Supplementary written evidence submitted
by the Financial Services Authority (FSA)
1. We are submitting this memorandum as
a follow-up to the oral evidence given by Adair Turner and Hector
Sants on 25 November.
2. In this memorandum we provide answers
to the specific questions the Committee asked on:
European Supervisory Authorities
(ESA) decisions and fiscal autonomy;
fiscal consequences of Article 21
the EU Alternative Investment Fund
Managers Directive; and
qualification requirements for investment
advisors under our Retail Distribution Review (RDR).
ESA DECISIONS AND
3. The Committee was concerned that a decision
made by the ESA could impinge on the fiscal autonomy of a Member
They asked if we were content that the Member State affected could
only appeal to a majority vote.
4. The European Council (the Council) have
made it clear that any decision made by the ESA should not impinge
on the fiscal responsibilities of Member States. The Commission's
legislative proposals also:
prohibit ESAs from making decisions
about emergency powers (article 10) or disagreements between supervisors
(article 11) that impinge on the fiscal responsibilities of Member
establish a process by which a Member
State can challenge an ESA decision made under article 10 or 11
if they believe that the decision impinges on the fiscal responsibilities
of Member States; and
permit an ESA decision made under
article 10 or 11 to be appealed to the ESA Board of Appeal.
5. On 3 December 2009, the Council put forward
amendments focused on challenging an ESA decision. These removed
the need for a qualified majority vote and established a process
to enable Member States to challenge an ESA decision if they feel
it impinges on their fiscal responsibilities and appeal to the
Council if their challenge is rejected.
6. Fiscal responsibilities are a matter
for government. However, we consider that these revised arrangements
are a reasonable policy compromise between the need to ensure
the fiscal responsibilities of Member States are not impinged
and the need to ensure that Member States do not have inappropriate
recourse to the fiscal carve-out.
21 (ESA REGULATIONS)
7. The Committee also asked whether we shared
its view that the Article 21 powers could also have fiscal consequences.
The operation of this article needs to be viewed in the light
of other provisions of the ESA Regulation. Article 21 of the ESA
Regulations deals with the relationship between the ESA and the
European Systemic Risk Board (ESRB). It focuses on how the ESA
should treat risk warnings or recommendations made by the ESRB
that are addressed to the ESA or a national supervisory authority.
Article 21 provides that:
where a risk warning or recommendation
is addressed to the ESA, the ESA must either comply or explain
its reasons for not doing so;
where a risk warning or recommendation
is made to a national supervisor, the ESA is required, where relevant,
to use its powers to ensure a timely follow-up;
where a recommendation or response
to a risk warning results in an ESA decision being made under
Article 10 or Article 11, that decision should not impinge in
any way on the fiscal responsibilities of a Member State; and
if a Member State considered that
it did so impinge, it would be able to challenge the decision
and appeal to the Council if the challenge was rejected.
8. We therefore do not share the view that
Article 21 could on its own have fiscal consequences; where the
ESA uses its decision making powers under the provisions on crises
or binding mediation, any decisions made could be challenged if
a Member State thought these impinged on its fiscal responsibilities.
EU ALTERNATIVE INVESTMENT
9. The Committee asked us to provide a note
on the changes that we would like to see made to the current draft
of the Alternative Investment Fund Managers Directive (AIFM Directive).
It also asked us to explain why we felt these would be difficult
10. At a high-level, we recognise that the
AIFM Directive has changed considerably since the original Commission
proposal. However, we still believe that there are a number of
areas which could be significantly detrimental to alternative
investment fund managers and to investors, particularly in terms
of restricting the choice of available investment options and
increasing costs without commensurate benefit.
11. The Directive is likely to change further
as it progresses through both elements of the co-decision procedure.
The Treasury, as the lead negotiator for the UK and supported
through the provision of technical advice by the FSA, continues
to argue for changes to the Directive, including ensuring that
the way in which the provisions of the Directive apply to different
types of funds should reflect the different risks they pose.
12. There are a number of issues where Member
States do not agree, including:
how the Directive applies to fund
managers of non-EEA domiciled funds;
the provisions on the remuneration
of alternative investment fund managers and their staff;
whether to remove de minimus thresholds;
some operational aspects, including
the provisions on depositaries and valuers.
13. At the time of writing, the Directive
is still subject to debate in EU Council working groups under
the Spanish Presidency. In the EU Parliament, the Directive is
being considered by the Economic and Monetary Affairs (ECON) Committee
and the Legal Affairs (JURI) Committee. A vote in these committees
is scheduled for April, with a plenary vote of the full Parliament
in July. Subject to a positive vote by these committees, the plenary
session and the agreement of the EU Council, the Directive could
be adopted at some point in the middle of 2010. This timetable
is subject to change as negotiations progress.
EEA-based managers of non-EEA domiciled funds
14. One of the most significant issues is
how the Directive applies to EEA-based managers of non-EEA domiciled
funds. The original Directive proposal provided a pan-EEA "passport"
for the marketing of non-EEA domiciled funds if the funds and
their managers met strict prescribed "equivalence" requirements
(compared to EEA standards) for regulatory and tax regimes.
15. The Swedish Presidency proposed removing
the marketing passport for non-EEA funds in its compromise texts.
There has been significant opposition to the marketing passport
from Member States who wanted the existing national regimes for
the marketing of non-EEA funds to continue to apply. The compromise
proposal published by the Swedish Presidency imposes more burdensome
requirements on EEA-based managers compared to those based outside
the EEA. We believe that this approach could incentivise fund
managers based in the EEA to migrate outside Europe. This would
not prevent them from trading in European financial markets, but
would make it more difficult for EEA regulators to identify and
mitigate the risks arising from their trading activity.
16. The original Directive proposal did
not contain any explicit provisions on the remuneration of alternative
investment fund managers or their staff. The remuneration provisions
introduced by the Swedish Presidency were largely a read-across
of those under negotiation in the Capital Requirements Directive
and were significantly different in nature and form to those which
had been agreed for the UCITS Directive. We believe that the Directive
should contain a remuneration framework which enables the alignment
of the interests of alternative investment fund managers to those
of investors. While the original provisions have been changed
during the negotiations, we believe that further technical changes
are necessary to ensure the framework in the final proposal delivers
De minimis thresholds
17. Pressure also remains to remove the
de minimis thresholds in the original Commission proposal. One
purpose of these thresholds is to exclude the management of funds
that are not of systemic importance or relevance. We believe that
a focus on systemically important or relevant funds is proportionate
and consistent with the G20 recommendations. We support the thresholds
remaining in the proposal.
18. We continue to argue that the requirements
in the Directive covering operational aspects such as asset valuation
and custody of assets must be robust and practical. They must
recognise the fact that an effective regulatory approach has to
accommodate the global investment reach of funds and the service
providers they use, rather than simply preventing these activities
occurring outside Europe.
19. The Committee asked how many advisors
would have to take examinations in order to provide investment
advice under the RDR.
20. The current minimum qualification required
to provide investment advice is equivalent to a Qualifications
and Credit Framework (QCF) Level 3 qualificationthe vocational
equivalent of an A-level. We will require investment advisers
to hold a QCF Level 4 qualification by the end of 2012. QCF Level
4 is the vocational level qualification used for professionals
and technical people.
21. In developing our policy we sought to
assess the impact on all advisers who are subject to the RDR as
a whole. This has included collating our own existing data on
individuals carrying on "approved persons" roles in
the specific investment advice sector, data from relevant professional
and trade bodies, and independent research conducted by Deloitte
LLP on our behalf.
22. It is difficult to provide exact figures
as the figures change frequently, however we estimate that approximately
60,000 advisers are affected in total. Of these, we estimate from
our own data and information received from the Chartered Institute
for Securities and Investments that around approximately 8,500
are stockbrokers. We cannot yet answer the question of how many
of those 8,500 will need to take additional qualifications in
order to meet the new requirements but we do know from professional
body membership data that, of the 60,000 total population, 15,000
already hold credible and relevant qualifications that meet the
23. The preliminary list of appropriate
transitional qualifications was only published on the 15 December
in CP 09/31so the numbers given above could change with
the publication of this list with fewer advisers now needing to
take further exams. We also expect to add to this list in the
near future once other potential qualifications have been assessed.
24. Industry feedback suggests that the
majority of those affected are working in the packaged products
sector rather than in advising on securities and derivatives.
We have confirmed that the majority of the Chartered Institute
for Securities and Investments qualifications plus some combinations
of the London Stock Exchange exams were already Level 4 and above,
so will be appropriate post end 2012. For this reason the precise
figures on who does or does not need to study for further qualifications
are subject to change.
25. The Deloitte LLP research on advisers'
current levels of qualifications estimated that approximately
25% of investment advisers already held qualifications equivalent
to Level 4 or above, and that a further 25% were part-way towards
achieving one. Accordingly, we estimate that approximately 75%
of all advisers had at least some work to do to earn a Level 4
qualification by the end of 2012. In particular, approximately
26% of advisers at small-commission based adviser firms held Level
4 qualifications. This figure rose to 32% of advisers in the case
of large commission-based adviser firms. Among small fee-based
and large fee-based adviser firms, the numbers of advisers with
Level 4 qualifications were greater at 51% and 44% respectively.
We have commissioned additional research to provide us with a
breakdown of the number of advisers that need to undertake further
exams by firm category and size. This research will be published
in Q3 2010.
26. The reasons for us proposing these changes
in qualifications are because we are not satisfied that the existing
qualifications requirements are adequate for the demands of today's
investment market. We are thus expecting higher standards than
20 or 30 years ago. All existing retail investment advisers will
be affected by our increased qualifications proposal. The new
standards are specifically designed for people working in technical
or professional jobs. The aim is to test advisers on their ability
to gather a range of information; consider and select appropriate
options from a range of possible solutions; distinguish between
facts and inferences and make judgements about value, these are
core to the role of an investment adviser. Existing advisers should
find these examinations are simply testing what they already do
in practice. It must be in the public interest to ensure that
advisers meet reasonable professional qualification levels.
27. There remains a minority who are operating
without any qualification at all; while we do not have precise
numbers of how many have been allowed to operate unqualified,
this position is in our view simply no longer tenable. If people
already have credible and relevant qualifications which are equivalent
to the new level then those qualifications would be acceptable
and any gaps in content against the new standards could be met
with structured Continuing Professional Development. There is,
therefore, no need for those individuals to take any further exams.
We have some sympathy for those for whom examinations are stressful
and we are therefore permitting alternative forms of assessment
as allowed by the qualifications regulators, OfQual and QAA.
28. For those who do have to take further
qualifications (and these will not necessarily be in the form
of a written examination), the amount of study required will depend
on individual circumstances and the awarding organisation they
choose to use. Investment advisers are not being asked to start
from scratch and we expect they would already be familiar with
much of the content of the new standardsif they were not,
their employer should not allow them to carry out their current
role. As such, and with the move from what is essentially the
vocational equivalent of moving from an A level to the first year
of a degree, this should represent a broadening and deepening
of knowledge rather than the acquisition of new learning. We announced
our intention to make this shift in November 2008 and are therefore
giving advisers just over four years to qualify at a level equivalent
to the first year of a degree.
29. We already have principles for businesses
which require firms to employ individuals that are competent to
carry out the role. However, for investment advisers there is
also a requirement for the individual to be "fit and proper".
For retail advice this includes a demonstration of competence
via the holding of an appropriate qualification, amongst other
criteria. The Committee has in the past shown general support
for the concept that people providing an advisory service should
be appropriately qualified.
30. Our aim is to raise professional standards
in this sector and to ensure that investment advisers have the
skills and knowledge they need to restore consumer confidence,
encourage greater engagement and secure the sustainability of
the sector for the future.
12 February 2010
7 Q95: Do you share our concern about the application
of the so-called fiscal safeguard? Back
Q97: If it is a specific fiscal consequence, are you content that
it can only be appealed by the Member State affected to a majority
Q98: Do you share the Committee's view that the Article 21 powers
could also have fiscal consequences? Back
Q111: "It would be helpful, but perhaps separately because
we are pressed for time, if you dropped us a note on what more
ought to be done and your reason for gloom with regard to whether
it can be done." Back
Q89: "Mr Sants, can I ask you about the Retail Distribution
Review in box 11 on the Annual Report, a matter on which I have
written to you, about what appears to be a requirement on investment
advisers to take time off to pass qualifications that they may
not have passed or even taken 20 years or so before? How many
advisers are affected?" Back