Select Committee on Treasury Written Evidence

Memorandum and letter to the Clerk submitted by the Investment Management Association


  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 investment companies).

  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 Standards.

  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 UK,

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 measures.

  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 services.

  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 clients—indeed, 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 (MIFID).

  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 better—particularly 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 Report"[11]which 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 years[12]that 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 fund[13]were 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 national legislation."

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 when—despite all our efforts to select, personally invite and mobilise representatives from the user/consumer side—only 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 groups.

  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 available—together with all other contributions to the post-FSAP-consultation, on our web-site.

  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 ( The report was commissioned and co-funded by IMA and the Corporation of London. Back

12   Article 2(2) of the Directive 2001/108/ec states: Back

13   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.


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