Select Committee on Treasury Written Evidence

Memorandum submitted by Fidelity International

  1.  Fidelity International is grateful for the opportunity to contribute to the Treasury Select Committee Inquiry into European Financial Services Regulation.


  2.  Though still in their infancy, the Lamfalussy arrangements are a distinct improvement on the previous set-up in the European Union. But there is clearly still room for improvement.

  3.  Of principal concern to us is the UCITS Directive (Undertaking for Collective Investment in Transferable Securities). Although this is not strictly speaking a Lamfalussy Directive, the arrangements envisaged under the Lamfalussy process have been brought into play. CESR (The Committee of European Securities Regulators) has undertaken work on a number of areas emerging from the 2001 Directives. Their recent publication on eligible assets has gone a long way to clarifying the rules governing the asset classes into which UCITS funds may invest. These new rules, if implemented consistently, will clear up a number of differences that have emerged between national regulatory authorities in the EU. This process has shown CESR willing to listen to consultation by changing a number of its original suggestions following constructive feedback from the industry. But it was dealing with an issue that was already causing problems for firms in the marketplace. The time it has taken to resolve has caused confusion and significant additional costs for firms.

  4.  The CESR work on the Notification Process has also raised concerns. When a firm wishes to sell a UCITS across borders in the Single Market it has to register the fund with the Regulator in those markets it intends to target. The process has become a costly administrative nightmare, with each Regulator imposing different requirements on the fund. CESR has been charged with clearing up the mess and arriving at a uniform system. It recently published a consultation paper outlining a proposal for a new harmonised system.

  Though a welcome step in the right direction, the proposals lack detail. For example, the paper fails to specify where responsibility lies for verifying translations of legal documents required in the process. Also host states retain the right to question a firm's marketing plans but the paper fails to specify what is included in the definition of marketing. There is thus scope for national regulators to impose individual requirements.

  5.  In the case of the Markets in Financial Instruments Directive (MiFID), we feel that there is still far too much detail at Level 2 which is likely to create a great deal of adjustment in the FSA regime and indeed other European regimes, with no clear understanding of the possible benefits and probable costs.

  6.  The timescale around Lamfalussy is also troubling—as directives typically only have between 18 and 24 months from going on to the books until implementation. It is clear that this is an inadequate length of time for any complex topic to be dealt with properly. In the case of MiFID—Directive out April 2004—the EU will struggle to have final text of Level 2 by the original implementation date of April 2006 and countries will struggle to have made new laws and new rules by a mere eight months after that. We believe that the industry should have a full year from the date final rules are agreed to implement the necessary changes.


  7.  The FSA and others have promoted the principle and importance of cost benefit analyses (CBA) in Brussels. On the face of it this is encouraging. However, we have had occasion in the past to questions the effectiveness of the FSA's own CBAs. We believe that the position should be that unless demonstrable benefit to the investor can be established new rules should not be considered. We have no examples of better regulation affecting financial services.


  8.  The FSA has stated publicly on many occasions that it will not "gold-plate" MiFID and we thus expect to see the FSA's rule book slimmed down considerably when MiFID is implemented. However, the FSA's emphasis on principles-based regulation, particularly in the area of Treating Customers Fairly (TCF), means that it has the ability to use the somewhat fluid character of a principles-based system to extend the effect of MiFID beyond its intended scope. We would urge the Committee to probe the FSA as to what plans it has to prevent this type of gold-plating.


  9.  A final issue which we would like to bring to the attention of the Committee is that we believe the Commission could and should listen more to the consumer. They are careful to include consumer representatives in their public consultative activities but the mess over the UCITS Simplified Prospectus (SP) is evidence of how much room there is for improvement. The SP is a testament to the tendency of both regulators and consumer lobbyists to insist on every conceivable piece of information being included. As a result it contains so much information that it is both confusing and, crucially, uninformative. In the case of an umbrella fund with a range of sub-finds, the SP can run to well over 100 pages.

  Even in the case of simpler products the SP can be more than 10 pages. In our experience the document could be reduced to two pages and still be effective in giving consumer the information they need. With the SP the investor is like someone who asks for directions to a house around the corner and is given a large scale ordinance survey map of the entire county.

8 December 2005

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