Draft Undertakings for Collective Investment in Transferable Securities Regulations 2011
The Committee consisted of the following Members:
† Campbell, Mr Alan (Tynemouth) (Lab)
† Docherty, Thomas (Dunfermline and West Fife) (Lab)
† Freer, Mike (Finchley and Golders Green) (Con)
† Glindon, Mrs Mary (North Tyneside) (Lab)
† Goodwill, Mr Robert (Scarborough and Whitby) (Con)
† Gyimah, Mr Sam (East Surrey) (Con)
† Hemming, John (Birmingham, Yardley) (LD)
† Hoban, Mr Mark (Financial Secretary to the Treasury)
† Kaufman, Sir Gerald (Manchester, Gorton) (Lab)
† Leslie, Chris (Nottingham East) (Lab/Co-op)
† Mann, John (Bassetlaw) (Lab)
† Mowat, David (Warrington South) (Con)
† Redwood, Mr John (Wokingham) (Con)
† Sharma, Alok (Reading West) (Con)
† Stephenson, Andrew (Pendle) (Con)
Vaz, Valerie (Walsall South) (Lab)
† Williams, Stephen (Bristol West) (LD)
Wilson, Sammy (East Antrim) (DUP)
Annette Toft, Committee Clerk
† attended the Committee
First Delegated Legislation Committee
Monday 27 June 2011
[Mr James Gray in the Chair]
Draft Undertakings for Collective Investment in Transferable Securities Regulations 2011
4.30 pm
The Financial Secretary to the Treasury (Mr Mark Hoban): I beg to move,
That the Committee has considered the draft Undertakings for Collective Investment in Transferable Securities Regulations 2011.
It is a pleasure to serve under your chairmanship, Mr Gray.
The regulations transpose the updated fourth EU directive on undertakings for collective investment in transferable securities—UCITS—into UK law, and that is supplemented by new Financial Services Authority rules. I shall give the background to the UCITS framework before explaining why the Government are introducing the regulations.
The directive sets out a common set of cross-EU rules for how eligible investment funds should be run. The rules emphasise transparency and consumer protection, which means that UCITS funds are particularly suitable for retail investors. However, because of their strengths, UCITS funds are frequently used more widely, including by pension funds and insurance companies. UCITS funds account for about three quarters of the funds under management across Europe.
The UCITS framework is important for the UK fund management industry and investors. For investors, the directive ensures strong consumer protection—for example, through clarity in marketing—and integrates the EU market, giving a wider and more diversified set of funds that can be selected. The UCITS directive has been a key contributor to the growth of UK asset management firms by bringing down barriers and allowing them to market across the EU, based on authorisation by the FSA. Beyond the EU, the UCITS brand is recognised as a gold standard worldwide and fund managers market it globally.
The update, which is the third since the directive was introduced in 1998, is intended to ensure that the market operates more efficiently and brings further industry and consumer protection benefits. UCITS IV addresses four widely recognised shortcomings. First, fund management companies face difficulty in establishing UCITS funds in other member states, but UCITS IV removes that barrier by streamlining how UCITS funds are notified in other member states so that funds can access the market without delay, once the fund manager has notified the domicile’s regulator.
Secondly, UCITS IV rightly emphasises clear and transparent disclosure to retail investors so that they can easily understand the information about the fund in which they are considering investing. In practice, however, such requirements have led to prospectuses that are too long and complex, and have not allowed investors to make effective comparisons between UCITS funds. UCITS
IV improves investor disclosure by replacing the perspective that was previously required with key investor information that is set out in the form of a simple document giving investors key facts in a clear and understandable manner.Thirdly, European funds are unlikely to take advantage of economies of scale and are generally smaller than their American counterparts. That leads to increased costs for investors, but the directive addresses that shortcoming in two ways. For the first time, UCITS will allow master-feeder structures to be marketed across Europe. For example, feeder funds in different domiciles across the EU can invest in the same master fund located in the UK, which will allow a single portfolio of assets to be offered across jurisdictions and for different types of investors. The directive also introduces a framework to allow UCITS funds to merge across borders, which will, again, remove a barrier to the creation of larger funds.
Finally, there is a criticism that UCITS prevents specialisation, in that all the most important activities associated with a fund’s management have to be located in one member state because only the fund can be passported. In practice, even though most of the investment management may be carried out in the UK, funds that are not based in the UK have to establish extra fund management companies in the domiciles of each of the funds. That has pushed up administrative costs, which ultimately have to be borne by investors, and prevented gains from scale and specialisation. UCITS IV introduces an effective management company passport that allows a management company to operate a fund in a different member state without the need to be established in that member state. To support that, UCITS IV requires improved co-operation between UCITS regulators, particularly when they are supervising a UCITS management company and fund that are established in different member states.
The new regime has been warmly welcomed by the UK industry, which considers that it provides another opportunity to grow and that it serves investors better. The Government are taking all available measures within the current fiscal constraints to maintain and build the UK’s lead as a centre for asset management, and that includes capitalising on UCITS IV. In particular, we want the UK to be the home for new master funds, so we are working with the industry to develop the most suitable vehicle to meet the real demand for a tax-transparent vehicle in Britain. It was announced in this year’s Budget that the Government will legislate to introduce a tax-transparent fund from 2012.
We are amending tax law to accommodate the conditions introduced by the management company passport, thus removing any risk that a foreign UCITS fund could become taxable in the UK as a result of having a manager resident in this country. I hope that all Committee members will be able to support the regulations, which will bring considerable benefits to not only the UK fund management industry, but consumers.
4.35 pm
Chris Leslie (Nottingham East) (Lab/Co-op): I cannot think of anything I would rather do on this hot and balmy day than debate these regulations, which are generally uncontentious. They are thought broadly
to improve access to the single market through the management company passport and to provide greater security around investments through the key investor information. All that seems straightforward, but will the Minister help with three or four specific points?First, I understand that the Investment Management Association has been concerned for some time that third countries—non-UCITS fund managers—may well find it onerous to comply with the UCITS arrangements. Therefore, any professional investors searching products globally—beyond UCITS users—may find that product diversity becomes smaller rather than larger as a result of the arrangements. I cannot tell whether the IMA’s argument is correct, but does the Minister have any thoughts on third country involvement in the scenarios it raises?
Secondly, the simplified notification procedure takes away from national regulators the right to vet funds before they are marketed. Obviously, that means that there will be a stronger role for the European supervisory bodies, but do the regulations in some ways weaken the capabilities of the new regulators under the Minister’s financial services reform proposals, and perhaps shine a spotlight on the limits of the Treasury’s new architecture as it relates to European supervisory arrangements? Will the Minister comment on the role that national regulators might play if that simplified notification procedure comes into being?
Thirdly, I want to ask about the European Commission’s plans to reform the UCITS arrangements further, especially in respect of depositories. This is a rolling programme of reform, so the Commission has said that there is no plan for a post-implementation review of UCITS IV. Is that a wise approach? Should not there be a post-implementation review of these UCITS arrangements?
Finally, on the management company passport, the Minister told Parliament a while ago that the Government were consulting the industry to find an appropriate way to implement the proposal and ensure that the UK tax consequences of a foreign UCITS fund having a UK management company were minimised. Moreover, he said that any changes would be subject to the appropriate parliamentary procedure. When will those specific proposals be brought forward, and will they be subject to the affirmative procedure?
4.39 pm
Thomas Docherty (Dunfermline and West Fife) (Lab): It is a pleasure to serve under your chairmanship once again, Mr Gray. I assure you that my electronic device is firmly in my pocket and will not be used under your chairmanship.
I will be brief because I have just one question for the Minister. The impact assessment, which I accept was signed off on 12 April, and page 3 of the explanatory memorandum refer to the FSA. The Minister has introduced substantive proposals to split the FSA’s functions. Although I am sure that we will not get into that debate today, I would be grateful if he could explain which of the new bodies will be taking over the FSA’s role under the regulations. It would be useful if the explanatory memorandum reflected the fact that, subject to parliamentary approval, the FSA would cease to have such functions at some point in the near future.
4.40 pm
Mr Hoban: I am grateful for the Opposition’s support for the regulations.
The hon. Member for Dunfermline and West Fife asked about future regulatory changes. If Parliament passes the relevant Bill—the draft Bill, which was published the week before last, will be subject to pre-legislative scrutiny—the responsibility for funds will rest with the financial conduct authority. The prudential regulatory authority will principally examine banks and insurers, so the FCA will take over that responsibility.
I am not sure of the correct parliamentary process for trying to pre-empt a future regulatory structure in documents such as impact assessments and explanatory notes. Some might suggest that it would be presumptuous for such documents to reflect a structure set out in a Bill that has not even received its Second Reading. However, I shall try to be as clear as I can about the new homes in which these activities will reside, if that helps hon. Members.
On third country funds, we do not expect the arrangements to be any more onerous under the new regime than they were under the previous one, so we do not expect that additional burdens will be put on third country funds. The Government’s approach to those funds has been clear, and we saw that with the alternative investment fund managers directive, when we fought to ensure that third country funds could be marketed in the European Union. I think that the suggestion behind the question asked by the hon. Member for Nottingham East is that it is important for there to be choice and for investors to be able to choose from funds that are managed from not just within the EU, but outside it. We are clear—this is one of the principles that we follow—that any regulatory reform should not erect barriers around Europe at the same time as it seeks to abolish barriers within Europe.
The hon. Gentleman raised post-implementation review, and it is important to recognise, as he did, the need to keep such things under review. As he indicated, further work is being done on UCITS V. The Commission’s approach is to keep these matters under review. I am sure that if the industry feels that UCITS IV has disproportionate consequences that had not been identified previously, it will make that clear to the Commission and the Government. Any such concerns would be taken into account in drafting UCITS V. It is not the case that the process has come to a dead end with UCITS IV. I suspect that we will have not only UCITS V, but further directives after that.
The hon. Gentleman’s point about depositories is important, and that was something on which there was considerable discussion in the context of the AIFM directive. We are trying to ensure that we get the balance right on liabilities for depositories, so that is something on which work is ongoing.
The hon. Gentleman mentioned the passporting of funds managed from overseas into the UK. That already happens. A large number of funds are passported into the UK under the UCITS directive and the FSA has powers to regulate the funds’ marketing activities. One thing that is happening under UCITS IV, in recognition of that flow across borders, is enhanced supervisory co-operation among European regulators. If the FSA has concerns that a passporting fund is not being managed
in accordance with the directive, it can raise that matter with the home state regulator, which must take the appropriate action and inform the FSA of the outcome. That helpful measure will improve co-operation between jurisdictions. It is important to recognise that notwithstanding the new powers that have been given to the various supervisory authorities, one of the cornerstones of UCITS IV is enhanced co-operation between European regulators.More work is being done on a management company passport and it is important to ensure, for example, that there is certainty in foreign funds’ tax treatment. We are taking further steps on that, and I will write to the hon. Gentleman with more details as appropriate.