Select Committee on Treasury Written Evidence

Memorandum submitted by Invesco Perpetual


  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.



2.1  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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