Financial Regulation: a preliminary consideration of the Government's proposals - Treasury Contents

Written evidence submitted by BlackRock

  1.  BlackRock is one of the world's largest publicly traded investment management firms. As at 31st March 2010, the assets under management of BlackRock were USD 3.36 trillion. BlackRock is a premier provider of global investment management, risk management and advisory services to institutional and retail clients around the world. The firm manages assets on behalf of institutions and individuals worldwide through a variety of equity, fixed income, cash management and alternative investment products, as well as the industry leading exchange-traded fund platform, iShares.

  2.  BlackRock welcomes the opportunity to comment on the proposals made in this consultation paper. In providing our responses we are mindful of the fact that the Government's paper does not deal with the proposals in great detail pending further consultation. Our response is therefore also in general terms given the lack of clarity which currently exists.

A  Do the Government's proposals appropriately assign roles and responsibilities between the different regulatory institutions?

  1.  As currently drafted the proposals are unclear as to whether asset managers doing business in the UK would be prudentially regulated in the United Kingdom by the Prudential Regulation Authority ("PRA") or by the Consumer Protection and Markets Authority ("CPMA"). Our response below highlights the concerns for asset managers of: (i) being dual-regulated by the PRA in respect of prudential issues and by the CPMA in respect of conduct issues; and (ii) being regulated by CPMA at the prudential and conduct level.

  2.  Under the current proposals deposit-takers, insurers and broker-dealers (or investment banks) are considered to be carrying on prudential regulated activities and will therefore be prudentially regulated and supervised by the PRA and supervised by CPMA in respect of conduct-related issues. Whereas those firms carrying on non-prudential regulated activities will be exclusively supervised and regulated by the CPMA for both prudential and conduct issues. Some asset managers may have entities within their group in the United Kingdom which have permissions as a deposit-taker for insurance business only (for example, life insurance entities providing unit-linked policies without any mortality guarantees to UK pension funds and other UK insurance companies which are in the most material aspects similar to asset management businesses) and/or entities which have permission to deal as principal for limited purposes (for example, for purposes of managing corporate cash or making seed capital investments in sponsored product). It is unclear from the consultation whether these permissions will bring some or all of asset management group entities in the United Kingdom within the scope of prudential regulation by the PRA and conduct regulation by the CPMA or whether it is intended that these activities would be excluded from the scope of the PRA.

  3.  The proposals indicate that the Financial Policy Committee ("FPC") will be empowered to give directions to the PRA (and the CPMA, if relevant) on the regulatory tools that should be deployed in pursuit of macro-prudential policy, and how they should be formulated or calculated. It seems most likely that such directions would be relevant to the PRA and the types of firms it regulates. Should asset managers be regulated by the PRA, the concern is that such directions would be applied to asset managers in the same way as they would be applied to banks, insurers and broker-dealers, which would likely not be appropriate given that asset managers do not engage in proprietary trading and therefore have significantly different risk profiles than these institutions. It will be important to ensure that, if asset managers are to fall under PRA regulation, the implications of the exercise of the PRA's prudential oversight is considered in the context of the very different business model and risk profile that asset managers pose and not with a "one-size fits all" mindset with issues posed by the major banks and broker dealers.

  4.  If asset managers doing business in the UK are to be regulated by a single regulator, the CPMA, it is important that the CPMA is equipped with staff who have appropriate expertise and skills to regulate and supervise asset management businesses with both a retail and wholesale/institutional business, not only at a conduct level, but also prudentially. A potential solution to this issue is for the CPMA to have a "college of expertise" to supervise asset managers at both a conduct and prudential level separately from, for example, high street independent financial advisers. The consultation itself acknowledges that prudential regulation and conduct of business regulation require different approaches and cultures and combining them in the same organisation is difficult. The challenge will therefore be to ensure that the CPMA can appropriately supervise and regulate asset managers at a prudential level, given its remit of also supervising and regulating institutions such as high street independent financial advisers which have a significantly different prudential profile.

B  Will there be unintended consequences of the Government's proposals for regulation on the prospects for non-bank financial institutions?

  1.  Our concerns regarding the split between the PRA and the CPMA for asset managers are set out above.

C  To what extent will the regulatory and administrative burden increase for those firms who now have to deal with two regulators?

  1.  In our view, if asset managers are to be subject to dual-regulation by both the PRA and the CPMA, the regulatory and administrative burden and lack of clarity will increase. The implications include:

    — increased resource requirements in order to deal with two regulators;

    — the potential for both underlap or overlap of regulatory oversight;

    — lack of clarity around how supervisory initiatives such as ARROW will operate. It will be important for both regulators to have a joined up approach and efficiencies for ARROW supervisory visits suggest that they should be conducted together; and

    — lack of clarity around which regulator is responsible for supervision and enforcement of specific issues, eg transaction reporting. On the basis of the current proposals, it would seem that responsibility for enforcing systems and controls failings will lie with the PRA (in respect of dual-regulated firms) and therefore, a firm would have enforcement action from both regulators to manage at the same time.

  BlackRock intends responding more specifically to HM Treasury's consultation paper concerning this current proposal.

September 2010

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