Written evidence submitted by the Investment
Management Association
1. The IMA represents the investment management
industry in the UK. At the end of 2009, its members managed some
£3.4 trillion of assets on behalf of a diverse range of clients
including pension funds, life insurance companies, holders of
retail investment products, sovereign wealth funds and others.
We welcome the opportunity to contribute to the Committee's deliberations
on this matter and would be pleased to supplement this note with
oral evidence should that be of assistance to the Committee.
2. There is no absolute and definitively
correct structure for financial regulation. All models have their
pros and cons. We think however that there are merits to the model
now proposed by the Government, in particular:
— the separation of prudential and conduct
of business regulation, which may sometimes be in conflict; and
— bringing oversight of financial stability
into closer proximity with the prudential regulation of individual
banks.
Ultimately, however, how well the structure
performs will depend on the talents and experience of the individuals
charged with managing it. Getting this right will be the single
most important challenge facing the Government in introducing
these changes.
3. We welcome and support the proposal that
the prudential regulation of investment management firms should
rest with the CPMA. This recognises that the business model of
an investment management business is radically different from
that of a bank or an insurance company, in that it is agency-based
rather than a principal model. Custody of client funds is completely
separate from the manager, unlike banks and insurers where they
are held on balance sheet. For this reason, prudential or solvency
regulation of the sort required for banks and insurers is not
necessary for investment managers.
4. We also agree strongly that the CPMA
should have oversight of all conduct of business regulation, both
retail and wholesale. The focus of prudential regulators is on
the structure and solvency of the business itself. Prudential
regulation does not as a matter of course concern itself with
the detailed rules around the institution's dealings with its
customers. A major problem in the conduct area can of course impact
a firm's prudential situation—Equitable Life being a case
in point—so that the prudential regulator will need to keep
itself informed. But that is very different from carrying out
the supervision itself. It is significant that for many years
banks were not subject to statutory regulation in respect of their
dealings with customers, and it was only in recent years that
the FSA began to take this on.
5. Keeping retail conduct regulation under
one roof will also help to ensure that comparable rules are applied
to different products which effectively compete with each other—for
example funds, life insurance investment products and banking
products. At the present time all are subject to different rules,
although a forthcoming EU initiative will seek to address this.
So long as this remains the case, there is a risk of consumer
detriment.
6. Investment managers have a major interest
in the integrity of capital markets. In aggregate, rewards for
capital market intermediaries are at the expense of investors,
most of whom are ultimately small retail clients, whether through
pensions, ISAs or other channels. It is therefore essential that
we have strong and effective regulation of capital markets to
ensure that they operate openly and transparently and in the interests
of issuers of capital and of end investors.
7. One necessary condition for an effective
regulator is that it can see the whole picture. We do not therefore
support the suggestion that the UK Listing Authority be removed
from the CPMA and combined with the Financial Reporting Council.
We do not believe it is sensible to separate primary from secondary
regulation of the equity markets in this way. The continuing disclosures
under the Listing Rules are an essential ingredient of a well
functioning market, and to separate responsibility for them from
responsibility for investigating market abuse would risk opening
unwelcome gaps in regulation which could ultimately work to the
disadvantage of investors.
8. Moreover, the FRC is not equipped to
act as a market regulator. Its primary functions now are for standard
setting and for oversight of professions. We do not think there
is a logical fit between these and the duties of UKLA.
9. We attach responses to the questions
listed in the Committee's call for evidence.
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