Memorandum submitted by Invesco Perpetual
1. OPENING REMARKS
1.1 Invesco Perpetual forms part of the
AMVESCAP group, one of the world's leading independent fund management
groups managing assets worth $404bn (as at 28 February 2006) billion
globally. Within the UK Invesco Perpetual offers a wide range
of unit trusts and investment trusts to retail and institutional
investors. With our core expertise in fund management, we aim
to achieve superior investment performance, in turn helping people
to build greater financial security.
1.2 This perspective gives Invesco Perpetual
major insight into investment behaviour in the UK and a strong
understanding of what is required to ensure that long-term savings
and investments are able to appeal to the broadest possible range
of investors. In previous years we have campaigned hard to ensure
that the UK maintains a favourable regulatory environment for
investment. In continuing that approach, we are grateful for this
opportunity to respond to the Treasury Committee inquiry.
1.3 Invesco Perpetual particularly welcomes the
Committee's decision to invite focused written submissions on
the issue of the Markets in Financial Instruments Directive or
MiFID (Directive 2004/39). As the review of the investment services
directive (IMD) nears a completion date in 2007 it is vital that
inquiries, such as this, help to guide policymakers towards a
more effective approach to formulating regulation on a truly risk-based
approach within which all the costs and benefits have been properly
considered at the outset. From this starting point, we believe
that MiFID has exposed a number of weaknesses within the current
approach which need to be addressed.
2. SPECIFIC CONCERNS
Lamfallusy
2.1 As the first EU Directive to be passed under
the Lamfallusy procedure MiFID offers an insight in how the new,
streamlined legislative process will work in practice. On the
whole, we believe that the Lamfallusy process has been a positive
development and welcome its use in developing future financial
regulation.
Regulatory Impact Assessment
2.2 Typically, the first stage at which any impact
assessment takes place is during the transposition stage of a
directive, at which point the FSA is required by the Financial
Services and Markets Act (2000) to undertake a full Cost Benefit
Analysis (CBA). As Callum McCarthy, Chairman of the Financial
Services Authority (FSA), has stated publicly MiFID was never
subjected to any cost/benefit analysis prior to the adoption of
the Directive in 2004. We feel it is significant that the Chairman
of one of the most influential regulators in the EU has suggested
that many of the problems with MiFID have arisen for that reason.
2.3 In the two years since adoption of Directive
2004/39 the Commission still has no firm basis upon which to base
its position as to the likely outcomes. While there has been an
assessment as to the macro-economic benefits of an integrated
EU market, the Commission has never tested MiFID for its full
impact. The Commission does, however, acknowledge that the compliance
costs will be front-loaded while the benefits will be accrued
over time. This poses the important question of whether the benefits
will materialise at all. While the Commission accepts that the
costs will be upon us all very shortly, the benefits are not yet
secured. Given the overall slow progress towards achieving the
internal market and the need to re-launch the seriously delayed
Lisbon Agenda in May 2005, this should be seen as a major concern
for policymakers.
2.4 This concern was demonstrated during the
European Council meeting in Brussels on 23 and 24 March where
the Council welcomed the need for further progress in "all
areas of better regulation: simplification, impact assessment,
repeals and withdrawals, codification, sectoral analysis, reduction
in administrative burden, business involvement" .
2.5 We welcome this announcement alongside any
moves by the Commission to ensure that such assessments are part
of the early groundwork in all future Directives. Whilst this
assessment might not take the form of a full Cost Benefit Analysis
it could nonetheless help to highlight some of the likely outcomes
well in advance. As to the Treasury Committee's question on whether
or not the Commission should undertake a CBA on MiFID at this
stage, this would depend on the extent to which such an assessment
would actually enhance the outcome.
Ensuring more effective implementation
2.6 In May 2004 the tripartite progress report
"Delivering the FSAP in the UK" published by the Treasury,
FSA and Bank of England highlighted that firms will typically
have "at least three months of certainty in which to finalise
their arrangements for dealing with the implementation of EU directives
in the UK". However, what that report does not raise is the
years of uncertainty that often precede this stage and the unnecessary
costs run up by firms during the overall consultation process.
2.7 While the tripartite report does mention
that firms will want to understand the challenges of implementation
before the final three months, with the "advantage"
of being able to influence and inform the implementation of EU
measures in the UK, in our experience of MiFID this `advantage'
has come at a very high cost. Taken together the number of hours
committed to this process by our senior management team as well
as the input from our operations and compliance teams, has run
into tens of thousands of pounds. Even with all the costs accrued
so far, we do not yet have the benefit of knowing the final outcome
and we are still unable to plan for implementation with any degree
of certainty.
2.8 We believe that much of this cost could have
been avoided with the benefit of clearer objectives at the outset.
A clearer sense of the likely costs and benefits would also have
helped to guide policymakers. Instead, we have been subjected
to too many amendments and too much uncertainty. In short, we
believe that the MiFID implementation process has failed most
of the "better regulation" measures as outlined by the
European Council above.
The timeframe for implementation
2.9 In total 42 separate measures have been introduced
under FSAP (of which MiFID is just one). While we support the
overall goal of a fully integrated and well functioning capital
market, as envisaged under the FSAP, we note with concern how
the implementation phase has been problematic with most of the
measures involved being made to fit a tight transposition timescale.
It is worth recalling that it was the FSA which first warned in
2003 of "compliance bottlenecks" resulting from firms
having to digest too many reforms due to inadequate coordination
of the Financial Services Action Plan . Against this background,
the original decision to delay implementation of MiFID was therefore
welcomed. However, it remains to be seen whether the revised timescale
will suffice.
2.10 To assess "whether the UK financial
services sector is prepared for the domestic implementation of
MiFID" depends very much on the final rules. As the FSA's
deadline for publishing final rules is January 2007 it is difficult
to assess. Equally, the "extent to which the proposed MiFID
implementation timetable is realistic for UK firms" will
also depend up on the final rules.
2.11 If the eventual changes do not stray too
far from current UK practice then we are confident that the current
2007 timeline is achievable. At this stage Invesco Perpetual is
confident that we will be well-placed to integrate any rule changes
within the current timeframe. However, the FSA has already warned
that the UK can expect to see some significant changes in current
market practice. How significant the impact is felt will of course
depend on where and how trading occurs. Other firms will no doubt
be in a less favourable position than ours. Equally, it is unlikely
that other EU Member States will be as well placed as the UK to
implement MiFID without some major upheavals.
Conduct of Business requirements
2.12 The main concern relates to how the scope
of best execution is applied. The Commission has signaled that
the necessary "investment in IT systems may well take up
a bigger part of firms' budgets as they seek to deliver best execution".
This is likely to involve both front-loaded and ongoing compliance
costs. In order to limit such costs, we would support no major
rule changes on the basis that the regulatory standards already
observed in the UK are sufficient to ensure adequate investor
protection. Applying a heavy-handed approach could sacrifice a
risk-based approach to financial regulation, the benefits of which
are not clear.
2.13 Our concern arises from an apparent lack
of prior coordinated consultation on MiFID and apparent difficulties
in applying principles, such as best execution, to different asset
classes. The lack of prior coordinated consultation is highlighted
by the differing requirements of best execution on investment
banks, brokers and asset managers and the apparent lack of initial
involvement of buy side asset managers in setting the principles
for best execution and for possibly some other areas of MiFID.
The issues with detailed application of principles is highlighted
by the difficulties in applying the best execution and transparency
principles to over the counter trades as undertaken in the larger
and more liquid fixed income markets.
Working towards 2010
2.14 Looking forward to the EU Commission's White
Paper on Financial Services Policy (2005-10), we have previously
called for a more balanced regulatory framework, which is able
to both protect investors while making a more positive contribution
to maintaining the overall competitiveness of both UK plc, in
which we are a major investor, as well as maintaining the competitive
position of the UK fund sector internationally. We welcomed last
year's report by the Better Regulation Task Force (BRTF) in promoting
debate around this issue. However, we now need firm action to
ensure that the overall standard of transparency and engagement
with industry is improved before further legislation comes forward.
March 2006
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