The Gazette 1987

187 / 342

GAZETTE JULY/AUGUST 1987
Investor Protection
The effect of the changing U.K. regulations in Ireland
by
Ronan O'Houlihan and Dr. Eileen Fitzpatrick , ., Ph.D.
The necessity of providing greater regulation wi thin the
securities industry has become increasingly apparent in
recent years. Whilst inadequacies in the existing legislation
have been obvious for some time, they have become more
acute against a background of deregulation in international
markets where the risk exposure for the investor can be
increased. In Ireland this necessity has been brought into
sharp focus by the proposed development of the Custom
House Quay as an international financial centre. In order to
establish the credibility of the centre, it must be structured
on a three-tiered basis. The fiscal and physical infrastructure
have been well analysed. It is our contention that the
introduction of an appropriate regulatory framework is
equally important if the centre is to attract international
participants of the highest quality.
In the U.K., the final stages of
deregulation ("Big Bang") occurred
in October last year. In conjunction
with these changes a new legal
f r amewo r k, wh i ch will con-
siderably step up the standard of
investor protection, is about to be
imposed.
The revolution in communi-
cations technology which has
occurred in the financial world in
the past decade has made 24-hour
trading in financial markets the
order of the day and placed them
in a global rather than domestic
context. As more and more
markets deregulate and open up to
foreign trade, the distinguishing
line between international and
domestic markets grows even
finer. In the wake of these
developments, London, by
tradition a major international
financial centre, was forced to de-
regulate to restore a competitive
edge which it had been losing for
some time. This was largely due to
the existence of a system based on
single capacity which separated
functions into agency or principal
roles, providing protection for
investors through self-regulatory
organisations such as the Stock
Exchange. This, in combination
with the high transaction costs
entailed in fixed commissions, was
causing London to fall behind other
major financial markets which, by
and large, had adopted the dual
capacity system where brokers act
as both principals and agents. On
27th October 1986 ("Big Bang"
Day) the Stock Exchange brought
into effect the last of a package of
reforms to its rules and trading
arrangements of wh i ch the
switchover to dual capacity and
the abolition of fixed commission
formed the major part.
Ronan O'Houlihan and
Dr.Eileen Fitzpatrick
are members of
Montgomery Govett Ltd.,
Investment Managers,
31 Mount Street, Dublin 2.
Traditional barriers thus broke
down and multifunctional con-
glomerates, which offer a range of
financial services became
common. Within those con-
glomerates, because of the dual
capacity system in which the
broker is also a market maker,
there is greater potential for the
occurrence of " c on f l i c ts of
interest". This is borne out by the
recent events at Lloyds, which
arose as a direct result of members
being able to act in a dual capacity.
It is ironic that, just as the rest of
the City is converting to dual
capacity, Lloyds have decided to
revert to single capacity to avoid
the re-occurrence of such a
situation. Another important
consequence of deregulation in the
U.K. is that the powers of the old
self-regulatory organisations
became defunct. The resulting gap
will be filled by a private city body,
known as the Securities
Investment Board, which will
oversee a network of new self-
regulatory organisations within the
framework of the new legislation.
The changes which have occurred
in the U.K. market have served to
highlight the fact that we have no
proper or, indeed, any statutory
f ramework wh i ch seriously
addresses the problems of the
modern securities industry in
Ireland. The immediate effect has
been to create a regulatory vacuum
in the Irish financial sector. Prior to
V I EWPOI NT (from p 175)
modest strength which might as
usefully be brought in the Circuit
Court as in the High, and with a
corresponding reduction in expense.
There is, however, one area in
which it can be strongly argued
that there is a case for integrating
the system and having one court
deal with all matters and that is in
the area of family law. The division
of jurisdiction between the three
levels of courts having original
jurisdiction is puzzling. The attempt
to extend the jurisdiction in family
law matters to Circuit and District
Courts has been quite unsatisfac-
tory. Many District Courts are
physically unsuitable for the con-
duct of family law cases and the
length of the lists in many District
Courts has created difficulties in
ensuring that such hearings can be
held in camera and still be dealt
with quickly.
Perhaps the recently reviewed
Committee on Court Practice and
Procedure could be asked to take
a hard look at the basis upon
which jurisdiction is allocated to
particular courts, with a view to
removing some of the present
anomalies. •
177