor Compensation Company DAC (“ICCL”) is one of the bodies under the aegis of the Department. It is not a State Body and does not receive any funding from the Exchequer. The principal objectives of the ICCL are to operate a financially sound scheme in order to provide statutory levels of compensation to eligible investors of failed investment firms and to make sure compensation is paid without undue delay. There have been a number of Brexit related entrants into the Irish market that are now contributing to the scheme. Currently, the amount paid out in Ireland is €20,000 and this is below what would be paid out in the UK, but is in line with other large MSs. We intend to review the overall level of compensation that the ICCL pays out to retail investors in the event of a failure of an investment firm.

Work is underway to draft primary legislation (through the Central Bank Amendment Bill) for the establishment of a Liquidation Committee for a failed investment firm in order to facilitate ICCL in dealing with the winding-up of an authorised investment business firm. Under Section 18(4) of the Investor Compensation Act, 1998, the Minister for Finance may appoint persons as Directors of the ICCL who appear to the Minister to represent the interests of the clients of investment firms. One such Consumer Interest Director vacancy arises commencing on 1 August 2020. The Department has commenced a process and it is envisaged that following a selection process that the Minister will prescribe a new Director for a three-year term from 1st August 2020.

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3.1.6.4 Policy and legislation in relation to Pensions

Principal Officer: Brendan O’Leary

Michael J McGrath Assistant Secretary General

Brendan O'Leary Principal Officer Pensions

Catherine Murray Deirdre Aherne Assistant Principal Assistant Principal Pensions Policy Pensions Policy

KEY POINTS

The Pensions Policy unit provides a central, co-ordinating focus to the formulation of Department of Finance policy input in this area and actively contributes to ongoing, whole-of-Government pension reform initiatives, which have crosscutting application across areas such as financial services; taxation; the public finances; and longer term economic competitiveness.

The key policy work streams that the Section has been engaged with include i) Automatic Enrolment; (ii) the Interdepartmental Pensions Reform and Taxation Group; and (iii) Pan- European Personal Pension Product.

Detail Automatic Enrolment The last Government’s Roadmap for Pension reform 2018-2023 sets out a proposal to introduce a quasi-mandatory Automatic Enrolment (AE) system in 2022, whereby eligible employees without a pension will be enrolled in one, with possibility for an opt-out.

Whilst overall pension policy and the delivery of AE is under the remit of Department of Employment Affairs and Social Protection (DEASP), the introduction of AE has policy implications for this Department, in particular the design of appropriate financial incentives. This could either be delivered through a stand-alone direct expenditure approach, or alternatively through paralleling the current tax incentive / relief model. There are pros and cons attached to each, which will be teased out at official level. While preliminary discussions have commenced involving DFIN / DPER and DEASP, it will be later during 2020 before this aspect can be advanced. The Department is a member of the Automatic Enrolment Programme Board (AEPB), led by DEASP which provides strategic direction for the project.

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It is being proposed that a Central Processing Agency (CPA) be established to help deliver aspects of AE. Consideration will be given in the months ahead to defining the responsibilities of the CPA and whether it needs to execute these directly or could do so through other organisations. The focus here is to minimise the cost and operational risk for the State arising from the establishment of the CPA.

Interdepartmental Pensions Reform and Taxation Group (IDPRTG) The Roadmap sets out the need to promote long-term pension saving to address income adequacy in retirement and in particular for lower income earners. The Interdepartmental Pensions Reform and Taxation Group (IDPRTG), chaired by the Department of Finance, was tasked with reviewing certain areas of the Roadmap. The Group includes representatives from the Department of Public Expenditure and Reform; the Department of Employment Affairs and Social Protection (DEASP); the Office of the Revenue Commissioners; and the Pensions Authority.

While implementation of the Roadmap is primarily a matter for both the Minister for Employment Affairs and Social Protection and that Department, the IDPRTG finalised its draft report in late 2019. The Report has been subsequently updated to take account of later data to hand.

The Report represents a significant building block for a piece of long-term structural reform in the area of pension provision. It makes a number of practical, focussed recommendations on the reform and simplification of the existing supplementary pension’s landscape, elements of which have developed in an ad hoc manner over a number of years. The Report also considers the cost of tax relief for pension saving; proposes the discontinuation of the Approved Retirement Fund (ARF) option on a prospective basis and replacement by a combination of in-scheme drawdown and a redesigned Personal Retirement Savings Account (PRSA) operating as a whole-of-life product. This is in line with proposed simplification measures and should enhance consumer outcomes by improving regulatory oversight and reducing costs.

On agreement, following Ministerial consideration, it is proposed that the Report be published, which in turn would facilitate stakeholder engagement. Commencing implementation of measures contained in the Report will provide certainty to the Pensions market.

Pan-European Personal Pension Product (PEPP) The EU Commission proposal for a Pan-European Personal Pension Product (PEPP) was adopted by Council in 2019. The Pensions Unit had domestic responsibility for negotiating this file and engaged with key stakeholders such as DEASP, the Pensions Authority, the Central Bank of Ireland and the Office of the Revenue Commissioners as part of the negotiation process.

The PEPP framework will constitute a complementary voluntary scheme alongside national regimes. As far as is possible, and consistent with the overarching objective of pension product rationalisation and simplification, as proposed through the IDPRTG Report, it is proposed to align the taxation of PEPP with the existing PRSA legislation. The first PEPP products are expected to come to the EU market by approximately 2022.

The Pensions Unit is responsible for ensuring the PEPP Regulation is appropriately transposed under Irish legislation through a Statutory Instrument. Work on this undertaking has commenced in order to meet our transposition target of Q3/Q4 2021.

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3.1.7 Shareholding and Financial Advisory Division

The briefing prepared by Shareholding and Financial Advisory Division provides a high level introduction to the issues relevant to the Division. More detailed and in depth analysis of any of the topics can be provided if needed.

DESCRIPTION: The Shareholding and Financial Advisory Division (SFAD) manages the State’s investments in the banking sector (Allied Irish Banks, Bank of Ireland and Permanent TSB), the Minister’s shareholding in the National Asset Management Agency (NAMA) and represents the Minister’s interests in relation to the oversight of NAMA in line with the NAMA Act. SFAD also represents the Minister’s interests in relation to the liquidation of IBRC, and advises the Minister in relation to the Credit Union sector. Finally, using the expertise within the Division, it provides financial advisory services to the wider Department as required. The Division has 15 staff of which 10 are on long-term secondment from the NTMA. The Head of Division is Ireland’s director on the board of the European Investment Bank.

Head of Division - Des Carville

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3.1.7.1 State’s Banking Investments Overview

Deputy Head of Unit - Scott Rankin

Des Carville Head of Division Shareholding and Financial Advisory Division

Scott Rankin Deputy Head of Division Shareholding and Financial Advisory Division - Core Pillar Bank Engagement

Paul Keogh Ronan Heavey Assistant Principal Specialist Shareholding and Financial Shareholding and Financial Advisory Division Advisory Division - BoI and PTSB - AIB

KEY POINTS

 Ireland’s banking investments amounted to State aid, and as such the banks and the State are effectively obliged to reverse these investments over time, market conditions permitting, in order to repay the aid provided. The Department keeps under constant review the exit options available to the State in order to maximise the return from these investments over time.

 A total of €64bn was invested in six banks of which c. €35bn went into Anglo/INBS, only a small portion of which will be recovered. The remaining €29bn went into AIB/EBS, BOI and PTSB, and in recent years DoF has been confident that the full amount of this investment can be recovered over the medium to long term. Given current market conditions, even before the impact of Covid- 19 is fully factored in, reaching this target now looks increasingly unlikely, at least within a five year period.

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DETAIL:

What is our objective and strategy? Ireland’s banking investments were involuntary and resulted from emergency measures to protect the financial system. They also amounted to State aid, and as such the banks and the State are effectively obliged to reverse these investments over time, market conditions permitting, in order to repay the aid provided. The Department keeps under constant review the exit options available to the State in order to maximise the return from these investments over time. Aside from following the principle of not wanting the State to remain an outside and distortionary force in the economy, successive Governments have taken the view that holding risky equities is not a sensible financial decision and the proceeds from disposals should be used to reduce the national debt.

A total of €64bn was invested in six banks of which c. €35bn went into Anglo/INBS only a small portion of which will be recovered. The remaining €29bn went into AIB/EBS, BOI and PTSB, and in recent years DoF has been confident that the full amount of this investment can be recovered over the medium to long term. Given current market conditions, even before the impact of Covid-19 is fully factored in, reaching this target now looks increasingly unlikely, at least within a five year period. In measuring our progress towards this yardstick we have been very transparent that we include all cashflows associated with State support i.e. income and disposal proceeds, fees and charges for the guarantee schemes. We have also been very clear that we look at our three remaining investments on a portfolio basis.

Unlike the approach of the C&AG, we have not factored in a funding or opportunity cost for these investments. Such a cost is very significant particularly for IBRC and AIB. For instance, in their most recent update on the cost of the banking rescue, the C&AG have calculated a funding cost figure for rescuing the system of as much as €22bn, €7.5bn of which related to the three remaining banks.

While the C&AG funding cost figures are perfectly rational8, what they don’t measure is the benefit to the wider economy from rescuing the core of the banking system which was the reason for the intervention in the first place. This intervention had a knock on positive impact for government spending and tax receipts with the latter back to record levels pre-Covid-19.

Table 1 below summarises the amount invested compared with the amount recouped to date (through disposals and fees) and the most recent valuations of our remaining investments. The comparison shows a current net deficit of €7.6bn. This is in contrast to the position at the peak in bank valuations in H1 2018 when it showed a surplus of €2bn. It is important to note that we are running a fairly large unrealised loss in AIB and PTSB which is only partly offset by a running surplus on BOI.

8 C&AG also helpfully adds the profits earned by the Central Bank on bonds it received as part of IBRCs liquidation . € ad deduts this fro the total ost of resuig the syste Page 109 of 166

Table 1: Viable banks - summary investment position AIB BOI PTSB Total €bn €bn €bn €bn Total invested by the State 20.8 4.7 4.0 29.4 Cash received to date - Disposal/redemptions 7.1 3.6 1.9 12.6 - Coupons/dividends/fees 3.5 2.3 0.8 6.6 10.6 5.9 2.7 19.2 Net cash position - In/(out) (10.1) 1.2 (1.3) (10.2) Valuation of remaining investments – 8 May 2020 2.1 0.3 0.2 2.5 Net position – May 2020 (8.0) 1.54 (1.1) (7.6)

Executing share sales has proven more difficult than envisaged even before Covid-19 Given the size of our AIB exposure (8x larger than our BOI investment) our strategy has prioritised the return of this value, with disposal strategies for BOI and PTSB facilitating, or at a minimum not hindering, this objective. DoF has previously posited a number of pre-conditions that should be in place for us to execute any bank disposals. These are: i. The financial sector must be stable and no longer be dependent on State involvement ii. The relevant bank must be ready for the State to start selling down iii. The market appetite must be there for our shares iv. The disposal must meet our value for money considerations

Earlier this year, the State was capable of selling shares in both AIB and BOI however share prices and valuations were a long way below where we would have liked and would not have been consistent with recovering our €29bn investment.

Even before Covid-19 the environment for banks across Europe had deteriorated markedly since 2018, on the back of ECB rate cuts and a ratcheting up in regulatory demands. However, the impact from these two trends has been particularly harsh in Ireland. This explains why, despite the best economic performance in Europe, Irish bank share prices, which are now at 20-25% their start-2018 level, have materially underperformed their peers, at 40-45% over the same period. This is undoubtedly due to domestic bank specific news flow and in particular the disproportionate rise in capital requirements imposed by the SSM and the CBI. This underperformance has been exacerbated by the regular negative news flow about banks in the media (mortgage rates, NPL sales, deferred tax assets etc) and political discourse (various Private Members’ Bills, remuneration etc).

The best way to see how well capitalised Irish banks are relative to their peers is to look at the leverage ratio which is a simple ratio of shareholders equity (plus tier 1 debt) over total assets. It ignores the complexity associated with risk weighted asset models which include 20 years or more of historic loan losses and therefore in Ireland still punish Irish banks and ultimately consumers for the enormous losses incurred during the 2009-11 crash. This is despite the fact that lending practices have changed utterly since then and we also have Central Bank restrictions on the quantum of mortgage lending. Data shows that leverage ratios in Ireland are amongst the highest in Europe.

The Department published a paper on RWAs in 2019 which explained the link between crisis era loan losses, very high capital demands and mortgage rates. The subject matter is complex but we have made some progress in getting this across in media and political circles. However, the facts do not Page 110 of 166 suit the widely held but simplistic narrative that Irish banks are profiteering through higher interest rates than other European countries. If this were the case KBC and Ulster Bank would not have considered exiting the market due to their extremely low level of profitability and regulatory pressures.

The Department also published a paper on deferred tax assets in late 2018 showing the negative impact of impeding the banks’ ability to carry forward losses. The State would take a large upfront hit in the value of its investments in return for an annual cash inflow of corporate tax payments. It would take a number of years for the latter benefit to equal the upfront loss.

The last disposal of bank shares by the State was the AIB IPO in June 20179. Although this was a very successful transaction at the time, nearly all of the progress that was made up to that point and into H2 2017 has since dissipated. Investors in the IPO have been very disappointed as the excess capital and emerging growth story that was there at the time has fallen away for the reasons already discussed.

In order to take advantage of very favourable market conditions, the Department of Finance recommended removing the Programme for Partnership Government restriction on further AIB share sales a number of times in 2017/18, so that we could proceed to sell more shares. Unfortunately, since late 2018 onwards a variety of factors including poor markets, executive departures (CEO and CFO of AIB), and Brexit have acted as stumbling blocks to further sales. Covid-19 now presents a further very significant challenge to be considered.

Even if market conditions are right, there are a surprisingly low number of days in any given year where the State is capable of selling shares for various reasons including our possession of price sensitive information. For instance, advisors and investment banks generally have a preference for not selling shares on Mondays and Fridays. In addition, Jan, Feb and July are ruled out ahead of banks’ reporting their results as are the two weeks leading up to quarterly trading updates (usually late Redacted under Section 36(1) April and Oct/early Nov). (b) of the FOI . This makes execution a challenge and the Act 2014. messaging around the price achieved in any sale equally a challenge e.g. why didn’t you sell in, say, Jan when the price was higher? This underscores the need to take advantage of good opportunities and execute quickly when they do arise.

Redacted under Section Despite very strong progress 36(1)(b) of the FOI Act 2014. in reinvigorating the franchise and fixing the balance sheet, the bank has two problems which are widely known. First, ECB interest rates at zero and the high, and still rising, capital requirements being set by the regulator. The bank is not too different from a Building Society in the UK yet has to operate with a multiple of the equity for every loan (leverage) that UK peers operate with. As a result, absent a corporate transaction the Department of Finance does not envisage any reduction in the State’s investment in PTSB in the medium term.

9 Note the last sale by the UK treasury of RBS was one and a half years ago and the Dutch treasury (ABN Amro) nearly two and half years ago Page 111 of 166

3.1.7.2 State’s shareholding in Allied Irish Banks

Specialist – Ronan Heavey

Des Carville Head of Division Shareholding and Financial Advisory Division

Scott Rankin Deputy Head of Division Shareholding and Financial Advisory Division - Core Pillar Bank Engagement

Ronan Heavey Specialist Shareholding and Financial Advisory Division - AIB

KEY POINTS

 The State invested €20.8bn in AIB between 2009 and 2011, and following an IPO in 2017 now owns 71% of its ordinary shares.  AIB returned to profitability in 2014 and since then has demonstrated a strong performance trajectory with capital growth, new lending growth and significant restructuring of impaired loans. Following the capital reorganisation facilitated by the State at year end 2015, the bank has a strong balance sheet with regulatory compliant and market acceptable capital ratios.  A core plank of the investment case in AIB at the time of the IPO was its holding of excess capital. However, the level of this surplus has been eaten away over time by higher and higher capital requirements which we (and investors generally) believe have reached excessive levels. Returning some of this excess capital to the exchequer is a key objective for the State though this will not be easy as the SSM will likely challenge the bank in its efforts along the way.  The relationship between the State and AIB is managed through a Relationship Framework Agreement which guarantees that the State will not interfere with the day to day running of banks. SFAD monitors performance and significant issues on an ongoing basis.

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3.1.7.3 State’s shareholding in Bank of Ireland

Specialist – Scott Rankin

Des Carville Head of Division Shareholding and Financial Advisory Division

Scott Rankin Deputy Head of Division Shareholding and Financial Advisory Division - Core Pillar Bank Engagement

Paul Keogh Assistant Principal Shareholding and Financial Advisory Division - Bank of Ireland

KEY POINTS

 The State invested €4.7bn in the bank during the period 2009-2011. Following the sale of the CoCo and preference share investments in 2013, the State’s remaining investment is its 14% equity stake with a current value of c. €0.3bn.  BOI has been profitable since 2014 and the capital build has been impressive since then. Other key financial highlights are much increased new lending volumes and the significant reduction in non-performing loans.  The relationship between the Department of Finance and BOI is managed through a Relationship Framework which is less prescriptive than the AIB Relationship Framework reflecting the State’s relative shareholdings in the two banks.  The State’s options in relation to a future sell down are by way of a large volume block sale, an orderly trading plan (a so-called “dribble out”), or a combination of both.  Apart from favourable market conditions, the key consideration in the timing of any decision to sell down our BOI stake is that it must not clash with an AIB disposal as the investor pool will be similar. Decisions in relation to AIB must take priority given the much larger size of our investment.

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3.1.7.4 State’s shareholding in PTSB

Deputy Head of Unit - Scott Rankin

Des Carville Head of Division Shareholding and Financial Advisory Division

Scott Rankin Deputy Head of Unit Shareholding and Financial Advisory Division – PTSB

Paul Keogh Assistant Principal Shareholding and Financial Advisory Division - PTSB

KEY POINTS

 The State invested €4bn in Permanent TSB (“PTSB”) in 2011 to address the recapitalisation needs of the bank. To date, total proceeds of €2.7bn have been generated from disposals, investment income and liability guarantee fees. The market value of our remaining 75% equity stake in the bank was c. €0.16bn at 8 May 2020.  The financial position at PTSB has improved substantially since 2016 with the bank returning to profitability, significantly reducing its NPLs and achieving a material increase in its mortgage market share. Another key achievement by the bank was its successful exit from its EU Restructuring Plan announced in early 2019.  Notwithstanding this progress, major challenges remain for PTSB both the income side, arising from the lower-for-longer interest rate outlook, and in managing a cost base appropriate to the bank’s reduced balance sheet size.  The State’s relationship with PTSB is governed by the Relationship Framework which is dated 29 March 2011 and amended and restated as of 23 April 2015.  Legacy legal actions relating to the State’s investment in PTSB are ongoing. Details are included in the Legal section.  The bank announced the appointment of a new CEO on 22 June 2020.

Page 114 of 166 3.1.7.5 NAMA

Specialist – Gary Hynds

Des Carville Head of Division Shareholding and Financial Advisory Division

Gary Hynds Specialist Shareholding and Financial Advisory Division - NAMA, IBRC and HBFI

David Tuohy Specialist Shareholding and Financial Advisory Division - NAMA, IBRC and HBFI

KEY POINTS  NAMA has made significant progress towards achieving its mandate over the past few years and has now repaid the final tranche of the €30.2 billion Government guaranteed senior debt originally issued by the agency in Oct 2017, two years ahead of schedule.  NAMA redeemed all remaining subordinated debt in March 2020 and, subject to continuing favourable market conditions, will return a surplus of up to €4bn to the Exchequer over the coming years.  The C&AG recently published its special report on the Project Nantes loans”.  A Commission of Investigation has been established to investigate NAMA’s sale of its Northern Ireland loan portfolio.  The Department is currently running a competition through PAS for the appointment of two new directors to the Board. This competition is expected to conclude by the end of June 2020.

DETAIL: Progress since Inception & Current Position NAMA acquired its loans for a total of €31.8bn from the participating banks. Reflecting the steep reduction in property values following the financial crisis, this amount represented 43% of the outstanding amount (€74bn) owed by debtors. The market value of the acquired loans was €26.2bn, €5.6bn less than the €31.8bn NAMA paid for the loans. It was through this overpayment that NAMA delivered €5.6bn of State aid to the participating Irish banks.

Page 115 of 166 To achieve its current success NAMA had made numerous important, well founded and commercially informed decisions at a time of great economic crisis for the State. It has been these decisions that have allowed NAMA, against all expectations, to redeem all of its senior debt two years ahead of schedule eliminating the State’s contingent liability. NAMA’s success is recognised internationally but less so locally.

NAMA Surplus NAMA currently projects to return a surplus of €4 billion to the Exchequer (including c €300m as the value of NARPS) by the time it completes its work. Following the recent repayment of the remaining subordinated debt and the buyout of external equity interests, NAMA will transfer €2bn in June 2020 and a further c.€1.2bn is expected to return in 2021 and €500m in 2022.This timeline is contingent on the projected surplus of €4 billion remaining unchanged and prevailing market conditions that may determine the timing and disposal proceeds of residual assets. Redacted under Section 35(1)(a) of the FOI Act 2014.

The NAMA surplus is not general government revenue but rather a financial transaction in line with Eurostat rules. The intention of the previous Government has always been to use windfall gains and receipts from the resolution of the financial sector crisis to pay down our national debt and reduce our debt servicing costs.

Poolbeg SDZ In Oct 2017, Dublin City Council approved a Planning Scheme for the Poolbeg West SDZ, which is controlled by a NAMA appointed receiver. This site has the capacity to deliver up to of 3,500 residential units, 860,000 sq. ft. of commercial space, as well as community amenities. 10% of the delivered residential housing will be Part V social housing units and a further 15% will consist of social housing and affordable housing. It is now a matter for Dublin City Council to determine the precise ratio of social to affordable housing within this 15% and how they would like to deliver this element of housing. Discussions are on-going with the receivers in this regard. On 26th July 2019, NAMA issued a Request for Expressions of Interest for developers to enter into a Joint Venture (JV) with NAMA to develop the Poolbeg SDZ. The successful bidder will obtain 80% of the JV with NAMA retaining the remaining 20%. The bidding process was completed in April 2020 and NAMA is currently in the process of selecting a preferred bidder.

Residential Funding Programme NAMA is working with debtors and receivers to identify commercially feasible opportunities within its existing portfolio to bring forward new residential development. NAMA aims to facilitate the construction of up to 20,000 new residential units in Ireland by 2020, subject to its overriding commercial mandate.

Social Initiatives NAMA has an established policy (subject to its Section 10 commercial mandate) of identifying to Local Authorities, properties which may be suitable for their purposes and has facilitated the sale or lease by its debtors and receivers of properties at market value to public bodies for a wide-range of purposes, Page 116 of 166 including social housing, schools, healthcare facilities and urban economic, environmental and cultural regeneration. Up to end-Dec 2019 NAMA had offered 7,093 residential properties to local authorities and AHBs for social housing purposes. Demand was confirmed for 2,770 properties, of which 2,600 have been delivered by end-Dec 2019.

Commission of Investigation (CoI) The NAMA Commission of Investigation concerns the event surrounding the Sale of NAMA’s Project Eagle Portfolio in Northern Ireland in April 2014. This CoI has been extended to 30 September 2020. We will provide a legally privileged briefing under separate cover in due course.

C&AG Report on Project Nantes On 23 Dec 2019, the C&AG submitted its final report on NAMA's management and disposal of the Project Nantes loans. This relates to concerns raised by the PAC and the C&AG regarding the sale of loans by NAMA in 2012. Concerns raised in the Oireachtas focused primarily on whether the loan sale breached the requirements of Section 172(3) of the NAMA Act (no breaches were found).

The C&AG concluded that “…it is difficult to conclude that NAMA secured the best possible price for the sale of the Project Nantes loans.” and its analysis is that the NAMA Board repayment target for Nantes should have been c.€29m higher (€155m vs €125m) due to errors and poor analysis. It notes that the loan sale was not openly marketed and that NAMA did not obtain any updated property and/or loan valuations. NAMA argue that the sale of Project Nantes was only one constituent part of the approved aggregate repayment target and strongly disputes the position where NAMA has generated cash of €208m in total from this connection, well in excess of both the original payment target and the revised/corrected payment target. The C&AG report was published in March and it is expected that the PAC will consider the findings when it reconvenes.

NARPS NARPS is NAMA's social housing SPV established in 2012. As of 31 March 2019, NARPS has acquired c. 1,370 properties from NAMA debtors and receivers for lease to Local Authorities and Approved Housing Bodies. A decision was taken by the Minister in 2019 to retain ownership of NARPS in order to protect the vehicle's social housing mandate into the future. As part of the wind-down of NAMA we will consider future long term ownership options for NARPs within other State entities such as ISIF or the Land Development Agency.

Forward Looking Actions are already underway to prepare for the dissolution of NAMA as it is likely to require primary legislation, the Department is currently working with NAMA in relation to the development of its step plan for dissolution which will be submitted formally by the end of 2021. The Department has also commenced taking steps to normalise the relationship and oversight of NAMA to bring it in line with other large commercial state bodies. A decision was taken in Sept 2019 to significantly reduce NAMA Board fees to bring them in line with the NTMA and the Department will revert to you with some further recommendations later this year.

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3.1.7.6 IBRC (in special liquidation)

Specialist – Gary Hynds Des Carville Head of Division Shareholding and Financial Advisory Division

Gary Hynds Specialist Shareholding and Financial Advisory Division - NAMA, IBRC & HBFI

David Tuohy Specialist Shareholding and Financial Advisory Division - NAMA, IBRC & HBFI

KEY POINTS

 IBRC was placed in Special Liquidation in Feb 2013 and the expected timeframe for the completion of the liquidation was recently pushed out to end-2022 (from end-2021) as a result of COVID-19 and the likely delays that this will cause to outstanding legal cases.  Since 2013, the Special Liquidators have realised cash inflows of €17.1bn which has been used to repay the outstanding liabilities of IBRC.  As of Dec 2019, all admitted unsecured creditors of the liquidation have received 100% of what they were owed at the date of the liquidation in Feb 2013 (including interest where applicable). As part of this process the State has received c. €1.6bn.  David Tynan of PWC was appointed to the role of Assessor pursuant to the Anglo Irish Bank Corporation Act 2009 in Nov 2018 to determine the value, if any, of the equity when the bank was nationalised. He submitted his final report to the Minister in April 2020 in which he concluded that the fair and reasonable aggregate value of the transferred shares and the extinguished rights as at 15 January 2009 was nil and therefore, that no compensation is payable to former shareholders of any class or to former rights holders.  Separately, a Commission of Investigation into IBRC was established in 2015 to investigate certain matters of significant public concern regarding certain decisions, transactions and activities entered into by IBRC (pre-liquidation) between the period 21 Jan 2009 and 7 Feb 2013. The Commission has sought and received a number of extensions to its deadline. The Commission’s Seventh Interim Report was submitted to the Taoiseach in February 2020 and the Commission’s timeframe has been extended to 30 June 2020.

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DETAIL:

IBRC Background On 15 Jan 2009, the Irish Government decided, having consulted with the Board of Anglo Irish Bank, to take steps to enable the bank to be taken into public ownership. The Anglo Irish Bank Corporation Act 2009 was passed and transferred the ownership of Anglo Irish Bank to the Minister. In total the State invested €34.7bn in Anglo and INBS including promissory notes totalling €30.6 billion. In early 2011 the majority of the deposits held in Anglo Irish Bank and INBS were transferred to Allied Irish Banks and Permanent TSB respectively and in July 2011 Anglo Irish Bank and INBS were merged to form Irish Bank Resolution Corporation (“IBRC”).

In Feb 2013, following discussions between the Irish Authorities and the ECB, the Irish Bank Resolution Corporation Act 2013 was enacted and a special liquidation order was signed by the Minister for Finance placing IBRC into special liquidation. The joint special liquidators (“SLs”), Kieran Wallace and Eamonn Richardson, were appointed and now control the operations of IBRC pursuant to the IBRC Act 2013. The IBRC promissory notes were exchanged for a portfolio of long-term government bonds with a weighted average maturity of 34 to 35 years which compared favourably to the weighted average maturity of the promissory notes of 7 to 8 years. This significantly smoothed Ireland’s debt profile and reduced near-term borrowing requirements.

The Special Liquidation Overview The success of the liquidation, along with the numerous benefits obtained through the promissory note transaction itself, have been critical to the restoration of confidence in Ireland. A sixth special liquidation progress update report was published in May 2019 and is available on the Department of Finance website https://assets.gov.ie/8852/fdd3e60ee6d94c2990768e2bc6fa410f.pdf). This report provides a comprehensive overview of the breadth of work performed in conducting what is the most complex and challenging liquidations in Irish corporate history. A further progress update report is due to be published by end H1 2020. This series of update reports is published at the initiative of the Department to provide greater public awareness and transparency around the special liquidation including the various workstreams and associated costs.

Loan Sales Since Feb 2013, loans with a par value of €21.7bn have been prepared, brought to the market and sold. Among other assets, loans with a par value of €3.5bn remain which the SLs continue to manage. These are loan assets are mainly connected to ongoing and recently settled litigation. It is expected that the remaining Quinn related assets will come to market later this year and next year.

Payments to Creditors Over 3,200 claims were submitted to the SLs, the majority of which have been adjudicated on with a small number of claims outstanding. As of Dec 2019, all admitted unsecured creditors of the liquidation have received 100% of what they were owed at the date of the liquidation (including interest where applicable). As part of this process the State has received c. €1.2bn (plus interest of c. €109m) on its unsecured claims. The State has also received €347m in relation to its holding of the preference shares. In 2019 the SLs paid out €210m to the holders of the subordinated debt. Any further surplus Page 119 of 166 funds remaining at the conclusion of the liquidation will be returned to the State as it holds all of the Redacted under Section equity . 35(1)(a) of the FOI Act 2014. Cost of Liquidation The cost of the liquidation to YE2018 stood at c. €258m after securing a negotiated discount of €8m. These costs equate to c.1.5% of the total €17.1bn of cash generated from the liquidation to date. We are of the opinion that these costs compare favourably with comparable liquidations. The Department recently appointed an independent firm to review the costs and outcomes of the IBRC liquidation and compare them with similar sized liquidations and bankruptcy outcomes internationally. We intend, subject to the Minister’s approval, to publish this review when finalised.

Commission of Investigation (CoI) A Commission of Investigation was established in 2015 to investigate certain matters of significant public concern regarding certain decisions, transactions and activities entered into by IBRC (pre- liquidation) between the period 21 Jan 2009 and 7 Feb 2013. The timeframe has been extended to June 2020. We will provide a legally privileged briefing under separate cover in due course.

Anglo Irish Bank Assessor David Tynan of PWC was appointed to the role of Assessor pursuant to the Act in Nov 2018. The final report was submitted to the Minister in April 2020 (later than expected due to an unsuccessful legal challenge from David Hall and Paddy McKillen) in which the Assessor concluded that the fair and reasonable aggregate value of the transferred shares and the extinguished rights as at 15 January 2009 for the purposes of payment of fair and reasonable compensation for the acquisition of those shares and the extinction of those rights was nil and therefore, that no compensation is payable to former shareholders of any class or to former rights holders.

Forward Looking In May 2019, the SLs revised their expected timeframe for the completion of the liquidation from end- 2022 to end-2021, however, following COVID-19, this timeframe has been reverted back to end-2022 primarily as a result of the likely delay in the hearing of the outstanding legal cases. We will continue to monitor this and engage with the SLs to ensure they are working towards this projected timeline.

The remaining key tasks in the liquidation of IBRC include:

• the on-going management of c.70 legal cases (1,100 legal cases at the beginning of the liquidation) to which IBRC in SL remains party; • the realisation of all remaining assets; • the resolution of all creditor claims; • the liquidation of remaining subsidiaries; • the conclusion of the ongoing interest overcharge remediation project; and • The Commission of Investigation.

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3.1.7.7 Home Building Finance Ireland (HBFI)

Specialist: Gary Hynds

Des Carville Head of Division Shareholding and Financial Advisory Division

Gary Hynds Specialist Shareholding and Financial Advisory Division - NAMA, IBRC & HBFI

David Tuohy Specialist Shareholding and Financial Advisory Division - NAMA, IBRC & HBFI

KEY POINTS

 HBFI was established in late 2018 to lend money to small and medium sized builders and developers for commercially viable residential developments, particularly those situated outside the State's major urban centres.  HBFI has been provided with access to €750 million of funding from the Ireland Strategic Investment Fund, with which it is expected to facilitate the delivery of 7,500 units over the next five years. As of the end of Jan 2020, HBFI had approved funding of €114 million supporting the delivery of up to 616 new homes.  HBFI recently announced the launch of a number of new products which will enable them to broaden their reach and respond to a potential reduction in supply of development finance over the coming months.

DETAIL: HBFI Background HBFI (Home Building Finance Ireland) was established in late 2018 to lend money to small and medium sized builders and developers for commercially viable residential developments, particularly those situated outside the State's major urban centres. The lack of such finance has been long identified as a key contributory factor in the shortfall in residential supply.

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HBFI has a simple mandate to provide funding on commercial terms to developers for the delivery of residential development across the State. As HBFI has been designed not to displace funding that already exists in the State, it is expected that it will focus activities on segments of the market that are not currently well provided for by funders currently in the market. This includes smaller developments and those outside the main urban centres.

HBFI has been provided with access to €750 million of funding from the Irish Strategic Investment Fund (ISIF), with which it is expected to facilitate the delivery of 7,500 units over the next five years. As of the end of Jan 2020 HBFI had approved funding of €114 million supporting the delivery of up to 644 new homes.

In order to continue to operate in a manner consistent with State aid rules it is essential that HBFI maintain its lending at market equivalent terms and conditions, rather than offering cheap or subsidised credit, and is open to all eligible applicants, rather than restricting or setting quotas for social or affordable housing projects.

Current Issues Revised Business Plan Following a strategic review and considering market conditions in light of COVID 19, the board recently announced 3 new products (i) sub-10 unit proposals; (ii) apartments; and (iii) prime sties.

Potential funding for apartment remediation The issue of HBFI funding apartment remediation was raised on a number of occasions as the legislation passed through the Oireachtas in 2018. When assessing HBFI’s capability to lend for all types of residential projects, two factors must be kept in mind. HBFI’s operations must be in compliance with State aid rules and HBFI’s lending is intended to be off balance sheet. The funding of apartment remediation does not sit comfortably with HBFI’s commercial mandate however and is highly risky because actual costs regularly exceed initial estimates and the lack of adequate security against borrowings.

HBFI has not seen much demand for such activity. Ultimately HBFI will examine each application on its own merits and particular circumstance and make a commercial decision in line with its mandate and the HBFI Act. However, it is difficult to envisage a situation where HBFI could provide funding for apartment remediation for the reasons set out above.

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3.1.7.8 Credit Union Reform and Strategy

Specialist - Brian Corr

Des Carville Head of Division Shareholding and Financial Advisory Division

Brian Corr Specialist Shareholding and Financial Advisory Division - Credit Unions

Leonard Wall Assistant Principal Credit Union Policy; ReBo; Restructuring; Resolution; CUAC

KEY POINTS:  Credit Unions are struggling to generate profitability due to low loan-to-asset ratios (avg 27%), low/negative returns on investments and high cost-income ratios. Return on Assets (ROA) declined from 1.8% in 2013 to 0.7% in 2019 and is expected to decline further. The impact of COVID-19 has exacerbated this situation further.

DETAIL: Background Credit Unions are mutual independent not-for-profit organisations that provide savings-and-loan services to their members, who are linked by a 'common bond'. They are established and regulated in accordance with the Credit Union Act 1997 (the 1997 Act), the Credit Union and Co-operation with Overseas Regulators Act 2012 (CUCORA) and Central Bank and Credit Institutions (Resolution) Act 2011 (CIRA). Supervision is managed by the Registrar of Credit Unions in the Central Bank.

COVID-19 Response We have put in place a structure to ensure smooth and efficient flow of information between the sector, the Department and the Central Bank. We currently host three separate weekly calls with the representative bodies, the Central Bank, and CUAC. This helps track trends and emerging issues. We have also arranged regular conference calls between the Minister for Finance and the representative bodies since the pandemic began.

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Credit unions have been classified as an ‘essential service’ and have worked hard to ensure continuity of service to their members.

Credit Union Advisory Committee available as advisory support for the Minister CUAC10 advises the Minister in relation to the improvement of the management of credit unions, the protection of the interests of members and creditors of credit unions. The Minister can seek advice from CUAC on any credit union matter. CUAC has completed a research report, which included a survey of all credit union directors, which is expected to be published shortly. The report includes recommendations for the Minister and the Central Bank aimed at improving the role of the Director. As part of its agenda in 2020, CUAC had begun working on a new report involving a financial analysis of the sector. CUAC are now tailoring this work to consider the impact of COVID-19 on the sector and the strategic implications, and intends to report by 30 June 2020.

Engagement with Representative Bodies and many other stakeholders There is a range of representative bodies for the sector:  Irish League of Credit Unions (ILCU) – all island body, represents majority of credit unions.  Credit Union Development Association (CUDA) – 16 full members (assets of €2.5bn) and 34 affiliate members (assets of €4.8bn), the majority of which are also members of ILCU).  Credit Union Managers Association (CUMA) – for professional credit union managers  National Supervisors Forum (NSF) - for all supervisory committees for Ireland north and south.

The primary Representative Bodies, ILCU and CUDA, collectively represent almost all credit unions, but do not necessarily share the same views on issues relevant to credit unions. The Department is conscious that it leads policy for the whole sector and as a result we proactively engage with the sector via regular meetings with CUAC, Representative Bodies and collaborative ventures. We also engage directly with credit unions through bespoke events, which the Department has initiated, and bilaterally to ensure we understand the issues at an individual credit union level.

Profile of Credit Union Sector  241 credit unions as at Sept 2019; 55 with over €100m in assets control 59% of sector assets (from 41% of assets in 2015). Credit unions of < €20m asset size have reduced by 58% since 2015.  Assets have grown from €14.9bn in 2015 to €18.3bn at Sept 2019, an increase of 23%. Over the same period, average asset size has grown to €76m, an increase of 73%.  Loans have grown to €5.1bn at Sept 2019, an increase of 29% since 2015. The 28% average loan to asset ratio has remained static as a result of continuing growth in member savings.  Reserves averaged 16.5% in Sept 2019, with the corresponding figure in 2015 at 16.2%. The growth in savings is placing pressure on credit unions to maintain their current reserve levels.  Return on assets has fallen from 1.4% in 2015 to 0.7% in Sept 2019, and is expected to fall further due to a rising cost base (78% cost income ratio) combined with falling investment yields.

10 Current members : Lorraine Corcoran, Afanite; Olive McCarthy, UCC; Seamus Newcombe, CEO, Payac; Diarmaid O'Keeffe, Eisen Amper; Claire Byrne, CEO, St. Raphael's; John Doyle, CEO, St. Jarlath's, former CEO of ReBo. Page 124 of 166

Financial Sustainability Challenges At present credit unions are operating in an extremely challenging economic conditions with a fall in investment returns combined with an increase in deposits, loan books that are not growing much faster than deposits and low loan to asset ratios. Loan to assets ratios range from 12% to 73%, reflecting differing performance and common bonds across the sector. While similar conditions are also impacting banks throughout the EU, the issue is particularly acute due to the traditional business model of credit unions. Credit unions are, therefore, having to explore new options in terms of both lending, investments, generation of non-interest income, management of savings growth and costs efficiencies. The impact of COVID-19 has exacerbated this situation even further. Even prior to COVID-19 we were making the financial sustainability of the sector a key area of focus in 2020.

Approach to supervision has been refined with less on-site inspections for most of the sector Since 2012, the Central Bank has provided a systematic, risk-based, and defined regulatory approach, designed for financial institutions and tailored for credit unions. In 2018, amendments to the approach reduced the number of on-site inspections. Further enhancements in 2019, mean only those above €100m in asset size have an annual on-site inspection.

Investment Regulations: Review of changes made in 2018 due during 2020 Revised Investment Regulations for credit unions were implemented on 1 Feb 2018. The Central Bank committed to carrying out a review two years post commencement (i.e. during 2020) to assess the actual impact which the regulations have had as part of the post implementation review.

Lending Regulations: Review of the Lending Framework for Credit Unions completed in 2019 Following public consultation, the Central Bank published amending lending regulations on 1 January 2020. The changes introduced are positive, particularly increased capacity for house lending, the change to limits as a percentage of assets rather than loans and the simplification of maturity limits. While the amended regulations were cautiously welcomed by the sector, there is a concern that they lack flexibility to develop sustainable loan-to-asset ratios in the long term.

One of the new regulations is a combined concentration limit for house and business loans, which allows 7.5% (or 10% if compliant with certain criteria) of assets in house and business lending combined, while also containing a 5% limit for business lending. There is headroom of c €2bn for mortgages and SME lending collectively; up to €0.8bn for SME lending and €2bn for mortgages.

Capital Requirements for Credit Unions set by Central Bank at 10% of assets Under the Credit Union Act 1997 (as amended) credit unions are required to maintain adequate reserves. The Central Bank has the power to prescribe the regulatory reserve requirement a credit union must maintain at a minimum, which is 10% at present, and to introduce risk weighting. In terms of total realised reserves, the average for the sector was 16.5% as at 30 September 2019. Credit unions in Ireland have an exemption from the Capital Requirements Directive (CRD) and the Capital Requirements Regulation (CRR) which apply to most credit institutions in the EU.

Wide range of collaborations established Recently a range of collaborative ventures have been established to expand services and increase efficiencies including: Cultivate (agri-lending), PAYAC (current accounts), CUSOP (payments), Peopl Page 125 of 166

(insurance, JV with CUNA), Metamo (JV with Fexco), and shared service ventures for mortgages by both ILCU and CUDA. Further collaborations are possible to assist with SME lending and IT projects.

Social Housing – no AHB funding completed despite change in Investment Regulations There is no current legislative or regulatory impediment to the credit union sector (or any other party) establishing an SPV to invest credit union funds in Tier 3 Approved Housing Bodies (AHBs). The investment regulations allow for investment in AHBs. At a sector level the concentration limit could facilitate investment of over €700m. There are risks associated with credit unions providing such funding and it is not clear that long-term investment at low rates (competing with the Housing Finance Agency (HFA) and pension funds) is commercially viable. At present there is no commercial case for the State to establish an SPV, which would require State Aid approval, to replicate (and compete with) the HFA, which is a non-commercial semi-State Body already funding AHBs. The Department of Finance will continue to engage with the credit union movement on appropriate mechanisms for the sector to establish a vehicle to invest in AHBs.

SME Lending: growth in lending to €49 million, but from a low base Credit unions have been, and are, permitted to provide commercial loans. Commercial lending requires specific skills and expertise and may not be appropriate for all credit unions. Credit unions have capacity to lend up to €800m of SME lending. As at September 2019, the quantum of new commercial loans advanced was €49m (1.9% of new loans), an increase from €36.3m (1.5% of new loans) from 30 Sept 2017. Included in the total outstanding are agri-loans under the Cultivate scheme, which is a collaboration of 26 credit unions that provides loans for farmers up to €50,000.

Credit unions could be an avenue for lending through the Credit Guarantee Scheme and Microfinance Ireland scheme.

Community Banking Review supported the role of credit unions The Local Public Banking report published in 2018 concluded there is not a compelling business case for the State to establish a new local public banking system by drawing on Exchequer funding. Indecon was engaged to carry out a review, published in January 2020, and found that credit unions have a major part to play in offering community banking services. Indecon believes that important recent collaborative developments in the credit union sector will further strengthen community banking.

New Debit Card Services launched by c 35 credit unions in late 2019 Debit card provision requires Central Bank approval. The Member Personal Current Account Services (MPCAS) which allows approved credit unions to offer personal current accounts, and a range of payment services including debit cards, overdrafts has been available to credit unions above a guideline of €75mn asset size, since Oct 2016. As MPCAS becomes embedded, the Central Bank may make it available to other credit unions with appropriate risk management. PAYAC has recently launched current accounts with 35 of the largest credit unions.

Credit Union Loan Interest Rate Cap Legislation being drafted by OPC In 2017, CUAC recommended that the monthly interest rate cap be increased. This recommendation was formulated based on the results of a survey of the sector (117/ 42% responded). The

Page 126 of 166 recommendation was supported by a UCC report for Social Finance Foundation (SFF). The General Scheme of the Bill was approved by Government on 11 June 2019 to increase the maximum monthly interest rate on credit union loans from 1 per cent to 2 per cent; and to allow for that maximum rate to be adjusted in future by Ministerial Order. Government also granted approval for drafting, by the Office of the Parliamentary Counsel (OPC), of the Credit Union Interest on Loans Bill 2019 based on the General Scheme of the Bill. The Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach confirmed in late 2019 that it did not wish to conduct Pre Legislative Scrutiny on this Bill. Continuation of the Bill, which has been recommended by CUAC and the SFF, will be a matter for consideration by the incoming Government.

Personal Micro Credit Scheme DEASP established the Personal Micro Credit (PMC) scheme. The scheme is aimed at moving welfare recipients away from the use of high cost moneylenders and providing an alternative, low cost personal loan scheme. 109 credit unions are offering the 'It Makes Sense' loans.

Levies and charges on credit unions Credit unions are subject to the Industry Funding Levy, Resolution Levy, Stabilisation Levy and Financial Services & Ombudsman Levy (FSPO Levy). They also contribute to the Deposit Guarantee Scheme (DGS). While the Industry Funding Levy is increasing, other levies have fallen (Stabilisation Levy, FSPO Levy), been eliminated (ReBo Levy) or are proposed to fall (Resolution Levy to fall from €9m to €5m pa, a fall of 44%). The Stabilisation Levy for 2020 will remain at €3m but will be reviewed in 2020 ahead of the 2021 levy. The table below details levies and charges for 2017-2019 and forecast for 2020-2022. The forecast industry funding levy will depend on actual costs of regulation.

€m 2017 2018 2019 2020 2021 2022 Resolution Levy 8.5 8.9 9.0 5.0 5.0 5.0 Stabilisation Levy 3.5 3.0 3.0 3.0 TBD TBD ReBo Levy 1.6 - - - - - Industry Funding 1.6 1.7 3.3 5.7 8.2 8.2 FSPO Levy 0.5 0.6 0.1 0.1 0.1 0.1 Total 15.3 13.6 15.4 14.0 TBD TBD

Central Bank Industry Funding Levy to rise to 50% of regulatory costs by 2022 The Central Bank Act 1942 provides that the Central Bank may, with approval of the Minister, prescribe an Industry Funding Levy. The levy is a financial services industry wide levy, not specific to credit unions. Banks have been at 100% since 2012, other sectors will reach 100% during 2020-2023.

In 2015 the Minister at the time agreed to a phased movement towards 100 per cent Industry Funding in order to eliminate subvention, by taxpayers, of regulatory costs. Since then, recovery rates have increased across most industry sectors. The Minister approved the Central Bank’s proposal to increase the levy from 2019. However, the Minister, having taken into consideration the unique and important role of credit unions, recommended that they be provided with an exemption from the 100% target, the only part of the financial services sector to have such an exemption. Credit unions have a 50% target, to be recovered on a phased basis: 20% for 2019; 35% for 2020; and 50% for 2021. Recovery rates from 2022 on will be subject to review and public consultation.

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ReBo – awaiting completion of legislation to dissolve the entity The Credit Union Restructuring Board (ReBo) was established in 2013 to facilitate restructuring. ReBo was operationally wound down on 31 July 2017. The Credit Union Restructuring Board (Dissolution) Bill 2019 provides for its dissolution. This Bill passed all stages in the Dail but not the Seanad. There are queries outstanding from the C&AG in relation to the accounts for ReBo for 2017 and 2018 and as a result, the accounts have not yet been completed.

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3.1.7.9 Management of all legal matters concerning the Shareholding and Financial Advisory Division

Specialist - Emily King

Des Carville Head of Division

Emily King Senior Legal Advisor

KEY POINTS: The Senior Legal Advisor within SFAD provides advice on all legal matters pertaining to: • the State’s investments in the banking sector (Allied Irish Banks, Bank of Ireland and PTSB); • the Minister’s interests in relation to NAMA; • the Minister’s interests in relation to the liquidation of IBRC; • certain legacy litigation matters; and • the Credit Union sector.

In addition, the Senior Legal Advisor works with the Legal Unit of the Department on commercial law matters and proceedings as they arise within the Department.

The current panel of legal advisors was put in place in June 2018 following a procurement exercise to ensure that the Department has access to legal advice on a once off or project basis as necessary. At present, William Fry are advising the Department on the legal aspects of two projects following mini- competitions in which they were the successful tenderer. One is the Commission of Investigation into certain transactions at IBRC (which is ongoing), the other is advising the Minister on the disposal of part of the State’s shareholdings.

We deal with various matters of ongoing litigation including:  NAMA CoI;  IBRC CoI;  McKillen; and  Skoczylas.

We will provide a legally privileged briefing under separate cover in due course.

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3.1.7.10 Financial Advisory Services

Specialist – Mai Santamaria

Des Carville Head of Division

Mai Santamaria Principal Officer Equivalent

Morgan Slattery Specialist

KEY POINTS:  The Financial Advisory Team carries out evidence based research to provide empirical insights and input into policy considerations for the Department of Finance (examples: crowdfunding, REITs, PCP, equity funding review, Irish banking and economy overview).  The team carries out ongoing research and monitoring of Blockchain & Virtual Currencies (Cryptoassets), while coordinating the Department’s working group.  It provides insight and objective analysis on emerging areas of financial services and technology, developments in “digital finance economy” and “decentralised finance”, in Ireland, EU and globally.  The team organises and hosts events that relate to new and emerging topics of importance to the Department and the private sector, in areas such as equity funding, blockchain, aviation and the legal aspects of technology changes.  The team have been members of the Blockchain Ireland initiative for over 2 years, and represent Ireland at the OECD Ad Hoc Expert Group on Digitalisation and Finance and the European Union’s backed INATBA.

DETAIL: The financial advisory specialists team is a relatively new initiative which commenced in April 2017.

During this time, the team have collated, appraised and socialised a draft working list of areas of interest for research and review. The team liaises with other Divisions (mainly Banking policy and Economics) to ensure that initiatives are carried out within the strategic objectives of the Department as a whole. Continued engagement and collaboration is actively pursued to ensure we capitalise on the varied and expert knowledge of the financial services industry across the Department and other public bodies (i.e. ESRI).

One example of this collaboration is the team’s membership of the sub-committee on housing, for which it assists with research and analysis into the Irish residential housing sector. To date, the team

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has provided reviews on the role of Real Estate Investment Trusts (REITs) and the concentration of residential property ownership in Ireland.

A further example relates to research into the availability of debt and equity funding required by Irish SMEs. In Q1 2019, the team assisted with the Banking Policy team’s review of hybrid financial instruments as a financing tool for high growth SMEs.

One sector in particular that was identified as a potential source of additional capital for Irish SME was the Irish institutional investor community. To explore this topic further, the Department hosted a learning session on 12 June 2019 titled ‘Institutional Investment in Private Capital’.

Intra-Departmental Working Group on Digital Assets and Blockchain Background The Minister for Finance announced the formation of an intradepartmental working group on blockchain & virtual currencies on 22 March 2018.

Aims of the Intra-Departmental Working Group:  Monitor developments at a European (i.e. ECB, EBA, ESMA, EC, EIOPA) and global level (i.e. OECD, IMF) in relation to virtual currencies and blockchain, and provide input into the discussions as and when required  Build knowledge of developments in the technology with an aim to assess potential economic opportunities for Ireland  Engage with industry and subject matter experts across academia and the private sector to help build a dynamic communication flow  Liaise with other areas of Government to assess where involvement might be required  Consider whether suitable policy recommendations are required  Assist in promoting a better understanding of the technology across Government  Identify risks relating to the technology, and explore mitigating actions  To raise awareness of the possible risks to consumers and investors.  To identify opportunities to assist in the delivery of the IFS2020 objectives of fostering growth in technology, while supporting indigenous companies and continuing to secure foreign investment.  Continue to explore the role of institutional investment in the Irish venture capital and private equity landscape

Actions taken since 22 March 2018  Published a discussion paper on blockchain and virtual currencies following the announcement of the working group.  Created a dedicated Department of Finance Virtual Currencies and Blockchain “landing page” to provide one single point of collection for information relating to tax, consumer protection and regulatory matters: https://www.gov.ie/en/publication/67039d-b/  Additionally, published a notice on the VAT treatment of virtual currency transactions  Liaised with the Competition & Consumer Protection Commission (CCPC) to issue consumer warning notices  Included links to global documents in this topic, of relevance to public and private sectors.

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 The Working Group is engaging on several blockchain and cryptoassets initiatives at European level:  the European Commission’s Fintech Action plan report (over 10 points identified relating to blockchain)  the EU Blockchain Observatory & Forum: a pan-European initiative designed to explore how blockchain can be used to improve information exchange across member states.  the European Blockchain Partnership: an initiative designed to support the delivery of cross- border digital public services.  Providing review of blockchain and cryptoassets proposed changes to the 5th AML directive

 And Global level:  Attended 2 OECD workshops on blockchain, cryptoassets and ICO’s (May and July 2018)  Attended OECD blockchain forum (Sept 2018)  Provided review comments to FATF initiatives during 2018 and 2019  Secured participation in OECD’s Ad Hoc Experts Group on Finance and Digitalisation (EGFD), launching on 26 April 2018 in Paris  Secured participation at Japan’s Financial Services Agency blockchain and regulations workshop in March 2019.

 Monthly engagement with private sector, academia Enterprise Ireland and the IDA via the ‘Blockchain Ireland’ initiative. Blockchain Ireland is an IDA-led forum established as a vehicle to promote and enhance the blockchain industry in Ireland. www.blockchainireland.net

 Monitoring the growth of the Irish blockchain ecosystem and providing the first ever “full picture” of the blockchain ecosystem in Ireland.  Attended and participated as experts on the topic, representing the department, in up to 20 events, conferences and workshops, in Ireland and abroad. - BPFI conferences (In Ireland and Belgium) - MoneyConf, FinSum, Afore, VoB - OECD: workshops and forum - European Blockchain for Finance; European Blockchain Convention - EIRC

 The Department of Public Expenditure and Reform and the Department of Finance hosted a ‘blockchain hackathon’ in the Trinity Innovation Centre between 25 and 27 Jan 2018. The event saw nine teams of software developers competing to solve a number of technical challenges from across Government: www.blockathonireland.com

 Co-founder of BlockW initiative

Workplan for 2020 We would like to continue to represent the Department in the area of blockchain and cryptoassets this year, and be a source of “expert” knowledge. This will require a greater time investment in ongoing research and learning, particularly as we see new entrants into the Irish Market and the work on stablecoins is developed at G7/G20 and EU level. We expect to continue providing support for the Page 132 of 166

other divisions in this space, particularly in light of the 5th AML due to come into force in early 2020, supporting discussions at EU level (FSC, EFC, ECOFIN). This will continue our involvement with Blockchain Ireland and participation in conferences, fora and events in Ireland, EU and abroad.

We would like to focus on these topics selected for research and monitoring due to their potential impact on the economy, business sector and consumers:

- Follow up on seed and venture capital gaps identified in prior research; - InsurTech; - Aircraft leasing; - Decentralisation of finance (cloud computing and Big Tech banking offers); - Use of AI in financial services - Housing (in conjunction with Economics and HBFI teams) - Delivery of the Ireland for Finance actions relating to blockchain.

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3.1.8 International Finance Division

The briefing prepared by International Finance Division provides a high level introduction to the issues relevant to the Division. More detailed and in depth analysis of any of the topics can be provided if needed.

DESCRIPTION

The Division is responsible for managing Ireland’s relationship with International Financial Institutions (IFIs) and the Department’s role in Climate Action/Change, including Climate Finance. The IFIs include: the IMF, the World Bank Group (WBG), the European Investment Bank (EIB), the Asian Infrastructure Investment Bank (AIIB) and other IFIs such as the European Bank for Reconstruction and Development (EBRD), the Asian Development Bank (ADB), the Council of Europe Development Bank (CEDB), African Development Bank (AfDB) and the Green Climate Fund (GCF).

The Division also supports the Minister and the Minister of State in relation to International Financial Services (IFS), specifically the development and implementation of the Government’s Ireland for Finance Strategy launched on 26 April of 2019.

In addition, the Division is responsible for the Department’s Risk Management and Compliance Functions in line with its Corporate Governance Structure.

Head of Division and Executive Board Member - Paul Ryan (Director)

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3.1.8.1 International Financial Institutions and Climate Action

Principal Officers: Des O’Leary & Niamh Campbell

Paul Ryan Director International Finance

Des O'Leary Principal Niamh Campbell International Financial Institutions - IFIs (World Bank, Principal IMF, EIB,EBRD, CEDB, ADB, Climate Action/Climate Change AIIB, GCF, Climate Change and Paris Club)

Niamh McGuire Pat Mulhall Assistant Principal Assistant Principal Vacancy European IFIs Global & regional IFIs Assistant Principal (EIB,EBRD,CEDB) and Climate (IMF,WBG,ADB,AIIB,AFDB and Climate Action/Climate Change Change (incl GCF) Paris Club)

 KEY POINTS  Ireland is a member of a wide range of International Financial Institutions. Generally speaking, the Minister acts as Governor and the Secretary General acts as Alternate Governor (except in the case of the IMF where it is the Governor of the CBI). This area supports all our dealings with these institutions. Within each Institution, Ireland is a member of a Constituency made up of different countries. We are members of the following institutions:  International Monetary Fund (IMF): Managing Director Kristalina Georgieva (Bulgaria) - Ireland shares a Constituency with Canada and 10 English-speaking Caribbean countries) led by a Canadian Executive Director. Ms Louise Levonian.  World Bank Group (WBG): President David Malpass (USA) - Ireland shares a Canadian-led Constituency with 11 English-speaking Caribbean countries as at the IMF with one extra country. Ms Levonian is also the Constituency ED at the World Bank.  The Paris Club: French Treasury Chair and Secretariat. Established, 1956 and Paris-based, it consists of 22 countries (mainly EU and OECD) who are major creditor countries.  European Investment Bank (EIB): President Werner Hoyer (Germany) - Shared Constituency with Denmark, Greece and Romania.  European Bank for Reconstruction and Development (EBRD): President Sir Suma Chakrabarti (UK) whose term ends on 2 July 2020. Shared Constituency with Denmark, Lithuania and Kosovo.

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 Council of Europe Development Bank (CEDB): Governor Rolf Wenzel (Germany) – no Constituencies. Ireland joined the CEDB in 2004.  Asian Development Bank (ADB): President Masatsugu Asakawa (Japan) - Ireland shares a Canadian-led Constituency with Denmark, Finland, Netherlands, Norway and Sweden.  Asian Infrastructure Investment Bank (AIIB): President Jin Liqun (China) - Ireland shares a Euro Constituency with Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Italy, Luxembourg, Malta, Netherlands, Portugal and Spain.  African Development Bank (AfDB): President Akinwumi Adesina (Nigeria). Ireland was declared the 81st member of the AfDB on 24th April 2020 and we are currently negotiating to join the Nordic + India Constituency.  Green Climate Fund (GCF): Ireland commenced contributions to the UNFCCC’s Green Climate Fund (GCF) in 2016 and in 2019 Ireland pledged €16m for the 2020-23 period and established a constituency with Spain and New Zealand. As largest contributor, Spain holds a Directorship and Ireland rotates the Alternate Director post with New Zealand (we hold it for 2020 and 2022).  Climate Change: The section also has a role in climate change. (1) The all-of-Government Climate Action Plan was published in June 2019. (2) The EU Commission published a new European Green Deal in December 2019, setting out the policy and legislative agenda for climate and environment in the new Commission’s term. (3) The Sustainable Europe Investment Plan was published on 14 January and will be instrumental in meeting the additional funding requirements. (4) The World Bank-supported Coalition of Finance Ministers for Climate Action was launched in April 2019 at the World Bank/IMF Spring Meetings, with Ireland becoming one of the founding members, where we lead with other countries on a number of work-streams under the Coalition’s Helsinki Principles. Also involved in the Carbon Pricing (Principle 3) and NDCs (Principle 6) work-stream.

DETAIL: Current IFI Membership

International Monetary Fund (IMF)

Overview The IMF promotes international monetary cooperation and provides policy advice, technical assistance and loans to help countries build and maintain strong economies. It also provides loans and helps countries design policy programmes. A near-global 189 countries are members.

The IMF’s stated objectives are to (i) Provide a forum for cooperation on international monetary problems; (ii) Facilitate the growth of international trade, thus promoting job creation, economic growth, and poverty reduction; (iii) Promote exchange rate stability and an open system of international payments; and (iv) Lend countries foreign exchange when needed, on a temporary basis and under adequate safeguards, to help them address balance of payments problems.

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Minister’s role as Governor: The Minister is periodically required to consider and decide upon matters proposed by management for votes by the Board of Governors. These usually relate to governance or shareholding issues, but there are also periodic strategic and policy issues.

Representation: The Minister represents Ireland on the Board of Governors. The Central Bank of Ireland Governor, Mr. Gabriel Makhlouf, is Ireland’s Alternate Governor. The Secretary General or Senior officials from the International Finance Division are designated as Temporary Alternate Governor in the absence of the Minister/CBI Governor at Plenary Meetings. Ireland is permanently represented at the IMF in Washington by two seconded officials, both nominated by the Minister.

IMF Quota Review: The IMF Articles of Agreement mandate the Board of Governors to undertake a general review of Quotas (shareholding) every five years. Any changes to the Quota, due to their zero- sum nature, need to be supported by an 85% majority with the consent of those countries affected. Despite the support of most Directors, it was not possible to secure the required support for a Quota increase under the recent Fifteenth Review. Instead, the IMF Executive Board approved a doubling of the New Arrangements to Borrow (NAB) in January 2020 – detailed below.

New Arrangements to Borrow (NAB): In the absence of an agreement on a Quota increase under the Fifteenth Review and, in order to ensure that its current level of resources are sufficient to deal with any future crises, the IMF proposes to double its New Arrangements to Borrow (NAB) facility. This provides the main supplement to Quota subscriptions as a source of IMF resources. It is a credit arrangement between the IMF and a group of members and institutions to provide supplementary resources to the IMF when these are needed to forestall or cope with an impairment of the international monetary system. It will effectively act as a temporary measure in lieu of a quota increase, to ensure adequacy of IMF resources in the period beyond 2020. The consent of NAB participants (including Ireland) is now being sought in order for these changes to become effective on 1 January 2021. Currently, 40 member countries and Institutions have committed to lend NAB resources to the IMF. At the 2019 Spring Meetings, Ireland agreed in principle to fully participate in the NAB increase.

IMF and World Bank Spring and Annual Meetings: As the component parts of the Bretton Woods Institutions, the IMF and World Bank Group hold joint Spring and Annual Meetings. The 2020 Annual Meetings are due to take place in Washington (16 - 18 October). The Annual Meetings are held outside of Washington every three years with the next external meeting due to take place in Marrakech in 2021. Given the proximity of the Annual Meetings to Budget Day, the Minister has typically not been in a position to attend.

IMF Article IV 2020: As a member of the IMF, Ireland undergoes a regular review under the Article IV process (Article IV being the relevant provision in the IMF Articles of Agreement). This is a strategic review of the current position of the economy and its medium-to-long term prospects, medium-term fiscal policy and financial and banking policy. Due to the COVID-19 pandemic, the 2020 Article IV Mission (originally scheduled for early May of this year) has been postponed to a date to be confirmed.

Financial Sector Assessment Program (FSAP) 2021: The FSAP is a comprehensive and in-depth analysis of a Country’s financial sector with a twofold goal: to gauge the stability and soundness of the Page 137 of 166

financial sector; and to assess its potential contribution to growth and development. In September 2010, the IMF made it mandatory for 25 jurisdictions with systemically important financial sectors (based on the size and inter-connectedness of their financial sectors) to undergo assessments under the FSAP every five years. Ireland was one of these 25 jurisdictions. The most recent FSAP of Ireland was conducted in 2015-2016. Preparations are at an early stage for Ireland’s FSAP in 2021.

World Bank Group (WBG)

The World Bank Group (WBG) comprises five institutions with a common commitment to reducing poverty, increasing shared prosperity, and promoting sustainable growth and development:

 International Bank for Reconstruction and Development (IBRD) - aims to reduce poverty in middle-income and creditworthy poorer countries by promoting sustainable and equitable development through loans, guarantees, risk management products, and (non-lending) analytical and advisory services.

 International Development Association (IDA) - financing on highly concessional terms to governments of the poorest of the developing countries and is the world’s largest source of concessional financial assistance to the developing world.

 International Finance Corporation (IFC) - loans, equity, and advisory services to stimulate private sector investment in developing countries.

 Multilateral Investment Guarantee Agency (MIGA) - political risk insurance/credit enhancement to investors/lenders facilitating FDI in emerging economies.

 International Centre for Settlement of Investment Disputes (ICSID) - provides international facilities for conciliation and arbitration of investment disputes.

Minister’s role as Governor: The Minister is periodically required to consider and decide upon matters proposed by management for votes by the WBG Board of Governors. These usually relate to governance or shareholding issues, but there are also periodic strategic and policy issues.

Representation: The Minister is Ireland’s Board of Governors representative with the Secretary General Ireland’s Alternate Governor. Senior officials from the International Finance Division are designated as Temporary Alternate Governor in the absence of the Minister at Plenary Meetings.

Ireland is represented in Washington by two officials, both nominated by the Minister for Finance and shared between this Department, the Central Bank and the Department of Foreign Affairs and Trade. The Constituency is represented on the Board by Executive Director, Ms. Louise Levonian (Canada), who holds the same position in our IMF Constituency.

IDA (International Development Association) Replenishment: IDA is the WBG’s fund for the world’s poorest and least creditworthy countries to whom it provides financial support on concessional terms (grants or very low interest rates). It is one of the largest sources of assistance for the world’s 77 poorest countries, 39 of which are in Africa, and is the single largest donor for basic social services in these countries. IDA is funded largely by contributions from its richer member countries including Ireland. An IDA replenishment, during which contributors to IDA make their pledges, takes place every three years. In December 2019, at the conclusion of the IDA19 replenishment, Ireland pledged €102m, an increase from our contribution of €90m to the previous replenishment (IDA18). The focus of IDA19 Page 138 of 166

is closely aligned with the objectives of A Better World, Ireland's development policy. The increase in our contribution also reflects Ireland’s improved economic position and sends out an important message of our continued support for IDA and commitment to international development.

2018 Capital Increase: At the 2018 Spring Meetings, the WBG membership agreed a financial package which included a US$13bn paid-in capital increase, consisting of US$7.5bn for the International Bank for Reconstruction and Development (IBRD) and US$5.5bn for the International Finance Corporation (IFC). This increased the WBG’s annual lending capacity to US$100bn by 2030, from US$61bn in 2017. The final steps to commence the IFC subscription process (which will allow for Ireland’s first payment under the 2018 capital increase) are expected to be completed in 2020. Ireland made the first of five annual payments under the IBRD capital increase in September 2019.

Doing Business Report: The Doing Business Report is a flagship WBG publication published annually (usually, end-Q3). The Report assesses regulations and the ease of doing business in its 189 member economies. Ireland’s performance has been consistently strong in the last number of years, ranking 24th in Doing Business 2020 (published in October 2019).

Reporting to the Oireachtas: Under the Bretton Woods Agreements Act of 1999, the Minister is required to lay an Annual Report on Ireland’s IMF and WBG participation before the Oireachtas. The 2019 Report is nearing completion and it summarises major developments at the IMF and World Bank.

Paris Club Established in 1956 and based in Paris with a Chair and Secretariat provided by the French Treasury, the Paris Club consists of twenty-two mainly major creditor countries (mainly EU and OECD). Its role is to find co-ordinated and sustainable solutions to the payment difficulties experienced by debtor countries.

Members are: Austria, Belgium, Brazil, Canada, Denmark, Finland, France, Germany, Ireland, Israel, Italy, Japan, Korea, Netherlands, Norway, Russian Federation, Spain, Sweden, Switzerland, UK, USA. Others have also been invited to attend in an observer capacity in the last year, including China, India and South Africa. The inclusion of China, a major source of credit to developing countries on relatively high terms and conditions, is a major policy issue.

European Investment Bank (EIB) Based in Luxembourg, the EIB was established in 1958, under the Treaty of Rome, as the long-term investment bank of the European Union. The purpose of the EIB is to help implement the EU's policy objectives by financing investments that address these policy objectives. To finance these projects, the EIB borrows on the capital markets, passing on the benefit of its low borrowing cost, due to its AAA credit rating, to Member States. It also provides lending for investment and development purposes, in line with the EU’s Neighbourhood and Development policies, to pre-accession and neighbourhood countries (Eastern Partnership and Mediterranean - FEMIP), to developing countries in Asia, Africa, the Caribbean and the Pacific (ACP countries) and to South Africa under the Investment Facility Committee (IFC).

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Minister’s role as Governor: The Minister is frequently required to consider and decide upon matters proposed by Bank Management for votes by Governors which usually relate to governance, shareholding or Board representation issues with periodic strategic and policy issues.

Representation: Ireland is represented on the Board of Directors (non-residential) which meets approx. 10 times per year in Luxembourg, by Des Carville - Director (Head of Shareholding and Financial Advisory Division, Dept of Finance) and Des O’Leary – Alternate Director (Principal in International Finance Division). Andrew McDowell is Ireland’s full-time Vice-President and Member of the Management Committee but his four-year term ends in early September when a Danish nominee (under Constituency rotation) will replace. Ireland will next get this post in 2032.

EIB Dublin Office: In line with its practice across EU member states, the EIB opened an Office in Dublin in December of 2016 headed by Cormac Murphy, an Irish national who works in the Bank. A Corporate Loan Officer is also assigned to the Office.

EIB-Ireland Financing Group: An ‘EIB-Ireland Financing Group’, Chaired by the Department, was established by the Minister for Finance and EIB President in December 2016 to bring together relevant stakeholders to explore the potential for enhanced EIB funding on a sectoral approach combined with greater other supports in terms of advisory services to potential borrowers.

EIB Funding to Ireland: Ireland is a significant recipient of EIB funding covering both public and private sectors. Loans are made to a broad range of sectors, including: Broadband; Energy generation and transmission; Transport; Health; Water; Education (schools and Third Level); SMEs via SBCI; Social Housing; and Roads PPPs; with a broad geographic spread. In recent years, our engagement with the Bank has significantly broadened and deepened to cover new areas of activity, especially the private sector including agri-food, ICT and financial services.

Total net signatures and approvals of EIB projects in Ireland in 2019 was €960,304,549. Potential EIB signatures in Ireland for 2020 amount to approximately €1bn for a range of projects and sectors, including renewable energy, social and infrastructure projects

European Investment Fund (EIF) Membership: The SBCI have recently agreed to become a member on behalf of Ireland. The EIF operates in a manner similar to Enterprise Ireland by working closely with private sector companies via joint ventures and equity investments with a focus on companies involved in innovation, research and development across a range of sectors.

Impact of Brexit on the EIB: Brexit has had a major impact on the Bank’s capital structure and future business model. The shareholding structure changed with the loss of the UK’s 16.1% shareholding - the UK’s share capital was €39.2bn since 1 July 2013. EIB Governors (Ministers) approved a capital replenishment using reserves and callable capital in April 2019. This meant that the remaining EU-27 Member States secured an immediate capital replacement equivalent to the UK's €39.2bn share in the EIB subscribed capital (callable plus paid- in). This occurred without any payment from Member States, through a conversion of €3.5bn from EIB reserves into paid-in subscribed capital.

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European Bank for Reconstruction and Development (EBRD) The EBRD, headquartered in London, was established in 1991 to provide finance to help build market economies in ex-Warsaw Pact and Soviet Union countries in Central and Eastern Europe. Since then, the Bank has progressively and significantly extended to include Southern/Eastern Europe and SEMED (Turkey, Egypt, Jordan, Morocco and Tunisia) as its ‘countries of operation’. The Bank provides project finance and equity for banks, industries and businesses, both new ventures and existing companies. It also works with publicly-owned companies to support privatisation, restructuring of state-owned firms and improvement of infrastructure.

Minister’s role as Governor: Issues for consideration by the Minister include matters proposed by management for votes by Governors usually relating to governance/shareholding representation with periodic strategic and policy issues.

Representation: A residential Board of Directors is responsible for management of the day-to-day operations. Directors represent single or multi-country Constituencies (Ireland shares with Denmark, Lithuania and Kosovo). Mr Patrick Walsh currently holds the Irish Director post until 30 April 2021 and we hold the Directorship again from 2024 - 27 with an Advisor post from 2021 - 24.

Election of New President in 2020: Sir Suma Chakrabarti’s term as President ends in July and the election process for a successor is currently underway with three candidates: Odile Renaud-Basso (France, Director General of the Treasury), Mr Tadeusz Koscinski (Poland, Minister for Finance) and Pier Carlo Padoan (Italy – ex-Finance Minister and Deputy Secretary General of the OECD). Due to the Covid-19 pandemic, the election is postponed to Autumn 2020 (possible date 7/8th October for a combined physical Annual Meeting/Presidential Election). In the interim, a Vice President will fulfil the role of President.

Strategic and Capital Framework (SCF) 2020-25: The Bank’s Board is currently considering its SCF 2020-25 which sets out the strategic and policy background to more detailed operation plans for this period. The SCF envisages a major shift towards an engagement with sub-Saharan Africa. Ireland shares a concern with many other like-minded countries, mainly northern EU countries, that this proposal lacks a strong business case and will spread the Bank’s resources too thinly. Given that Ireland’s Constituency includes Lithuania and Kosovo, we are concerned that the EBRD must remain focussed on these two countries along with other ‘countries of operation’, before it expands geographically into areas where its lacks a track record or expertise.

Review of European Financial Architecture for Development: Wise Persons’ Group: The so-called Wise Persons’ Group was established in early-2019 to review the European Financial Architecture for Development, specifically the respective roles of the EIB and the EBRD. The Group comprises seven ‘wise persons’, led by a Chairman, Thomas Weiser (Germany). The Group’s Report, issued 7 October 2019, proposed three options: (i) Create a European Climate and Sustainable Development Bank, building on the EBRD and the external financing activities of the EIB (in such a scenario the EIB would concentrate on Europe and accession countries only); (ii) New mixed ownership European Climate and Sustainable Development Bank – EIB, EBRD, the Commission and other stakeholders; or Page 141 of 166

(iii) European Climate and Sustainable Development Bank based on an EIB subsidiary.

The Report also recommended further analysis and feasibility studies of the options be completed. The studies are due to be completed by end-2020 to be subsequently discussed at ECOFIN.

Ireland’s main issues for the potential European Climate and Sustainable Development Bank are to ensure it is justified by a strong business case and that it does not replicate the work of other IFIs such as the EIB, EBRD, World Bank, AIIB and AfDB.

Council of Europe Development Bank (CEDB) Based in Paris and with 41 member countries, the CEDB was established by the Council of Europe in 1956 to assist refugees. It has continued to maintain a focus on investment to meet social objectives within its member countries under the following themes: social integration (aid to refugees, social housing, SME financing, improvement of living conditions), environmental protection and rehabilitation and public infrastructure with a social vocation (health, education and judicial infrastructure).

Representation and Minister’s role: Unlike other IFIs, the Governor for Ireland is the Minister for Foreign Affairs and Trade because the CEDB was established under the remit of the Council of Europe. As such, the Minister for Finance has a different and smaller role than with other Institutions. However, any engagement with the Bank is done by this Department rather than the Department of Foreign Affairs and Trade. This involves funding proposals, governance, shareholding, strategic and policy issues.

CEDB funding to Ireland: The Bank provided lending to Ireland of €844m across a range of projects over the 2008-2017 period including: social housing; SME financing (via SBCI); urban regeneration and Courts). In 2019, loans were provided to the HFA (€150m) and Cork County Council (€33.7m).

Meetings: Apart from an Annual Meeting (held in a Member State which Ministers do not normally attend), periodic meetings involve Department officials. Ireland was due to host the Annual Meeting in July 2020 but the Meeting has been postponed due to Covid19, and Ireland will now host it in 2022 because Greece had already been nominated to host the 2021 Meeting.

Asian Development Bank (ADB) Established in 1966 and headquartered in Manila in the Philippines, the ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and Pacific, while sustaining its efforts to eradicate extreme poverty. It assists its members and partners by providing loans, technical assistance, grants and equity investments to promote social and economic development. Most recently the Bank released Strategy 2030 which sets the course of ADB’s efforts to respond to the changing needs of the region until 2030. Mr. Masatsugu Asakawa (Japan) took office as is new President on 6 January 2020. He is strongly supportive of Strategy 2030.

Minister’s role as Governor: Issues for consideration by the Minister include matters proposed by management for votes by Governors usually relating to governance/shareholding representation with periodic strategic and policy issues. The Minister may be required to meet with visiting high-level delegations at Presidential and Vice Presidential Levels.

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Representation: Ireland is represented through a Canadian-led Constituency (shared with Norway, Sweden, Finland, Denmark and the Netherlands). Ireland recently completed a term as Advisor with the Bank in 2019 and we will take up a further Advisory posting from 2022 to 2025 with an Alternate Executive Director posting from 2027 to 2029.

Asian Development Fund (ADF): In addition to capital contributions, Ireland has contributed approximately €96m to Special Funds. The main fund is the Asian Development Fund (ADF), established in 1973 as a three-year revolving source of concessional assistance. Replenishment negotiations for ADF-13 are currently ongoing and pledging is scheduled for September in Korea. A submission on our potential contribution will be sent for Ministerial consideration in due course.

Meetings: Apart from the Annual Meeting (held every third year in Manila and in a beneficiary member state in each of the other two years), other meetings such as those relating to the ADF Replenishment are also attended by officials from the International Finance Division. The 2020 is Annual Meeting is currently scheduled to take place in Korea in September. EU Ministers do not attend Annual Meetings and representation is at senior official level only.

Asian Infrastructure Investment Bank (AIIB) The AIIB came into operation in January 2016. It is based in Beijing and China played a leading role in the Bank’s establishment. Its mission is to promote social and economic development in Asia by investing in sustainable infrastructure. The Bank was founded to address the significant infrastructure gap in Asia. The Bank is currently working on a new Corporate Strategy, which will outline its vision for the next five years.

Minister’s role as Governor: Issues for consideration by the Minister include matters proposed by management for votes by Governors usually relating to governance/shareholding representation with periodic strategic and policy issues.

Representation: Upon joining the Bank, Ireland became a member of the Euro Area Constituency, comprised of Cyprus, Germany, France, Italy, Spain, Austria, Finland, Luxembourg, Malta, Netherlands, Portugal, Greece and Belgium. Ireland is currently represented on the AIIB Board of Directors by the French Director of our Constituency, Mr. Philippe O’Quinn.

Meetings: The Board of Directors functions on a non-resident basis, and meets quarterly with additional ‘virtual meetings’ called when necessary. In preparation for the Board, the Euro Constituency meets in advance to formulate a co-ordinated approach to present to the Board and Bank officials. Department officials attend these Euro Constituency and Board meetings. This year’s Annual Meeting will be held by virtual conference in July 2020. EU Ministers do not generally attend Annual Meetings and Ireland is representation at senior official level only.

African Development Bank (AfDB) Membership: On 24th April 2020 Ireland was formally declared as the 81st member of the African Development Bank Group (AfDB), headquartered in Abidjan, Ivory Coast. The Bank is a regional multilateral development finance institution which is focused on reducing poverty, improving living Page 143 of 166

conditions, and mobilizing resources for the continent’s economic and social development. The Group comprises three entities: African Development Bank (Bank), the African Development Fund (Fund) and the Nigeria Trust Fund (NTF). Membership of the AfDB now comprises 54 African countries and 27 non-African countries.

The African Development Fund (AfDF) is the concessional arm of the Bank and mainly provides development finance on concessional terms to low-income Regional Member Countries which are unable to borrow on the non-concessional terms of the Bank.

Minister’s role as Governor: The Minister will be periodically asked to consider on matters proposed by management for votes by Governors which usually relate to governance or shareholding representation issues with periodic strategic and policy issues. The Minister may also be required to meet with visiting high-level delegations.

Representation: Formal steps are underway to join the Nordic + India Constituency (Current membership includes Denmark, Finland India, Norway and Sweden). Due to be concluded shortly, we will then be represented at the Board of Director’s through our Constituency membership.

Responses by International Financial Institutions to Covid19 In response to the COVID-19 pandemic a range of emergency and follow-up measures have been announced by all of the IFIs of which Ireland is a member. Working in close partnership with member Governments, other International Agencies and each one, the IFIs have formulated a range of measures and responses designed to address the COVID19 crisis and its fallout. Regular updates on these responses are provided to the Minister. The following provides an outline of the main C19 responses with a focus on the two Bretton Woods Institutions and the EIB.

World Bank: The World Bank Group has committed US$160 billion in financial support over the next 15 months to help countries respond to immediate health consequences of the pandemic, support businesses and bolster economic recovery. The WBG is working closely with countries on plans to support economic and social responses to the COVID-19 emergency. An overarching approach, roadmap and pipeline are expected in the coming weeks.

IMF: The IMF has put in place a range of COVID19 supports and it has received an unprecedented number of requests for assistance. Over 50% of member countries have signalled their need for assistance in the year to mid-May and 41 emergency financing arrangements have been approved so far in comparison to 30 such requests (average of three per annum) over the 2009-19 period. The Division provides ongoing updates on the details of the delivery and implementation of these packages and in respect of any consequential asks or opportunities for Ireland.

EIB Pan-European Guarantee Fund: On 9th April, the economic response to Covid-19 was agreed by Finance Ministers. Among the measures agreed was the pan-European Guarantee Fund (EGF). This €25bn Fund is an initiative of the EIB and will provide working capital to SMEs, midcaps and corporates that are viable in the long-term but are struggling due to the economic impact of the Covid-19 pandemic. Using private sector investors, it is aimed to leverage the Fund to €200bn. Public sector bodies may also be assisted by the Fund.

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All 27 EU Member States are invited to participate in the Fund and contributions will be proportionate to each Member’s shareholding. Ireland’s current shareholding is 0.66%, therefore our contribution fund will be capped at €164.7m and this will also be the upper limit to a Guarantee that we will be asked to provide along with other contributing countries. The Fund will be established when Member States accounting for at least 60% of EIB capital have signed up to the fund. Legislation is required in Ireland to allow any financial obligations to be drawn from the Central Fund and to provide a Guarantee to the EIB for any losses on the overall Fund.

Paris Club and the Debt Service Suspension Initiative (DSSI): Measures on debt relief have also been identified as an important factor responding to the COVID19 crisis. On 15 April, the G20 and the Paris Club, supported by the IMF and World Bank, formally announced a time-bound suspension by bilateral official creditors of debt service payments for the poorest countries that request forbearance. Ireland, as a member of the Paris Club, has been very supportive of the Debt Service Suspension Initiative (DSSI). This initiative will help to free up additional fiscal space to respond to the immediate crisis. The IMF estimates that debt suspension would be worth about US$12 billion to nations most in need and if private sector creditors were also to participate on comparable terms, potentially a further US$8 billion of relief could be realised.

Ireland continues to call on private creditors and multilateral development banks to seriously consider how they can participate in the DSSI and offer relief to the poorest debt-burdened countries at this crucial time. To-date the Paris Club (PC) is processing requests for relief under the PC/G20 Debt Service Suspension Initiative (DSSI) from 15 countries.

Requests for International Assistance related to COVID-19: To date Ireland has only received a COVID19 specific request from the IMF seeking a $14.3m contribution to Catastrophe Containment and Relief Trust (consideration of this request was deferred pending the appointment of a New Government). However, given the scale of the crisis and the number of poor and vulnerable countries that will require assistance, there will inevitably be further direct and indirect opportunities and requests for funding and resources to address the COVID19 crisis.

Climate Change and Climate Finance issues Background International Finance Division currently provides the policy input for the Department on matters relating to Climate Action/Climate Change and Climate Finance, taking account of the role of International Financial Institutions in encouraging low carbon and climate-resilient investments and in the context of overall national policy on climate change on which the Minister for Communications, Climate Action and Environment leads. The Division operates as the Department’s focal point for all of its work on Climate Action-related issues such as taxation, economic analysis and financial services.

Climate Action Plan 2019 The all-of-Government Climate Action Plan was published in June 2019. This sets out actions across every sector with the objective of ensuring that Ireland meets its EU 2030 climate commitments, putting us on a pathway to achieve net zero emissions by 2050. The Department has been assigned lead responsibility for a number of actions, the majority of which fall under the heading of carbon pricing, fiscal and taxation measures. The Second Progress Report on the Plan is due to be published shortly.

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Budget 2020/ Carbon tax The Minister for Finance committed to a €6 increase to €26 per tonne in Budget 2020 as a first step towards the 2030 target €80 per tonne. The Programme for Government has extended this target to €100 per tonne. Further information on Carbon Tax will be provided by Taxation Division.

Coalition of Financial Ministers on Climate Action In recognition of the key role that Finance Ministers can play in contributing to Climate Action, the Coalition of Finance Ministers for Climate Action was launched in April 2019 at the World Bank/IMF Spring Meetings, with Ireland becoming one of the founding members.

Supported by a World Bank secretariat, the Coalition aims to support the use of fiscal policy, public financial management and mobilization of Climate Finance to promote domestic and global action on climate change, with this to be achieved by: (a) facilitating exchange of experience and insights on relevant policies; and (b) serving as a forum to promote common standards and best practices.

Due to Ireland’s successful experience with Sustainable Finance, Green Bonds and Green Budgeting, we have a lead role on three of the six work-streams of the Coalition: (i) Mobilising the Private Sector; (ii) Macroeconomic and fiscal policy; (iii) and Budgeting. We are also involved in the Carbon Pricing and Nationally Determined Contributions (NDCs) work-streams.

European Green Deal As part of the new EU Commission’s ambition and increased commitment to tackle Climate Change, it published a new European Green Deal on 11 December 2019, setting out the policy and legislative agenda for climate and environment in the new Commission’s term. The Deal is framed as a new growth strategy that aims to transform the EU into a fair and prosperous society, with a modern resource-efficient and competitive economy where there are no net emissions of greenhouse gases in 2050, and where economic growth is decoupled from resource use. Rather than focussing on specific proposals, the Communication presents a roadmap, an overall policy agenda, setting out a schedule for delivery of key commitments over the course of 2020–2021.

European Climate Law and revised 2030 targets The Commission has published a proposal for the First European Climate law which aims to enshrine the EU wide net zero target into legislation, and is also pursuing enhanced GHG reduction targets. For the 2030 targets, a pro-rata application of increased ambition would see Ireland’s 2030 target increase from a reduction of 30% to an approximate reduction of 40%. Domestically, the Programme for Government includes a commitment to introduce a Climate Action Bill in the Dáil in the first 100 days of Government.

Sustainable Finance At the EU level alone, the yearly investment gap to meet EU climate and energy 2030 targets is estimated to be between €150bn to €177bn of additional investment per year to 2030. Beyond the 2030 horizon, the transition to a net-zero greenhouse emissions economy in 2050 is estimated to require annual average investments in the range of €1.19tr to €1.48tr from 2031 to 2050. The sheer volume of funding required, alongside increasing demand from investors to invest in products that pursue sustainability goals, has seen the rapid emergence of Sustainable Finance within

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the international financial services sector in recent years. The IFSC has become a major hub for Sustainable Finance globally and it is a key plank of our current Ireland for Finance five-year Strategy.

Ireland issued its first sovereign Green Bond in late 2018. Following on from this, in October 2019, the NTMA raised the size of its second sale of bonds to fund green projects to €2 billion after drawing orders in excess of €11 billion from international investors seeking access to the deal. The World Bank raised its first Bonds on the Dublin Stock Exchange in 2019 in two separate deals for $1.5bn and €550m. Further work continues to attract further IFI Bond issues to Dublin.

Sustainable Development Day (June 2020) - postponed The announcement of the World Bank Global Sustainable Development Bond was made at Ireland’s first Sustainable Development Day which was held on 15-16 May 2019 in Dublin. This sought to highlight Dublin's potential as an international centre for sustainable finance, especially for IFI green/sustainable bond issuances, targeted at global investors given Irish companies’ significant involvement in global financial services.

A further event was planned for 4 - 5 June in Dublin Castle with a planned attendance of 300 high level international investors, multilateral banks, international intuitions and financial services businesses in areas such as Sustainable Finance and Climate Finance. However, this was deferred on foot of the Covid 19 pandemic.

Climate Finance Week Globally, investment in ESG (Environmental, Social and Corporate Governance) funds is steadily increasing. Ireland has a number of world leaders in Sustainable Finance investments, and increasingly in Asset Management companies, insurance companies and pension funds. Climate Finance Week Ireland is hosted by Sustainable Nation Ireland and organised in conjunction with the Department of Finance attracted over 1,000 participants at last year’s event. Climate Finance Week Ireland 2020 is planned for 2-6 November.

EU developments on Sustainable Finance The European Commission published its Action Plan on Financing Sustainable Growth in May 2018 which laid the foundation of the new regulatory regime including a proposal on a unified classification system, a ‘taxonomy’ and a new disclosure framework, which introduces disclosure obligations on how institutional investors and asset managers integrate environmental, social and governance (ESG) factors into their risk management processes.

The Sustainable Europe Investment Plan was published on 14 January and will be instrumental in meeting the additional funding requirements associated with the EU’s low carbon transition, and seeks to mobilise €1trillion of investments across the next decade. The plan also includes the establishment of a Just Transition Mechanism and Just Transition Fund which are consistent with the focus on ensuring a just transition in Ireland’s Climate Action Plan.

Climate Finance Climate Finance is important for adaptation to Climate Change and the increasing risks to economic activity, for which significant financial resources will be required to allow countries to adapt to the adverse effects and reduce the impacts of climate change. There is a global UN target for an annual US$100bn contribution for international Climate Finance for developing and emerging economies Page 147 of 166

which will be sourced from developed economies, public and private sectors, and IFI. Ireland has increased its support for developing countries tackling climate change. In 2015, the Government made a commitment to provide €175m in international climate finance between 2016 and 2020. Ireland’s international climate finance increased from €54m in 2016 to over €69m in 2017, and over €79m in 2018.

UNFCCC’s Green Climate Fund (GCF) The GCF was established under the United Nations Framework Convention on Climate Change (UNFCCC) to channel financing for Climate Change adaptation and mitigation to developing countries. Ireland commenced contributions to the GCF in 2016 and made annual contributions of €2m up to 2019. Ireland pledged €16 million to the GCF for the period 2020 to 2023 (€4m per annum). Ireland has joined a constituency with Spain and New Zealand where it has an Alternate Director on the Board which meets quarterly in Seoul, South Korea.

Conference of the Parties to the United Nations Framework Convention on Climate Change (UNFCCC COP) COP26, which is a follow-on the Paris COP 25, was due to be held in Glasgow in December 2020 and it has now been postponed to 2021 because of Covid-19.

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83.1. .2 International Financial Services, Department’s Risk Management and Compliance Functions

Principal Officer: Karen Cullen

Paul Ryan Director International Finance Division

Karen Cullen Principal Officer International Financial Services; Risk & Compliance Function

Mila Sullivan John Day Caitríona O'Connor Assistant Principal Assistant Principal Assistant Principal International Financial Risk Management Compliance Section Services Section Section

KEY POINTS

International Financial Services (IFS) sector Ireland attracts a significant number of global financial services firms across a range of sectors including aviation financing, investment management and fund services, investment/international banking, international insurance, payments, fintech and sustainable finance. Some 47,000 people were employed in IFS at end-2019.

‘Ireland for Finance’: IFS Strategy ‘Ireland for Finance’ a new Strategy to further develop the international financial services sector to 2025 was launched in April 2019. The Strategy is underpinned by annual Action Plans with deliverables by the public and private sector stakeholders. The Action measures are structured around the four foundational pillars of the Strategy being: 1. operating environment t; 2.technology and innovation, 3. talent, and 4. communications. The key target is to reach 50,000 people in direct employment in the sector by 2025.

Draft Action Plan 2020 A draft Ireland for Finance Action Plan 2020 was prepared by officials following engagement with all stakeholders at the end of 2019. The submission of the draft Plan to Government in early 2020 was postponed when the General Election was called. It can be revised to take account of issues such as Covid-19 and recent Brexit developments.

Page 149 of 166 European Financial Forum A major event in recent years has been the co-hosting of the European Financial Forum (EFF), in February in Dublin Castle. Since its establishment in 2016, it has become a major showcase event for Ireland as a location for global financial services that attracts very senior figures in the international industry, both from business and from Government and Regulatory Bodies. Given the Covid-19 pandemic, there is considerable doubt about hosting a European Financial Forum in 2021.

Risk and Compliance Monitoring Functions Formal risk and compliance monitoring functions are gaining increasing importance in the public and private sector and the Department is leading out on best practice in these new formal functions across the civil service. Obviously the current top priority for the Risk Section is the coordination of the Department’s Covid-19 response and serving the Senior Officials Group chaired by the Department of the Taoiseach. For the compliance function, data protection and procurement advices are increasingly significant areas of work.

DETAIL: International Financial Services

Background Over the last 30 years, Ireland has built a substantial specialist international financial services sector consists of more than 430 firms and employing approximately 47,000 people at end-2019.

Looking forward – the new Strategy ‘Ireland for Finance’ Ireland for Finance, launched at end April of 2019, is the Government’s Strategy for the further development of the sector to 2025. The vision is for Ireland to be a top-tier location of choice for specialist international financial services and to enhance and protect our future competitiveness. The key target is to reach 50,000 people in direct employment in the sector by 2025 (target may need to be reviewed – see Draft Action Plan 2020 section below). It also identifies as an important aim that the jobs will be high quality, well paid, and ‘sticky’. The jobs target recognises the difficulty of increasing business levels and associated employment in the face of increased competition from other jurisdictions, EU and elsewhere, and more critically the significant disruption by technological advances to long established business models. This is part of a global phenomenon which will fundamentally change the nature of financial services in the next five to ten years. The Strategy endeavours to ensure that Ireland can successfully address any emerging challenges and opportunities by building on our existing strengths and mitigating any shortcomings.

Ireland for Finance architecture The implementation of Ireland for Finance is structured around four pillars. Action measures under each of these pillars are set out in annual action plans. The four pillars are: 1. operating environment, focused on ensuring the policy, culture and legislative conditions underpinning IFS will support growth. 2. technology and innovation, focused on providing a collaborative approach to addressing emerging challenges and opportunities in technological developments. 3. talent, which seeks to ensure that we continue to have skilled people to meet the demands of the IFS sector, including meeting new and changing skills.

Page 150 of 166 4. communications and promotion focused on ensuring that Ireland’s IFS offering is communicated to all those who are or may be attracted to investing in Ireland.

Three horizontal priorities apply across the pillars: regionalisation, sustainable finance, and diversity.

In its role as the Ireland for Finance Secretariat, the Division is responsible for overseeing the development, implementation and monitoring of the annual Action Plans that underpin the overall Strategy. The Plans aim to ensure the continued development and growth of the IFS Sector across the four pillars of the Strategy to enable Ireland withstand competition from other jurisdictions and to proactively address emerging challenges and opportunities, domestically and internationally.

Three Committees support the Minister of State and the Division in developing, implementing and monitoring Ireland for Finance.

 High level Implementation Committee (HLIC) of Secretaries General of the relevant Government Departments and CEOs of IDA and Enterprise Ireland (9 members including the Chair and the Secretary from the Dept). The Central Bank attends as an observer.  Industry Advisory Committee (IAC) of representatives of the financial services industry, an overseas member and a Secretary (18 in total). (the Minister of State or officials do not attend)  Joint Committee (JC) consists of the HLIC and IAC meeting together and it is chaired by the Minister of State (with a Secretary from the Department).

The Committees meet quarterly and between meetings, representatives of the relevant Government Departments and State Agencies meet as the Public Sector Coordination Group.

Annual Action Plans Implementation of Ireland for Finance (IFF) is done by means of annual Action Plans. Action Plans are prepared by the Division following consultation and discussions with the relevant Government Departments/State agencies and industry interests. While the Department drafts the Plans for consideration by the Minister of State/Minister and ultimately the Government, a key feature of them is that they are jointly developed and implemented by the long-established and successful ‘public- private’ partnership between Government Departments/Agencies and industry: representative organisations, advisory firms and individual businesses. Actions are driven by their responsible owners in accordance with the required targets, outcomes and timelines.

Engagement with industry is conducted with a range of organisations, including: Banking & Payments Federation of Ireland (BPFI); Financial Services Ireland (a division of IBEC); Irish Funds; Insurance Ireland; Irish Association of Investment Managers; Law Society; Institute of Banking; and Chartered Accountants Ireland; etc. For Action Plan 2020, a number of other organisations with particular expertise in areas relevant to the strategy were also consulted, including, for example, Sustainable Nation Ireland, 100 Women in Finance, the 30% Club.

A draft Action Plan 2020 had been finalised in December 2019, but it did not proceed to Government for approval when the General Election was called in January. Moreover, the changing circumstances related to Covid-19 may have delayed progress on some of the proposed action measures in the draft Plan.

Page 151 of 166 Redacted under Sections 29(1)(a), 30(1) (c) and 40(1) (c) of the FOI Act 2014.

Finally, a key action of interest to industry is the establishment of a Central Bank Stakeholder Engagement Body to follow on from work done in 2019 by the Central Bank, the Department and industry. This is currently a matter within the Central Bank’s competence as an independent regulator. Redacted under Sections 29(1)(a), 30(1) (c) and 40(1) (c) of the FOI Act 2014. European Financial Forum A major action in the last five years has been the European Financial Forum (EFF), which is held every January/February in Dublin Castle. It has become a major showcase event that attracts very senior figures in the industry, both from businesses and from Government and regulatory bodies from Ireland, the EU and major international markets such as the USA, China and Japan. Examples include Mary Daly, President and Chief Executive of the US Federal Reserve Bank of San Francisco; Michael Corbat, CEO of Citigroup; and Norihiro Takahashi, President, Government Pension Investment Fund of Japan. The EFF is usually addressed by the Taoiseach, Minister for Finance, Minister of State in Redacted the Department, and Central Bank Governor. under Sections 29(1)(a), 30(1) (c) and 40(1) (c) of the FOI Act 2014. Promotion of Ireland for Finance Before the advent of Covid-19, it was envisaged that there will be a continuation of extensive promotional engagements – internationally and domestically – to highlight the attraction of Ireland for international financial services businesses that are currently based outside Europe but seeking an EU location or seeking to locate here from the UK against the background of Brexit. As a result of Covid- 19, the level of domestic and international travel in the promotion of Ireland for Finance will have to be re-evaluated and a new model of engagement considered.

Engagement with industry It can be expected that financial services industry organisations, representative bodies and individual businesses will seek meetings with the new Minister in the context of the opportunities and challenges posed by Brexit, Covid-19 and the ongoing work of the Ireland for Finance Strategy. Work is currently being completed on a range of potential stakeholder engagements and meetings for consideration by the Minister.

Page 152 of 166 Risk Management Function The Division is also responsible for the Department’s Risk Management function in line with its Corporate Governance structure. This function has developed significantly over recent years and aims to fully embedded risk as part of the culture of the Department, in terms of governance, management and operations. The Department of Finance Risk Management Framework operates on the ‘three lines of defence’ method, consisting of local management (as first line of defence), risk management structures (as second line), and internal audit (as the third line).

Within the risk management structures are a Risk Team, and the Departmental Risk Committee. The primary focus of the Risk Committee is on any identified top risks and uncertainties as outlined in the Risk Register, with other risks being monitored and reported on at other levels within the organisation. However, the Risk Committee should satisfy itself that appropriate risk management systems are in place for the management of these risks throughout the organisation

The Risk Team also, where appropriate, aligns and co-ordinates with the Government’s National Risk Assessment structure (under the Department of the Taoiseach) and other Government Departments/Agencies in identifying, managing and monitoring relevant Risk and Compliance Frameworks. It also coordinates the Department’s interaction with the COVID-19 Governance structures, in particular through Principal-level membership of the relevant Senior Officials Group (SOG) set up by the Department of the Taoiseach.

Redacted under Sections 29(1) (a), 30(1) (a)&(c) and 40(1)(a) (b)&(c) of the FOI Act 2014.

Page 153 of 166 Compliance Monitoring Section

The Compliance Monitoring Section seeks to provide assurance to the Executive Board, and ultimately to the Secretary General and Minister, that the Department is adhering to the legal, regulatory and governance obligations applying to the Department and aegis Bodies as follows:

 Data Protection  Procurement  Irish Language  Protected Disclosures  Ethics in Public Office  Lobbying  Other statutory and mandatory obligations.

The Department’s Compliance Framework is an important part of the Department’s management of risk. Failure to comply with statutory or other obligations could result in significant reputational damage to the Department. The Section examines and monitors the Department’s current systems and procedures to meet each of its obligations as set out in a Compliance Obligations Register. There are currently approximately 130 obligations listed on this register.

On an annual basis, the Compliance Monitoring Section circulates a Financial Control and Compliance Questionnaire to all business unit owners and this questionnaire supports the signing, by the Secretary General of the Statement on Internal Financial Control (SIFC) attached to the Department’s annual Appropriation Accounts.

The Department has a designated Data Protection Officer (DPO), as required under the General Data Protection Regulation (GDPR) and Section 34 of the Data Protection Act 2018. The DPO is responsible for the management of all requirements of the GDPR and the Data Protection Acts 1988 to 2018. This includes the Department’s responsibilities as a data controller and processer, dealing with data breaches, data subject access requests and providing support and training to the Department’s staff to ensure that personal data in the Department’s possession is safe and secure. The Compliance Monitoring Section has a central oversight function with regard to all procurement in the Department and provides support and guidance to Divisions with their procurement. It also maintains a contracts register and. prepares the annual return required under Circular 40/02 ( report from the Secretary General to the C&AG on any procurements above a certain threshold undertaken outside of agreed procedures i.e. without a competitive tendering process).

The Department’s third Irish Language Scheme 2018 - 2021 was published by the Compliance Monitoring Section in February 2018 and contains the Departments commitments in relation to the provision of services through Irish.

The Section also provides policy guidance for the Department on Protected Disclosures, ensures the timely return of annual declarations in respect of the Ethics Acts and monitors and reports on any activity under the Regulation of Lobbying Act 2015.

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The requirements in terms of governance, compliance and data protection have not changed in the context of COVID19 but the working environment has significantly changed with over 95% of the Department’s staff currently working remotely from home. Guidance has issued to staff to ensure continued adherence to best practice on compliance while remote working. The Risk and Compliance Sections maintain close contact with other relevant business areas in the Department (e.g. Corporate Affairs and HR Division) to ensure that it continues to provide guidance and support to staff as the Department moves through the phases of easing of COVID 19 restrictions.

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Corporate

The briefing prepared by Corporate provides a high level to the issues relevant to the units within its remit. More detailed and in depth analysis of any of the topics can be provided if needed.

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3.1.9 Corporate Affairs

DESCRIPTION Corporate Affairs is responsible for developing and overseeing the implementation of the Governance Framework, the Integrated Business Planning Framework and an internal control framework of oversight for bodies under the aegis of the Department. It is also responsible for internal communications, delivery of ICT solutions capability and systems and improved information management in cooperation with the OGCIO shared service facility, Business Continuity Management, Facilities Management Unit and the Finance Unit.

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3.1.9.1 Corporate Governance, Internal finance and budget management, Corporate Communications, ICT and Business Continuity Management, Freedom of Information, Parliamentary Questions, Print Room, Press Office, Facilities Management Unit & Finance Unit.

Principal Officer: Scline Scott

Scline Scott Principal Officer Corporate Affairs

Rachel Murphy Mary Michael Fiachra Aidan Murphy Justin Sullivan Ailish Farrelly Assistant McCarthy Rownan Quinlan Assistant Assistant Principal Assistant Media/ Assistant Assistant Principal/ Principal Data Principal Communications Principal Principal Press Officer FMSS Project Information Corporate Facilities Mgt Finance Unit and Affairs Unit Governance Officer

 KEY POINTS  Managing and maintaining codification of a Governance Framework for the Department  Development of new Statement of Strategy (new statement required for 2020 under PSM Act 1994)  Coordinating the underlying business planning process.  Managing an Oversight Framework for 17 bodies under the Department’s aegis.  Corporate Affairs manages the relationship with the Office of the Government Chief Information Officer (OGCIO – D/PER) as the core ICT services and support provider for the Department.  The Unit manages a relationship framework for both the Audit Committee and Internal Audit services on behalf of the Secretary General/Accounting Officer.  The Business Continuity Management Policy, currently being developed, is part of the Executive Board’s overall management system that establishes, implements, operates, monitors, reviews, maintains and improves business continuity processes in the Department.  There is greater transparency with FOI requests as the Department operates a publications scheme whereby additional material is included on the Department’s website.  The Print Room, Facilities Management Unit and the Finance Unit are managed by Corporate Affairs.

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DETAIL:

Governance & Strategic Planning In 2015 the Department codified a Governance Framework. The Objective was to produce a concise organisational specific Governance Framework that provides a clear and comprehensive summary of the principal aspects of corporate governance within the Department of Finance. The Statement of Strategy, informed by the Programme for Government, outlines high level priorities agreed by the Minister and these priorities are reflected in the annual work programme. To bring clarity to roles and responsibilities at the level of the individual staff member, the Department has a Business Planning Framework. This framework is implemented by Corporate Affairs and supported by Senior Management.

Bodies under the Aegis of the Department The Department of Finance has 17 bodies under its aegis. These require varying degrees of oversight in accordance with their governing legislation and central regulation. The 17 bodies are:

Central Bank of Ireland Irish Financial Services Appeals Tribunal Credit Review Office Irish Fiscal Advisory Council Credit Union Advisory Committee National Asset Management Agency Credit Union Restructuring Board National Treasury Management Agency Disabled Drivers Medical Board of Appeal Office of the Revenue Commissioners Financial Services and Pensions Ombudsman Office of the Comptroller & Auditor General Home Building Finance Ireland Strategic Banking Corporation of Ireland Investor Compensation Company DAC Tax Appeals Commission Irish Bank Resolution Corporation

Records Management & ICT eDocs was developed by the OGCIO to provide a centralised system of storing digital files. Most newly created official documents are stored in eDocs in digital format rather than in physical paper files. eDocs facilitates greater efficiencies in records management particularly in relation to the retrieval of documents, increased security and accountability for official files. Corporate Affairs manages the relationship with the Office of the Government Chief Information Officer (OGCIO - DPER) which provides ICT support, advice, infrastructure, service management and systems development expertise as a shared service.

Corporate Affairs also manages the purchasing and distribution of devices and licenses throughout the Department. This enables staff connectivity to the Departments various systems and network as and where appropriate. This is of particular relevance with regards to Covid-19 and staff working remotely. Work in this area has substantially increased in recent months. Since the Covid-19 crisis commenced, numerous extra devices and licenses have been purchased and we have remote access in place for over 90% of our staff.

A significant component of the Department’s workload relates to the provision of parliamentary support. This includes processing large numbers of Parliamentary Questions, Freedom of Information requests, Government memos and Ministerial representations. Corporate Affairs, with OGCIO, support the delivery of ePQ, eFOI, eSubmissions, eCorrespondence and, eDocs.

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Business Continuity Management Policy Corporate Affairs is developing a Business Continuity Management (BCM) Policy. This is part of the Executive Board’s overall management system that establishes, implements, operates, monitors, reviews, maintains and improves business continuity processes in the Department. It sets out the minimum standards to which the Department shall operate to minimise the likelihood of employee, stakeholders or general public impact, regulatory breaches and reputational damage arising from disruption to business operations. Covid-19 brought about a rapid response from all divisions in relation to BCM and has shown that access to a reliable ICT infrastructure is imperative to staff in undertaking Departmental work. The completed BCM policy will provide an overarching framework which will include the development or consolidation of incident management, response and recovery plans by relevant support functions and divisions.

Systems to support internal financial control: Audit Committee & Internal Audit

Audit Committee The role of the Audit Committee is to consider the adequacy and effectiveness of the Department’s internal control systems, control environment and control procedures, to oversee the work of the Internal Audit Unit (IAU) and to provide guidance in relation to the suitability and robustness of the systems of risk management and internal control within the organisation. The Audit Committee, comprising a majority of non-executive members, reports to the Secretary General, and works to an agreed Charter that is reviewed annually.

Internal Audit The Internal Audit Unit (IAU) assesses areas that are specifically requested by the Department’s Executive Board and the Audit Committee in respect of the areas of responsibility of the Accounting Officer of the Department. The IAU’s expertise and independent approach evaluates management approach to risk and internal controls. IAU services are provided by the Department of Public Expenditure and Reform and this relationship is managed by Corporate Affairs through a relationship framework, and regulated by a service level agreement which is revised annually.

The Print Room

The Print Room provides a professional and confidential printing service to the Department of Finance, the Department of the Taoiseach and the Department of Public Expenditure and Reform. Annual outputs include Budget books and associated publications, Summer Economic Statement, Revised Estimates and National Economic Dialogue material. During Q1 2020, the Print Room was in a position to assist the Department of Employment Affairs and Social Protection with a large print request received on foot of Covid-19.

Communications/Media Manager The Communications/Media Manager reports to the Head of Corporate Affairs and is involved in a range of activities across the Department, working closely with Heads of Division and policy leads on specific areas of work in accordance with the priorities set by the Department’s overall communications strategy and key messages.

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Press Office The Press Office is the primary point of contact between the Department and members of the media, as well as members of the public. Its responsibilities include responding to queries regarding the work of the Minister for Finance and the Department from all members of the media, advising the Minister and senior officials on interaction with the media and organising all public and press events and appearances for the Minister and senior officials. The Press Officer accompanies the Minister for Finance to official events which have a media element.

Facilities Management Unit Facilities Management Unit is responsible for on-going operations to support the Department through planning and management of office space and facilities and for planning and implementing the major elements of the Health and Safety (safety management) System. The unit’s main priorities for 2020 are: ongoing review of office and common areas to ensure efficient use of available space; management of the Departmental Safety Management System; undertake a number of “Green” initiatives, including the proposed installation of bee hives on the roof of South Block; progress a programme of continuous improvement with particular reference to the buildings in the South Block campus, and provision of support in relation to the Department’s History Fellowship.

Additionally, since the onset of the Covid-19 crisis, FMU has been operating in a fluid and progressive situation requiring a more flexible response. The Unit has been working to safeguard a healthy environment for staff continuing to attend the office; coordinating with Corporate Affairs and Human Resources on the development and implementation of a Return to Work Protocol in line with Government and HSE guidelines; and engaging interdepartmentally to ensure any new post-crisis procedures or processes enacted are consistent with those across the wider Civil Service.

Finance Unit The Finance Unit deals with internal financial management for the Department’s Vote and prepares internal financial management reports for the Executive Board. The Finance Unit also prepares the annual Appropriation Account for the Finance Vote, negotiates the Department’s Estimate from the Department of Public Expenditure and Reform and is involved in two Oireachtas committee hearings each year – the Finance (Select) Committee, which reviews the Estimate with the Minister, and the Public Accounts Committee (PAC), which reviews the Appropriation Accounts with the Secretary General.

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3.1.10 Human Resources Unit

DESCRIPTION Human Resources is responsible for the development and delivery of the Department’s HR strategy and the provision of a wide range of HR services to management and staff. The Department’s HR Business Strategy 2016-2019 is focused on five key elements; Organisational Structure and Workforce Planning, Leadership, Organisational Learning and Development, People Management and Employee Engagement.

The Unit’s Mission is to be the best HR Unit in the Civil Service. We achieve this through providing best in class HR services to management and staff. The Unit is measured by the quality of our reporting to the Executive Board, turn times of service and surveys on our services provided. Actions to deliver the HR Business Strategy are developed each year as part of the business planning process in the Department.

Principal Officer: Niall O’Ceallaigh

Niall O'Ceallaigh Principal Officer HR Manager

Gearóid Browne Liz Doyle Siobain Errity Assistant Principal Assistant Principal Assistant Principal Employee Relations / L&D Recruitment/Org HR – Tullamore / Performance Management & Workforce Management Planning

KEY POINTS  The Department has a total workforce of 324 staff, 306 based in Dublin and 18 in Tullamore. A number are based in Europe (in EU Institutions) and the USA (the World Bank and the IMF). The pay bill approved for 2020 is €20.6m.  The HR Unit is focussed on having the right people with the right skills doing the right job at the right time. All elements of the HR Business Strategy work towards equipping the Department with the sufficient resources, the necessary skills and expertise, and the right environment to maximise both potential and performance.  The Department strives for high levels of performance, through investment in L&D and high levels of attendance (3.37% sick leave rate for 2019). The staff attrition rate for 2019 (i.e. resignation or retirement from Civil Service) was 4.48% (15 people) and our turnover rate for 2019 was 19.43% (61 people), this figure includes transfers within in the wider civil service as well as secondments. This figure is in large part due to the high success rate of our staff in Civil Service promotional competitions.

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3.1.11 Legal Unit

The Legal Unit is responsible for providing legal advisory services for the Department through the Head of Legal.

Head of Legal Unit: Antoine Mac Donnacha

Michael McGrath Assistant Secretary General

Antoine Mac Donnacha Head of Legal Unit

Emma Keane Moya Moore Advisory Counsel Advisory Counsel

KEY POINTS  The Legal unit supports and advises the various business units across the Department whenever the need arises.  The unit is involved in all Departmental Legislation, litigation and transpositions and provides legal services to support all areas of the Department.  The legal unit works closely with and liaises with the Attorney General’s Office and external legal advisers, as well as lawyers working in other organisations.

DETAIL: The legal unit is available to provide legal advice across the Department and is generally involved in a supporting role in respect of all legislation and litigation in which the Department is involved, as well as advising on legal issues which arise in the course of the Department’s operations. The legal unit monitors private member’s bills relevant to the Department and supports the relevant policy units in responding to them.

In-house advice is generally provided and where appropriate legal issues are referred to the Attorney General. As the various issues the legal unit is involved with will be included in this brief separately by the policy units concerned we do not propose to go into detail on those issues here. The head of the legal unit is seconded from the AGO as are Emma Keane and Moya Moore.

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3.1.13 Accountant’s Branch The Accountant’s Branch is responsible for transaction processing which is aggregated in the production of the Annual Appropriation Accounts.

3.1.13.1 Management of the Accountant's Branch

John Hogan Assistant Secretary General

Benny Molloy Ailish Farrelly Assistant Principal Assistant Principal Accounts, Business Administration Unit (BAU) FMSS Project

KEY POINTS  Most of the activity is based in Tullamore.  The Accountant's Branch processes accounting transactions which inform the production of aggregated outputs (e.g. the Annual Appropriation Account, bi-monthly Tax returns) for the Department of Finance, the Department of Public Expenditure & Reform (DPER) and some of its associated Votes (Superannuation, Office of Government Procurement (OGP), Shared Service Vote/National Shared Services Office (NSSO), Secret Service, the new Vote for the Office of the Government Chief Information Officer (OGCIO) in 2020 and the Vote for the President’s Establishment).  The Branch is preparing for the move to the Financial Management Shared Service (FMSS) in the near future but no date has as yet been finalised for “go-live”. The FMSS project is managed by the NSSO under the Department of Public Expenditure and Reform.  In the light of the FMSS development, the residual Departmental operations in Tullamore need to be relocated. The Finance Unit and the Exchequer Section have relocated back to Dublin. The PMG function has been outsourced to a commercial bank (Danske) and this is managed by Exchequer Section at Headquarters in Dublin.

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DETAIL:

The Department’s Accounts Branch looks after the daily transactional needs of the Department’s Vote as well as those of DPER and some votes under DPER (namely superannuation, OGP, NSSO, Secret Service Vote and OGCIO from 2020) totalling some €1,102 million (payments and receipts - based on 2020 Revised Estimates Volume).

It is also responsible for the provision of returns to the Office of the Revenue Commissioners in respect of VAT and PSWT for the aforementioned Votes and the provision of quarterly statistical information to the Department of Business, Enterprise and Innovation on prompt payments.

It also provides payment services to the President’s Office and an accounting platform for the Ombudsman’s Office.

The Accountant’s Branch, the Office of the PMG and the Finance Unit were among the Department of Finance operations decentralised to Tullamore in 2006.

At that point there were over 70 staff (from total Department staffing of approx. 120 in Tullamore) in the operation. Recently, Department staff numbers in Tullamore have been reducing as functions i.e. Payroll and Pension payments by the PMGs, have been transferred to the NSSO which is under DPER. Headcount in the financial operation in Tullamore currently stands at 15 (14.2 full time equivalents).

Future Developments The vote accounting activity will move to the NSSO’s new FMSS at a date determined by the NSSO Project team (no exact date has been set by the NSSO). This is a substantial exercise for the Department to liaise with the NSSO and to support migration of client data and service transition to the FMSS. At present, the staff compliment of 15 in the Department in Tullamore is not viable in the long term and the intention is that these staff will move to the NSSO on successful transition to the new FMSS.

The Exchequer function, which is the responsibility of the Department of Finance cannot transfer to the NSSO. It has been relocated from Tullamore to Dublin and arrangements are in place for Exchequer to use the FMSS platform for its transactions and outputs such as the high-profile monthly Exchequer Statement, when the FMSS system goes live.

The Minister for Finance is the Paymaster General by virtue of the Minister and Secretaries Act, 1924. The PMG activity is intertwined with the Exchequer.

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Prepared by Corporate Affairs, Department of Finance www.gov.ie/finance