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.
SUMMARY
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.
THE ASSET
MANAGEMENT INDUSTRY'S
INTEREST IN
EUROPEAN ISSUES
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.
THE OPERATION
AND DEVELOPMENT
OF THE
LAMFALUSSY ARRANGEMENTS
Consultation
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.
THE ROLE
OF THE
EUROPEAN PARLIAMENT
IN THE
LEGISLATIVE PROCESS
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.
IMPLEMENTATION OF
MIFID
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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