Memorandum and letter to the Clerk submitted
by the Investment Management Association
EU AND FINANCIAL
Thank you for your invitation to submit written
evidence to the Treasury Select Committee enquiry into the EU
and Financial Services.
The Investment Management Association (IMA)
represents the UK-based investment management industry. Our members
include independent fund managers, and the investment arms of
banks, life insurers, and investment banks. They are responsible
for the investment of over £2 trillion of funds (based in
the UK, Europe and elsewhere) including authorised investment
funds, institutional funds (eg pension and life funds), private
client accounts and a wide range of pooled investment vehicles.
In particular, our members represent 99% of funds under management
in UK-authorised investment funds (ie unit trusts and open-ended
IMA would be delighted to make our resident
experts available to provide oral evidence to the Committee on
any issue relating to the enquiry.
1. The Investment Management Association
(IMA) strongly supports initiatives to open-up the single market
for asset management. The UK is a net exporter of asset management
services, and so an efficient single market for asset management
is likely to be of direct benefit to UK.
2. The Financial Services Action Plan (FSAP)
has had some impact on removing barriers to the single market
for asset management but more action is required. We support the
recommendations for further liberalisation identified by the expert
group on asset management, and also the Commission's ongoing corporate
governance action plan and endorsement of International Accounting
3. However, the process of implementing
European legislation leaves much to be desired, notwithstanding
improvement brought about by the "Lamfalussy Process".
Some of the problems of implementation can be traced to UK goldplating.
However, there are equally difficulties with regulators in other
member states and much can be traced to the ambiguous drafting
of primary legislation (which itself is a function of the negotiated
nature of European legislation). Many IMA members now operate
across borders and so are as strongly affected by differences
in interpretation across Member States as by particular problems
arising from UK implementation.
4. Consequently, although IMA welcomes the
joint report by HM Treasury, the FSA and the Bank of England establishing
principles for implementation in the UK Delivering FSAP in
the UK, we believe that the problem of implementation extends
beyond the borders of the UK and therefore merits a wider response.
We suggest that this would make an excellent focus for the forthcoming
UK Presidency of the European Council, and would build on the
"joint regulatory initiative" of the Irish, Dutch, Luxembourg
and UK Presidencies.
5. The Investment Management Association
(IMA) is the trade body that represents the UK-based investment
management industry. IMA's members provide investment management
services to institutional and retail investors through individual
fund management agreements and pooled products such as authorised
investment funds. They have proven highly successful at exporting
their services: of the
2,800 billion worth of assets they manage from the
1,265 billion is managed on behalf of non-UK clients.
IMA therefore has a keen interest in the success of the single
market, which should provide the UK with a platform to exploit
its comparative advantage in asset management.
6. The main programme for promoting the
single market in financial services has been the Financial Services
Action Plan (FSAP), which was launched by the European Commission
in April 2000 following endorsement by the March 2000 Lisbon European
Council. The FSAP contains 42 legislative measures, designed to
further the completion of the Single Market in financial services.
By April 2004, the EU institutions had adopted 38 out of the 42
7. Both the European Commission and the
European Council have recently completed a review of the FSAP.
The European Commission conducted its review through four expert
groups of industry representatives (from the banking, insurance,
securities and asset management industries) and the European Council
conducted its review through the Financial Services Committee
(FSC). Both the expert group reports and the FSC report (which
were published in May 2004) assess the success of the FSAP and
recommend further measures to complete the single market in financial
8. In commenting on those reports (and observing
the way in which relevant EU Directives have been implemented
in the UK), we restrict our comments to the asset management industry,
and distinguish between institutional asset management and investment
fund business. Those markets have different characteristics and
so have (quite rightly) been dealt with differently by the FSAP.
9. The institutional asset management market
comprises clients such as pension funds, insurance companies,
and high net worth individuals. Because those clients have access
to sophisticated financial advice, the principle of caveat
emptor applies when they contract for asset management services.
That is, institutional clients do not require the full panoply
of consumer protection accorded to retail clientsindeed,
such regulation could reduce competition and innovation amongst
institutional asset managers.
10. Single market regulation, therefore,
should aim to promote competition by liberalising the institutional
market for asset management (ie by removing restrictions on institutions'
ability to freely contract with third-party asset managers on
a cross-border basis). Two measures are relevant: the Occupational
Pensions Directive; and the Markets in Financial Instruments Directive
11. The Occupational Pensions Directive
does, indeed, liberalise the institutional market for asset management
by establishing the "prudent man" principle that is,
by not seeking to dictate at EU level how the assets of pension
schemes should be invested and requiring national authorities
to abolish "nationalistic" investment restrictions.
The prudent man principle has long been part of UK pension regulation,
and its adoption throughout the EU should improve risk adjusted
investment returns to occupational pension schemes, and stimulate
the market for asset management services (such as are found in
the UK). Although certain aspects of the Directive which are less
than ideal (in particular, the various derogations provided to
member states), the IMA appreciates that the negotiated nature
of internal market law makes such trade-offs inevitable.
12. There are aspects of the MiFID which
rightly apply only to retail investors and in considering the
detailed "level 2" provisions it will be important to
ensure that protections appropriate to retail customers do not
interfere with institutional practices.
13. IMA believes that relatively little
additional legislation is required to complete the single market
for institutional asset management. (Indeed, the less legislation,
the betterparticularly since the institutional market is
fundamentally less prone to market failure than the retail market,
and since it is geographically mobile and sensitive to over-regulation.)
The only significant legislative "gap" (which is identified
by the report of the expert group on asset management) is a pan-European
private placement regime. This would enable institutional asset
managers to place their non-harmonised products (such as hedge
funds, private equity funds and property funds) with a limited
number of sophisticated investors, effectively extending the "prudent
man" principle to a wider audience than just occupational
pension schemes. The UK already has a private placement regime,
and its adoption throughout the EU would provide institutional
investors with more choice in investing their assets. It should
be noted that the Prospectus Directive contains a precedent for
private placement in the form of a "safe harbour" enabling
single company securities to be privately placed, and it seems
entirely reasonable to extend this regime (or a similar regime)
to collective investment schemes.
14. The investment fund is designed as a
product which can be marketed widely. The market includes relatively
unsophisticated investors who therefore require legislative protection
to help them manage the various risks that they face in contracting
for asset management services.
15. The principal piece of single market
legislation dealing with investment funds is the UCITS Directive,
which prescribes the investment and operational standards of investment
funds which may be offered on a cross-border basis within the
EU. The UCITS Directive is probably Europe's most successful piece
of financial services legislation which impacts the retail investor,
having opened up approximately 10% of the market to cross border
competition, and established a brand that is recognised as far
a field as Hong Kong. This is in marked contrast to the markets
for other retail financial services, which are often reckoned
to be inherently "local" and insusceptible to cross-border
sales (a point well made at paragraph 58 of the FSC report).
16. In May 2003, IMA published the "Heinemann
made a number of recommendations to complete the single market
for investment funds. Those recommendations are consistent with
the recommendations of the expert group report on asset management,
which we therefore strongly endorse. In particular, we enclose
a recent update to the Heinemann Report which expands on three
of those recommendations: registration; mergers; and pooling.
17. We noted that unlike some other financial
services we accept that some legislative change is needed at EU
level to complete the single market for asset management, since
legislative "bureaucracy" and "red tape" are
commonly cited as barriers to business rather than as catalysts
to competition. However, in highly protected retail markets legislation
is required to enable certain types of competition and innovation.
This should, however, be clearly targeted and proportionate.
18. Because the European Union has competence
(rather than full sovereignty) over the internal market, European
Directives must be implemented by each member state in order to
have legislative force. Although the focus on the Lamfalussy Process
has so far largely been on rule-making it was designed to bring
more consistency to that implementation process, by creating various
"level 3 committees" of national regulators to share
best practice and exert peer pressure on one another to ensure
consistent and appropriate implementation. IMA strongly supports
to the Lamfalussy Process and hopes that it will deliver the consistent
implementation so sorely needed by the financial services industry.
19. However, there is still some uncertainly
as to whether the Lamfalussy Process will succeed in ensuring
consistent implementation. This issue is discussed by all four
expert group reports and the FSC report. The FSC report makes
a number of concrete recommendations to improve implementation
which are worthy of further consideration, including: providing
access to transposition texts (paragraph 33); promoting greater
cooperation between regulators (paragraph 40); and providing market
participants with the right to bring questions of implementation
to the attention of the level 3 committees (paragraph 43). However,
ultimately there is an inherent tension between maintaining national
sovereignty over the implementation of European law on the one
hand, and expecting consistent implementation on the other. Indeed,
the FSC report identifies this tension when it observes (paragraph
44): "It is important that all Member States undertake to
abide by interpretations of community law and common standards
agreed in the level 3 committees on a voluntary basis"
(emphasis added). Notwithstanding this tension, IMA believes that
the issue of consistent implementation would make an excellent
focus for the forthcoming UK Presidency of the European Commission,
and would build on the "joint regulatory initiative"
of the Irish, Dutch, Luxembourg and UK Presidencies.
20. The problem of inconsistent implementation
cannot be overstated. For example, a recent issue has arisen when
implementing the UCITS Directive, which is designed to enable
investment funds to be passported between EU Member States. The
original 1985 Directive (UCITS I) was recently amended (UCITS
III) as part of the Financial Services Action Plan. The main effect
of UCITS III is to extend the range of investments which can be
included within an investment fund.
21. UCITS III permits investment funds "existing
on the date of entry into force" of the Directive to be grandfathered
for five yearsthat
is, they do not have to be compliant with UCITS III until 13 February
2007. The purpose of the grandfathering provision is to enable
fund promoters to plan and control the process of converting UCITS
I compliant investment funds to UCITS III.
22. However, a number of Member States (including
France, Belgium, Italy and Spain) propose to implement the Directive
in such a way that if a grandfathered UCITS I umbrella fundwere
to launch a new subfund, and even if the new subfund were permitted
by UCITS I, then the resultant umbrella fund would differ materially
from the umbrella fund that had existed on the date of entry into
force of UCITS III, and would no longer be able to avail itself
of the grandfathering provisions. Consequently, that umbrella
fund would have to convert to UCITS III. This proposal creates
significant commercial difficulties for fund promoters who had
expected to be able to avail themselves of the grandfathering
provisions and put-off UCITS III conversion. Considerable administration
is involved in this process, but failure to convert would have
little, if no, impact on investor protection.
IMA has received support from FSA and HM Treasury
in contesting this proposed implementation. However, it is still
unclear whether the Lamfalussy Process will be able deliver consistent
implementation of the Directive.
8 September 2004
"Member States may grant UCITS existing on the
date of entry into force of this Directive a period of not more
than 60 months from that date in order to comply with the new
Email to the Clerk of the Committee from
the Head of Directorate General Internal Market, European Commission
On 16 September the Treasury Committee had a
meeting on EU Financial Services. It has come to our attention
that the issue of insufficient consumer representation was brought
up in the Committee's inquiry.
We agree that consumer representation was low.
However, the European Commission services would like to point
out that in the context of the Post-FSAP consultation process,
enormous efforts were made to include consumer and user representatives
in the process. The composition of the expert groups was carefully
crafted to get input from both service providers and investors/market-users.
In particular representatives of consumers and shareholder organisations
were explicitly invited to participate in each of the expert groups.
The Commission stood ready to pay for the consumer representatives'
travelling costs, lunches etc. We were therefore very disappointed
whendespite all our efforts to select, personally invite
and mobilise representatives from the user/consumer sideonly
one representative of consumer organisations actually showed up
and participated (very constructively) in the debate (of the banking
expert group). There was another "consumer voice", a
representative of a national ombudsman scheme for financial services,
in the asset management group; however, due to internal reason,
he refused to have his name published as a member of the group,
and therefore doesn't "show" in the break up of the
Maybe it was due to the relative paucity of
authoritative expertise on the consumer/shareholder side of the
market, but maybe also due to a simple lack of interest from their
side, that the consumers' participation was so disappointing.
As we would have paid for expenses, the reason for the absence
of consumer representatives could not have been financial constraints.
Thus, as an inevitable consequence, the composition of the groups
shifted even more towards professional market participants.
The Commission should therefore not be blamed
for the appalling lack of interest shown by consumer organisations.
In the public consultation following the publication of the expert
groups report, the lack of interest in the process continued.
We have now, after expiry of the (meanwhile even prolonged) deadline
for the consultation, received only two (!) contributions from
consumer organisations, despite explicit messages and reminders
sent by us to the most prominent consumer groups and Chambers
of Commerce at EU and Member State level.
In order to nevertheless get a consumers' view,
the Commission services have in parallel taken particular steps
to mobilise an end-user perspective to the debate through its
recently-established FIN-USE network. FIN-USE, the Financial Services
Users Forum, was established by DG Internal Market to address
the lack of user/consumer input in our discussions. It consists
of twelve financial services experts. The FIN-USE forum is charged
with formulating policy recommendations to the Commission on EU
financial services initiatives on problems encountered by users
(retail consumers and SME's). FIN-USE had a meeting last week
to coordinate its input to the Post-FSAP-consultation; we expect
to receive their contribution soon and will make it availabletogether
with all other contributions to the post-FSAP-consultation, on
I hope this is useful.
23 September 2004
11 Heinemann et al, Towards a single European
market in asset management, Zentrum fur Europaische Wirtschaftforschung,
2003 (www.investmentuk.org/research/default.htm). The report was
commissioned and co-funded by IMA and the Corporation of London. Back
Article 2(2) of the Directive 2001/108/ec states: Back
Investment funds are often organised in the form of "umbrella
funds". Within one over-arching structure there will be a
range of "sub-funds" with different investment policies,
allowing investors to move easily between funds if they wish.