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Ireland’s ascent from economic basket case to European role model has been little short of miraculous, as it has transformed its economy from one of Europe’s poorest to one of its richest in little more than two decades. In the early 1980s Ireland suffered from high unemployment, mass emigration and high taxation. Now, it has some of the lowest taxes and healthiest public finances in Europe, labor shortages and the flow of migration have been spectacularly reversed and Ireland’s GDP per capita has recently overtaken England’s, unthinkable in the 1990s. Ireland’s economic miracle has been achieved in stages, using tax breaks to attract manufacturing companies, then company headquarters and the IT sector, but a key recent driver of Ireland’s success has been the development of a world-class financial services industry which has developed a highly lucrative niche in the structured finance and investment funds industries. In financial services, Ireland has developed by providing the administration services and the tax and regulatory environment for the establishment of funds and structured products, to some extent replicating the environments created by offshore financial centers such as Jersey and the Cayman Islands while also offering the added benefits of a network of tax treaties, the reputational benefits of European Union membership and the ability to sell Irish-domiciled investment funds to retail investors throughout the EU under the “passporting” rights provided by the UCITS Directive. As one lawyer said: “It is staggering what Ireland has managed to do with its tax and regulatory environment while retaining its tax treaties and staying off the radar of the U.S. authorities and the Organisation for Economic Co-operation and Development.” The benefits for the country’s leading law firms have been obvious as the economy has become more prosperous and legal work in Ireland more sophisticated and high value. The events of the past few months, however, mean the music has stopped in many of the areas in which Ireland has excelled. Meanwhile, another important pillar of Ireland’s economic boom � property � is also teetering on the verge of a significant slump, potentially decimating the balance sheets of the country’s banks. Is the party over for good? In the short term, lawyers say they are busy, albeit largely in counter-cyclical areas such as restructuring and insolvency rather than big-ticket deals and new issues. At the time of writing, the immediate direction of the economy is uncertain and law firms report a healthy stream of deals � property, mergers and acquisitions and finance � in the pipeline, but getting these to come to fruition is proving much more of a challenge. Even before the credit crunch, Ireland was aware that it could not afford to stand still if it was to maintain the levels of prosperity it has recently enjoyed. Much of the employment created by the earlier rounds of inward investment has now departed for lower-cost jurisdictions while in the financial services arena, back-office administration is under increasing pressure from newer entrants to the market such as India. Although the prohibition of preferential tax regimes such as those that Ireland applied in the 1980s and 1990s to first attract company headquarters and then the financial services industry to the country makes it more difficult for other jurisdictions to replicate the Irish model, the government knows that the country needs to compete on expertise as well as just offering a benign regulatory and fiscal environment. Ireland has already significantly increased the sophistication of its financial sector, but the priority remains to move Ireland’s financial services industry still further up the value chain. More than offshore As the EU takes an increasing interest in financial services regulation, and favorable tax treaties become harder to negotiate, the consensus is that Ireland’s financial services industry needs to do more than replicate what the offshore financial centers have been doing. “It would have been easy to sell ourselves as ‘offshore,’ but where does that get you?” asked John Cronin, chairman of McCann FitzGerald. “People, especially U.S. investors, are becoming uncomfortable with the lightly regulated regimes. The future is in smarter, rather than less, regulation. There are competitors emerging on the taxation front, but in the current climate investors prefer to use the tried and tested jurisdictions and those that can show they handled the present situation well will be the ones that they return to in future.” Every product has a supply chain. Moving further up it means engaging in those activities in the supply chain which are most profitable, said Liam Quirke, managing partner of Matheson Ormsby Prentice. “Is it necessary to have the investment managers in Ireland to do that? I do not think it is,” he said. “We can grow out the range of high-value activities without having George Soros relocating to Ireland. Pockets of investment fund managers may move here, but the reality is the traders will never move here in numbers. Traders will always congregate in and around the main financial markets and London and New York are the world’s main financial markets” The general view is that, for now at least, the wiser course is to continue the move into more sophisticated areas of administration, which require well-paid finance professionals, accountants and lawyers rather than traders and fund managers. One such initiative is to combine two of Ireland’s strengths � financial administration and IT � in response to the increasing need of financial institutions to cope with the scale and growing compliance needs of the fund administration and custody business. In the medium term, at least, Ireland’s future prosperity depends on it complementing London’s role rather than competing with it head-on. One of the main drivers for the financial services industry is to increase the range of products that can be established in Ireland. Ireland’s last budget cleared the way for carbon credit securitization, but the green light for full commodities securitization remains some way off and, for many, the regulators are not moving fast enough. The government and regulators have to tread a fine line, however. “While the uncertainty of the fallout from the credit crunch is the biggest threat currently facing the financial services industry in Ireland, it also represents the greatest opportunity,” said Quirke. “To be successful as a domicile where financial institutions can create their products for sale into Europe and other large regulated markets needs constant evolution. For example, there is currently a real market appetite for financial products based on a wider range of asset classes than is currently permitted. Our dilemma is that the regulator is never moving fast enough for the marker, whereas others may think we are moving too fast.” To this end, the Irish Government is in the process of reviewing its fiscal, legal and regulatory environment to ensure Ireland can continue to enjoy the benefits of responsive regulation, low tax and membership in the EU. “We need new financial architecture that takes better account of the complex relationship between domestic and EU laws,” said Arthur Cox’s managing partner, Padraig O’Riordain, who chairs the Irish Government’s Advisory Forum on Financial Legislation. “The government is very committed to maintaining the competitiveness of the legal and commercial structure that supports the financial services industry.” If Ireland is to build on the expertise it has gained, it will also need the global structured finance market to recover. Having amassed expertise in the creative structuring of financial products, demand in many areas has dried up, but the country’s lawyers remain publicly confident that the principles behind its financial industry are not broken, pointing to new areas of business � such as aircraft financing, insurance-related receivables and exchange-traded funds � that have continued to grow despite the credit crunch. Up the Legal Value Chain Although Ireland has been very successful in attracting work from offshore jurisdictions � and expects to continue to win market share from traditional offshore centers � the push to broaden out its financial industry well beyond the “onshore/offshore” market is reflected in the strategies of its law firms. While structured finance and funds practices have grown exponentially in recent years, there was little appetite among Ireland’s law firms to put all their eggs into the more exotic financial services basket even before the crunch. The growth in the sophistication of the economy has also enabled Irish law firms to move up the value chain themselves as Irish companies and investors have looked overseas for opportunities and the referrals process has become a two-way street. Likewise, they are no longer playing second fiddle to U.K. firms for large projects and transactions in Ireland, being increasingly able to deploy their own expertise, which has been boosted by the growing numbers of Irish lawyers that have returned home after stints in some of London’s top law firms. In size terms too, the largest firms in Ireland are not a million miles behind mid-tier London firms, with the big five all having in excess of 200 lawyers. Moreover, prolonged credit market turmoil has increased the importance of specialist skills in litigation and insolvency. As one lawyer asked: “Why would we build a firm that is at the mercy of a market that can just come to standstill?” A divide is emerging, however, between those firms that remain committed to maintaining a broad church of substantially standalone practice areas and those, such as Dillon Eustace and Matheson Ormsby, which are increasingly marshalling their wide range of resources in the service of corporate and financial services transactions. “We are looking to organize ourselves in a way that maximizes the return on our core business lines,” Matheson Ormsby’s Quirke said. “It is still full-service, but more interdependent.” Not all the leading firms have quite the same view. “In the past, if one firm made a move, the others would follow, but we will begin to see clear differences in strategy emerge,” said Arthur Cox’s O’Riordain. “Our strategy is to make sure we have strength in depth across our practice areas and to maintain a balance between our domestic clients and our international client base. Our specialist areas such as tax or pensions are standalone practices with their own clients � they do not exist solely to service other parts of the firm. This significantly deepens their experience profile and expertise.” If Irish law firms are to continue their ascent up the value chain, then the ability of Ireland to retain its pace as a leading financial center will be critically important. Its lawyers are confident that the flexibility and creativity that enabled Ireland to develop as an international financial center will help it emerge from current problems in a strong position. “There has been a fair degree of jealousy in parts of Europe of Ireland’s success,” said McCann FitzGerald’s Cronin. “Some people seem to be hoping that we will get our comeuppance with the credit crunch, but that just makes us more determined.” This article originally appeared inLegal Week, a publication of ALM. �

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