Select Committee on Treasury Written Evidence

Memorandum submitted by the Investment Management Association (IMA)

1.  The IMA is the trade body representing the UK asset management industry. IMA Members include independent fund managers, the asset management arms of banks, life insurers, investment banks and occupational pension scheme managers. They are responsible for the management of approximately £2 trillion of funds (based in the UK, Europe and elsewhere), including institutional funds (for example, pensions and life funds), private client accounts and a wide range of pooled investment vehicles. In particular, our Members manage 99% of UK-authorised investment funds (collective investment schemes).

  2.  IMA's evidence is focused on the operation and development of the Lamfalussy arrangements, on the role of the European Parliament in the legislative process and on implementation of the Markets in Financial Instruments Directive (MiFID). We have not included comments on the White Paper on Financial Services Policy but will be able to do so, if required, at a later stage.


  3.  We believe that the Lamfalussy process has been helpful, particularly because it has increased the openness of the legislative processes. We support the work of the Committee of European Securities Regulators (CESR), and believe that its existence has had a positive effect, in that it brings together the regulators and should increase the trust and communication between them.

  4.  We do, however, believe that there are a number of improvements which could be brought about.

 (a)  It is important for political issues to be resolved at Level 1 in order to ensure that the focus of CESR is on technical rather than political issues.

    (b)  CESR needs to be encouraged to focus on outcomes rather than inputs, thus avoiding overly detailed provisions. It should also be encouraged, where appropriate, to say that it does not believe that further advice or Level 2 provisions are needed.

    (c)  CESR should be encouraged not to operate to the lowest common denominator among national regulators, but to take decisions on the basis of what is right for the market and investors, particularly focusing on the development of the single market.

  5.  As regards the European Parliament, we have found its role to be a positive one, with MEPs being accessible and willing to work across national and political lines.


  6.  Members have a very strong interest in the development of an effective single market for financial services in Europe. As users of markets, we are keen to ensure that such markets are as competitive, liquid and accessible as possible. As providers of financial services, a large number of UK-based asset managers have already developed significant cross-border business.

  7.  As far as institutional business is concerned (managing money on a segregated basis on behalf of eg pensions funds) the market is already well integrated, and the interest of UK-based firms is in ensuring that EU measures do not create new barriers to business. Such business is covered by the Markets in Financial Instruments Directive.

  8.  Our members also operate investment funds, which are covered by the Directive on Undertakings for Collective Investment in Transferable Securities (UCITS). Within this directive, members are given a promise of an investment funds "passport", and a number have begun to build significant pan-European business. UK-based houses play a very significant role in a developing cross-border business. Some 21% of European fund assets are now attributed to cross-border activity of which nearly half can be attributed to UK-based managers. Over the last year some 83% of cross-border net sales were by UK-based houses.

  9.  As their business develops, however, they encounter significant administrative, legal and fiscal barriers. Such barriers have been sufficient to prevent even some of our larger members from considering benefiting from the wider markets which the rest of Europe could offer. The EU Commission's Green Paper on the Financial Services Action Plan which is being examined by the Committee refers to these points, which have been developed further in a subsequent Commission Green Paper on "The Enhancement of the EU Framework for Investment Funds". IMA has submitted a substantial response to that Green Paper, welcoming the Commission's acknowledgement of the problems, seeking to help the Commission to prioritise the issues and providing data to allow the Commission to develop a programme for future action and impact analysis.

  10.  While the UCITS directive pre-dates the introduction of the Lamfalussy regime, CESR, which was formed under that regime, has been given an important role under UCITS which is similar to that provided in Levels 2 and 3 of Lamfalussy directives.



  11.  We very much welcome the increased openness and enhanced consultative process that has come with the Lamfalussy arrangements. The practice of CESR and of the Commission to consult widely and to be willing to amend proposals in light of such consultation is to be commended. In particular, there have been differences of interpretation among regulators as to the instruments in which UCITS funds may invest. In June 2005, CESR published a consultation document on this subject which caused considerable alarm, particularly because it would have resulted in a substantial number of existing funds losing their ability to be marketed on a cross-border basis. Following an open hearing and receipt of responses, CESR agreed to publish a second consultation document which incorporated substantial changes from the first. While, in an ideal world, the first consultation would not have needed so much amendment, we believe that the end result will have been worth waiting for.

  12.  The consultation process undertaken by CESR before deciding its advice to the Commission on MiFID was detailed and useful. However, it was recognised at the time that insufficient time was being allowed for that process. This was partly because of the level of detail to which CESR chose to go, but it did mean that proper Regulatory Impact Analysis/Cost Benefit Analysis could not be undertaken.

  13.  We also very much welcome the fact that officials from HM Treasury have been willing to consult interested parties in advance of meetings of the European Securities Committee.

Possible improvements

  14.  We fully accept that there are still problems with the Lamfalussy process, but equally believe that it should be supported: in this spirit, we would suggest a number of explanations of why difficulties have arisen, and how the process might be improved.

  15.  The first difficulty arises from the experience of the negotiation of MiFID, and particularly the development of CESR's advice at Level 2. CESR is supposed to provide technical advice, but found itself faced with some "unfinished business" of a political nature from Level 1. Our impression is that in the interests of reaching agreement at Level 1, a number of difficult issues were side-stepped by devolving them to CESR. We believe that if the Lamfalussy process is to be effective, it will be important for issues where there are important national interests to be clearly identified and resolved at Level 1. While it would be naive to suggest that national regulators would not let national interests enter their discussions, we believe that it is important for the opportunities for this to occur to be kept to a minimum, enabling CESR to play to its strengths, ie to provide technical understanding and input.

  16.  The second difficulty arising from negotiation of MiFID has been a tendency on the part of regulators to go into too much detail. We very much support the FSA's risk-based approach to regulation, and believe that this is being jeopardised by the tendency for EU Level 2 requirements for MiFID to go into a great deal of detail. We believe that it is important for regulators to focus on outcomes, putting responsibility on senior management to decide how to achieve those outcomes, rather than to focus on inputs. In response to a mandate on the Transparency Obligations Directive, CESR expressed the view that there was no need to go beyond the Level 1 requirement. We believe that CESR should be encouraged to do this in other circumstances.

  17.  This third difficulty, which CESR itself has identified, is that different regulators have different competencies. While resolving this will be no small undertaking, we believe that in the interim it is important for CESR not to operate at the level of the lowest common denominator. Our concern is illustrated by a recent consultation document produced by CESR on simplification of the regime whereby UCITS funds which are to be marketed cross-border must be registered with the host state authority. The proposals made in that document have been designed so that they can be applied within the Member State whose regulator's activities are most constrained by national law. The very disappointing result is a focus on what cannot be done rather than what can, and should be done to lower costs and reduce bureaucracy. We believe that CESR should be encouraged to start from what is desirable, in the interests of efficiency and investor protection, and suggest ways in which this can be achieved, rather than focusing on its own limitations. Those Member States where it is possible to move forward should not be prevented from doing so.

Shift of emphasis: from policy formation to implementation

  18.  Much of the focus of activity for the Commission and CESR has been on Level 2, ie policy making. This is not surprising given the very large number of issues which have had to be dealt with at Level 2. It is important to remember, however, that there are two further levels. Level 3 measures are designed to improve the common and uniform implementation of Level 1 and 2 acts in Member States, and is largely a responsibility of CESR, while at Level 4 it is intended that the Commission should strengthen the enforcement of Community law.

  19.  We believe that it is now important to focus on implementation. We are very encouraged that Commission representatives have made clear statements that they intend now to focus on implementation and enforcement rather than new rule-making.

  20.  In practice, this will require a change of culture and mind-set within the Commission services. For staff, much of the attraction of joining the Commission has traditionally been drafting and steering legislation through the negotiation processes. We sense that implementation and enforcement has not necessarily been considered an attractive area in which to work. This attitude will clearly have to change, with reward systems and other structures adapted to the new approach.

  21.  The traditional approach to implementation and enforcement has been for the Commission to wait until Member States have implemented at a national level, and then for formal infraction proceedings to be initiated ex post facto. This approach clearly has significant drawbacks, in that it takes many years for such formal proceedings to come to fruition, during which time major differences of interpretation prevail and regulatory arbitrage may take place. It also results in uncertainty and instability, particularly if it is proved that the Member State was wrong and has to change its approach.

  22.  An example of difficulties in this area already exists within the context of UCITS funds. As from September 2005, funds have been required to produce a "simplified prospectus". This was intended as a document which would provide investors with the most important information they need to enable them make an investment decision, and was designed to allow comparability between funds, regardless of where they are domiciled in the EU. Member States have all taken different interpretations of a Commission Recommendation introduced in this area, which has meant that the documents being produced are neither simplified, nor are they comparable. The Commission has announced its intention to review, during the course of 2006, how the simplified prospectus regime has developed, but this is too late: it will require yet another regime change to achieve the initial intention of the requirement. We believe that this review should have been undertaken while the Member States were considering how to implement. While the Commission does not have formal powers until Member States have introduced legislation, it should be able play a role in ensuring that there is exchange of information between Member States as to how they are intending to implement, and in indicating what they believe is best practice in this area.


  23.  We are conscious that there have been a lot of discussions relating to "comitology" and the role of the formal role of the European Parliament in the context of the Lamfalussy processes. It is unfortunate that the Parliament has had to take up quite a lot of time on these sorts of issues. Generally, however, we believe that on policy issues the Parliament's contribution has been very valuable. It made a very positive contribution at Level 1 of MiFID, being faced with many competing interests, and had to deal with an unprecedented number of amendments to the Capital Requirements Directive. We have found MEPs accessible. They have been willing to listen and understand the business, as well as to challenge where appropriate. We have been particularly struck by how MEPs have worked effectively across both party and national lines, recognising the technical rather than political nature of much of the work involved.


  24.  It is difficult to comment in detail on the implementation process for MiFID since such implementation has not yet started, and cannot formally do so until the Level 2 texts are agreed. We welcome the fact, however, that the FSA has been raising awareness of the need to plan for such implementation. At the same time, it is necessary to maintain a sense of proportion and not to over-react. We have been working with our members, and have issued a summary of the implications for them and guidelines as to action they can take now, action that can be taken when the Level 2 requirements are known, and action which will have to await UK implementation. We also welcome the way in which the Treasury and FSA are keeping us informed of their proposed timetables (which have, inevitably been shifting in light of developments in Brussels), which have enabled us and our members to plan.

  25.  We do not yet know the extent to which Level 2 measures will be introduced through regulations or through directives. In either case, but particularly in the latter, we believe that it will be important for there to be guidance to help firms understand the intention of the new requirements. We think that in the UK the effect of the new requirements will be to modify a lot of existing requirements rather than introduce fundamentally new concepts, and we think that it will be particularly important for the FSA to draw attention to where the rules have changed, and why.

  26.  We are participating in a pan-industry group which is proposing to develop a set of industry guidelines to assist firms in areas of MiFID implementation which carry a high degree of legal risk and/or legal uncertainty. This is an unprecedented alliance of representative organisations from all parts of the financial services sector. The FSA has welcomed the formation of this group, and we hope that they will be encouraged to take its work seriously.

  27.  One area of concern is that while the UK is clearly taking implementation of the directive very seriously, there seems to be an alarming lack of awareness of the implications among our colleagues. The changes for them are, in many cases, going to be much more profound than for the UK. We understand that part of the FSA's thinking in producing documentation for firms about the impact of MiFID is to lead the way for other regulators, and we applaud this. We do, however, also think that it will be important for the FSA to remain aware of what is going on in other Member States, to ensure that there are common understandings of how the new requirements are to be interpreted, the attitude of Member States to options that are offered to them, and the competitive impact which the application of different rules will have on UK-based firms.

  28.  We have invited our European-level association, EFAMA, to run a workshop on the implications of MiFID, and have agreed to play a major part in this. We would encourage other UK-based associations, where appropriate, to do similar in order to ensure that levels of understanding and awareness are at a similar level throughout Europe.

December 2005

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