Supplementary memorandum submitted by
TREASURY SELECT COMMITTEE'S INQUIRY INTO
Following the Committee meeting a few days ago
at which I gave evidence, you asked those present to submit any
further information should they wish. This letter includes some
additional points that APCIMS would like to make.
The anti-money laundering requirements in the
UK are still causing significant problems. The regulations have
been set by the Treasury, the rules by the FSA and guidance by
the industry through the Joint Money Laundering Steering Group
and so all the entities have a responsibility in this area.
As we are all aware, it is not unusual for the
result of applying the anti-money laundering requirements to be
seen as completely disproportionate to the individual in terms
of the checks that need to be made and the number of times that
the are asked to provide essentially the same information. Whilst
entirely agreeing that some of this is as a consequence of the
guidance (and indeed APCIMS now have a representative both on
the JMLSG Board and on the Panel that is writing the new guidance)
it also relates directly to the supervisory regime.
A typical APCIMS member firm will take on a
client who has already been through anti-money laundering checks
at least once. In addition, the sorts of investments in which
they advise are long term and so whilst clearly there is a need
to be vigilant against anti-money laundering and particularly
perhaps in respect of trusts, they are not in the front line to
the same extent as the banking industry.
The current requirements are supposed to allow
what is known as a "risk based approach". APCIMS member
firms have therefore put together their risk based approach where
typically there will be many more checks undertaken on a high
risk client (one who for example does not have a UK bank account)
than the client who has been known to the firm for many years.
Sadly, however, the FSA supervisory teams have been requiring
firms to do the same checks in all categories rather than accept
that lighter checking arrangements are appropriate with a risk
based approach. We have had intensive discussions with the FSA
on this matter and indeed they have recently given an undertaking
to improve the training of their supervisory teams accordingly.
Nevertheless this is a key area in which the regime has caused
cost and undue irritation to low risk individuals and firms alike
and that is outside the responsibility of the industry.
A second area of ongoing friction are the requirements
that surround reporting of a suspicious action to NCIS. Clearly
suspicions should be reported but the UK is the only EU country
which does not have a de minimus in place. The result of
this is that small transactions that are suspicious have to be
reported with equal vigour as large transactions and hence a high
number of reports are currently passing to NCIS. In addition,
the "fear factor" of the FSA means that if in doubt
firms will report rather than use their judgement.
Confidence is undermined by this and by what
happens subsequently. For example, none of our firms have yet
had a report back from NCIS that in any way intimates that any
of the reports that they have made were in fact helpful in investigating,
catching or, indeed, convicting a money launderer. Secondly, there
are a number of stories (and we have one that we know is correct)
where firms have been so concerned about a situation that they
have attempted to get the issue pursued straightawayonly
to find that it is not given propriety by the police.
These issues are well known to the FSA, who
are endeavouring to co-ordinate the framework more coherently
in future. Nevertheless one cannot help but consider that if the
number of reports were reduced because an effective de minimus
was operating as far as the firms are concerned in the UK, then
that would mean that those received by NCIS and subsequently passed
to the police, would get a higher priority than happens at the
moment with an overall beneficial result.
For anti-money laundering to work, the regime
has to operate in a clear, effective and sensible manner from
end to end and that includes greater responsibility than just
getting the next set of JMLSG guidance written better, however
important that action also is for the future.
As APCIMS member firms act for the individual,
but then also address the market in an institutional capacity,
we have given some detailed thought to this question. The current
Financial Services Action Plan is of course, targeted at wholesale
business, but because of its breadth affects a much wider section
of the marketplace than just wholesale.
When individuals wish to participate in financial
services, they do so through an intermediary which can vary from
an execution only broker through to an IFA. That is, an individual
investor in the UK is not "connected directly to the market"
rather their requirements are dealt with by an entity who in turn
has responsibility to provide the individual with their required
financial service. As part of the regulatory framework in the
UK, the intermediary has to give protections to their client or
customer. Typically these include best execution, requirements
to give best advice, to advise how to complain and to provide
them with a route to the free to the complainant Ombudsman service
should that be needed. These protections are not replicated
in other EU countries where the level of protection for the client
or customer is much less.
The current Financial Services Action Plan has
as the main framework directive ISD 2 (now renamed MiFIDthe
Market in Financial Instruments Directive). This is intended to
reduce cross-border barriers and enable firms to operate more
freely in future than they do at present. In turn therefore this
can mean that, for example, a UK client who wishes to purchase
a non-UK investment should be able to do so more easily because
the intermediary can do so more easily. As such it may be that
there are some direct benefits for a few UK investors as a result
of the changes to market structure flowing from the FSAP.
However, looking at the situation from the perspective
of an investor in another country, they may well get more protections
as a result of the FSAP. For example, best execution (currently
a well known and well understood concept in the UK which requires
firms to keep proof of best execution for up to three years) is
not a developed concept elsewhere. Secondly, the FSAP brings with
it a set of compliance requirements which separate the compliance
function in the firm from the front office function. Again current
practice in the UK but not elsewhere. In fact, the set of what
are referred to as "conduct of business rules" within
MiFID is extensive and range across customer agreement letters,
transaction reporting and transparency. These are likely to cause
some changes in the UK in detail but not in principle, whereas
elsewhere they change substantially the way in which markets have
Therefore we conclude that whilst the FSAP may
well not be bringing much to the retail market in the UK in terms
of additional protections for clients or customers, it certainly
should bring benefits to individuals in other European countries.
Looking to see if there should be some further
avenues pursued in this area, there are three which APCIMS considers
to be worthy of consideration. The first of these is that whilst
financial advice is regulated in the UK, it mostly is not regulated
in any other European country. Secondly, it is possible to set
up as a financial adviser in some EU countries without having
a formal financial qualifications. Together this means that an
individual in the UK knows that their adviser has to be qualified
against a set of approved examinations and that the adviser is
also regulated. Therefore the whole process is controlled and
subject to protections, which are not often available in other
Thirdly, the UK has a comprehensive Financial
Ombudsman Service, which is free to the complainant and the firm
has to ensure that the complainant is directed to FOS if necessary.
In addition, firms have to tell their clients or customers how
to complain in the first instance.
No other European country has a comprehensive
Financial Ombudsman Service such as this and where there is an
Ombudsman it is invariably confined to banking only. In addition,
most European countries do not even have to tell their clients
how to complain let alone pass them on to an Ombudsman if they
do not like the answer!
The conclusion therefore that we draw is that
for there to be a direct benefit to individuals through the single
market, then extending the current protections that they get in
the UK to investors in other European countries would be a very
helpful step to take.
In parenthesis, it is often said that the UK
seems to have "the problems" whereas other countries
do not. I hope that the above paragraphs explain the reasons why.
If advice is not regulated, if there is no requirement for a firm
to tell individuals how to complain and no Financial Ombudsman
Service then, even though an individual may well not have what
they wanted, there is no mechanism for complaint and redress and
so perhaps it is not surprising that there are apparently "no
BASEL II AND
These are the two mechanisms whereby the capital
that firms will have to hold in future is going to be changed.
Basel directly impacts on banks but once put into the Capital
Risk Directive then it has a much wider mandatory application.
This Directive applies to all firms who are included within MiFID
and therefore not only applies to banks but stockbroking firms,
investment management firms and, indeed, all the IFA community
A key issue is that there must be a proper framework
for investment firms and especially the non-bank investment firms.
Unfortunately Europe defines an investment bank as an investment
firm as they do not take deposits. Problems therefore arise for
all the range of other entities which are also investment firms
but who are not investment banks. Originally this directive failed
to cater properly for this but in its current draft of the Directive,
there are three investment firm categories known as 50k, 125k
and 730k but the 730k has now been split into two, which gives
a much better result for the industry. It is extremely important
that, firstly, that split stays and, secondly, that the UK does
not implement in a super equivalent manner.
Both the FSA, the Treasury, are particularly
involved in the negotiations and we trust that co-ordination between
them will improve further.
One of the questions asked at the Committee
was whether we were aware of any incidences at the moment where
differential implementation arises or is likely to arise as the
FSAP is implemented.
Following on from the section above, under the
current capital adequacy requirements, investment firms have to
hold capital equivalent to 25% of annual costs. This is known
as the expenditure based requirement or EBR. However, the UK includes
more in the EBR calculation than any other EU country with the
result that a UK firm has to hold more capital to be in business
and so have higher costs than their competitors elsewhere. In
addition, the UK included more firms into the capital requirements
than others, indeed Germany excluded all its investment firms.
Another discrepancy is likely to result from
MiFID and will relate to what can be sold on an execution only
basis. The UK has a large retail execution only business primarily
for equities and collective investments (such as unit trusts).
There is, in addition, a small amount of derivative execution
only business. Meanwhile, in Italy the reverse is true in that
the major retail execution only business is derivatives.
MiFID expressly excludes derivatives from being
sold on an execution only basis, however, it is not believed that
in Italy this will make much difference. We understand from the
Italian authorities that the terms "execution only"
in their jurisdiction refers to the situation where there is no
interference whatsoever. Therefore if in future, those with the
execution only derivative sites put in a simple trading limit,
the individual will still be able to trade in derivatives because
this will no longer count as "execution only". However,
such an action will not trigger suitability requirements either.
In the UK however this is not the case and with
the Directive expressly excluding derivatives on an execution
only basis, that means that derivatives will not be bought and
sold in this way in future. An individual therefore may well find
post the implementation of MiFID that in spite of the EU countries
having followed the same article in the Directive, there will
be a different set of services available in one country compared
As more of these matters come to light, as this
will be the case during the CESR process, we will of course be
highlighting them and trying to see an equivalent of outcome as
being the way forward.
We look forward to the continued active interest
of the Treasury Select Committee in this key inquiry area.
1 November 2004