Financial Services Authority Annual Report 2008-09 - Treasury Contents

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 (ESA Regulations);

    —  the EU Alternative Investment Fund Managers Directive; and

    —  qualification requirements for investment advisors under our Retail Distribution Review (RDR).


  3.  The Committee was concerned that a decision made by the ESA could impinge on the fiscal autonomy of a Member State.[7] They asked if we were content that the Member State affected could only appeal to a majority vote.[8]

  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 States;

    —  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.


  7.  The Committee also asked whether we shared its view that the Article 21 powers could also have fiscal consequences.[9] 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.


  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 to achieve.[10]

  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; and

    —  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 this outcome.

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.

Operational aspects

  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.[11]

  20.  The current minimum qualification required to provide investment advice is equivalent to a Qualifications and Credit Framework (QCF) Level 3 qualification—the 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 new requirements.

  23.  The preliminary list of appropriate transitional qualifications was only published on the 15 December in CP 09/31—so 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 standards—if 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

8   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 vote? Back

9   Q98: Do you share the Committee's view that the Article 21 powers could also have fiscal consequences? Back

10   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

11   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

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