7 European and international issues
Introduction
84. Some of the regulatory decisions affecting
the UK financial system are now being taken at an EU level, rather
than being the sole preserve of the UK authorities. As Mr Richard
Saunders, Chief Executive, Investment Management Association,
told us in October 2010, "A large part of the regulation
which the industry now has to deal with comes from Europe, and
that is simply a fact".[117]
This point was also reiterated to us by Mr Sants, who noted that:
Rulemaking authority is broadly gradually moving
to the European architecture, as you know, and also that consumer
issues are rising to the fore of that European agenda over the
coming years. Both are statements of truth.[118]
85. As well as the European dimension, not all
those customers of advisers within the UK are necessarily firmly
fixed here. High Net Worth individuals can look across a range
of potential domiciles for both investment opportunities and where
they may wish to buy financial advice. The measures in the RDR
must be considered both from the context of ongoing work in Europe,
and with internationally mobile High Net Worth consumers in mind.
Ongoing work
86. One fear of those who wrote to us was that
current pieces of legislation now working their way through Europe
would unravel parts of the RDR, leading to uncertainty, and unnecessary
costs for firms, both large and small, should further changes
then be needed. In their evidence, Killik & Co requested that
"The Government should defer implementation of the RDR, whilst
a fundamental review is undertaken, particularly in the light
of the European Commission's PRIPs [Packaged Retail Investment
Products] project, which has the same objectives as RDR, but is
seeking to achieve them by different means".[119]
They provided more detail of their concerns as follows:
A serious weakness of the RDR is that the FSA is
"front running" Brussels, with no guarantee that Brussels
will follow. This is particularly in the area of PRIPs, which
are central to the RDR, but which have yet to be defined by the
European Commission, and which it may never define.
Indeed the Commission published a consultation paper
on 26 November 2010 that stated it favoured merging the PRIPs
project into the on-going work taking place on the reform of the
Markets in Financial Instruments Directive and the Insurance Mediation
Directive.
Therefore, at the very least, the PRIPS project will
be subject to some delay and yet the FSA is carrying on regardless.
Indeed one possible consequence of this is that it will be theoretically
possible that a financial services business registered in another
European country could be passported into the UK and be outside
the RDR.
Moreover, the Commission's consultation paper went
on to say that a new disclosure instrument was necessary but that
further consultation would be needed to determine how charges
and performance history should be presented. It added that the
responsibility for disclosure should rest with the product provider
rather than the distributor.
This, on top of RDR will make for a complex and burdensome
regime with consumers receiving information about charges from
both the product provider and the adviser. This seems likely to
add to consumers' confusion rather than improve clarity.
PRIPs and RDR are ostensibly seeking to achieve similar
outcomes for consumers in terms of removing product provider bias
and increasing transparency over charges, but are approaching
these aims in totally different ways. This should be reason alone
for RDR to be delayed and reconsidered in light of the PRIPs'
consultation.[120]
87. When we tackled Mr Sants on the potential
mismatch of the EU and RDR processes, he outlined the problem
the FSA faced as follows:
There is evidence—in our judgment, very good
evidence—of significant current consumer detriment. So,
yes, we have to make a judgment between seeking to address that
problem now and the possibility—I take your point that we
are not responsible for the final determination that Europe makes,
that is absolutely correct—that at some point in the future,
a number of years hence, the European regime might come out with
an outcome that is somewhat different to our proposal. That is
possible. The question is what if we make the judgment in the
round, and we judge on the basis of the data we have, that that
is a reasonable judgment to make?[121]
Mr Sants also emphasised that the FSA was engaged
with the European agenda, and was attempting to ensure alignment
between the UK model as outlined in the RDR, and what may eventually
appear in Europe. He told us that:
I am saying that we are, as you would expect, in
dialogue with the Commission, which I believe is our role to try
to influence the European agenda, and I know it is very important
to you that we do seek to influence the European agenda. We are
comfortable with the model we are introducing here in the UK and
we are proposing that as a way forward in Europe, and that is
what you would expect us to do. I am certainly not saying that
I know what the Commission is going to do.[122]
Ms Nicoll also felt that the European legislation
would not take effect until some time after the RDR implementation
date in January 2013. She told us that "We don't yet have
legislation in the context of PRIPS and we are not expecting that
until the end of this year. [...] most European legislation then
has a lead-in period and a transitional period. We think that
would take us well beyond the RDR deadline date".[123]
88. In written evidence to the Committee, the
FSA provided further assurances on how forthcoming EU legislation
would dovetail with the FSA's proposals under the RDR. It stated
that:
The Committee also asked whether our new rules should
take account of the timing of proposed draft EU legislation. We
support the European Commission's Packaged Retail Investment Products
(PRIPs) initiative, which has the potential to be an important
step forward in delivering consistent consumer protection. We
believe our rules will be compatible with the outcome of the Commission's
recent consultation, and we keep closely in touch with the Commission
on both our developments and theirs.[124]
We are confident that, rather than waiting for any
new EU rules to come into force, we should move to strengthen
protection for UK consumers now. It is worth noting that rules
about specific professional standards, including qualification
levels, are not covered by the PRIPs initiative and our rules
on professional standards would not be affected by the current
Commission consultations.[125]
89. The FSA and its successor
bodies will always be faced with difficult decisions over whether
to proceed with UK specific legislation quickly, or wait until
things have cleared at a European level. The FSA though should
act wherever possible to remove consumer detriment in financial
services, as it has in this case.
Passporting
90. One of the concerns raised by those giving
evidence to us was that EU firms outside the UK would able to
passport their operations into the UK, and by doing so, would
circumvent the requirements of the RDR. The FSA noted that:
The activity of providing services on a cross-border
basis is usually described as "passporting". Firms can
passport into the UK either by:
—setting up an establishment here, usually
described as a branch; or
—by providing services with no physical presence
in the UK, such as by telephone or internet.[126]
In additional evidence provided by Simon Mansell,
of Temple Bar, he raised the following concerns about passporting,
and the implementation of the RDR:
The FSA have confirmed that passporting is possible
and EU firms will only be subject to certain rules. In response
to my letter the European Commission confirms passporting firms
will not subject to the RDR. An FSA spokesperson also confirmed
this.
EU advisers will only have to comply with the FSA's
Conduct of Business rules, which cover adviser remuneration, but
will not have to comply with the RDR's rules in relation to qualifications.
The revelation could leave the market open for European
adviser firms, wishing to take advantage of more lax rules in
their home countries, to enter the UK market. It is also possible
that some UK-based firms may wish to move jurisdiction in a bid
to avoid some of the harsher rules due to be implemented with
the RDR in January 2013.[127]
91. The FSA however provided the following evidence
on passporting, and noted several requirements and restrictions
of those that may wish to passport their operations into the United
Kingdom:
There are currently 2,030 firms authorised to passport
into the UK. Between them, these firms have 195 establishments
around the UK. The precise requirements vary between different
EU directives, but in general for the investment advice sector
the following additional points are relevant:
—the UK's conduct of business requirements
(including the RDR rules on describing services and adviser charging)
would apply to branches set up in the UK for business conducted
with UK clients. The FSA would have responsibility for supervising
the conduct of business, including, for example, assessing whether
advice given was suitable;
—if a firm passports into the UK without having
a branch here (ie, provides cross-border services), then it will
have to comply with its home member state conduct of business
rules;
—a firm may not conduct its business on a cross-border
basis if it is doing so to evade the host state standards. An
indicator of this might be where a disproportionate volume of
business is being conducted in the host state compared to the
home state, particularly if the firm had previously been authorised
in the host state; and
—the competence of individuals is the home
state regulator's responsibility. Firms passporting into the UK
are not subject to the FSA's training and competence requirements,
which includes requirements for individuals to hold a relevant
qualification or carry out continuing professional development.
Individuals operating in branches established in the UK will need
to be approved by the FSA, if, for example, they are advising
retail customers.[128]
As well as this, the FSA also told us that:
It is important to note that EU directives do not
currently include all investment products. For example, UK personal
pensions are outside the scope of these directives. This means
that if a firm passports into the UK and wants to advise on pensions
the firm will typically require an additional permission from
the FSA (a "topup"). Under the top-up permission, the
firm will be subject to the host state requirements, so in this
example the firm would be subject to the RDR requirements for
their advice on pensions. [129]
92. We recognise that passporting
(where firms from other countries within the EU conduct business
in the UK) may seem to present an opportunity to some advisers
to counter the implementation of the RDR. However the evidence
provided to us by the FSA repays careful study. It makes it clear
that passporting will only be possible in some areas, and cannot
be used by UK operators as a device: "a firm may not conduct
its business on a cross-border basis if it is doing so to evade
the host state standards". We recommend that the FSA (and
its successor the FCA) undertake regular scrutiny of operations
passporting into the UK within the area of activity covered by
the RDR, and report on action it has taken to limit this type
of activity.
High Net Worth individuals
93. Several firms who provided written evidence
suggested that the implementation of the RDR might particularly
impact those who provide advice to High Net Worth individuals,
especially those such individuals who are internationally mobile.
The British Bankers Association outlined for us just how mobile
the market actually was, both in terms of customers, and the firms
servicing them:
High Net Worth clients of the UK wealth management
sector are commonly internationally mobile and can just as easily
access services in Switzerland or other offshore jurisdictions
as they can in the UK. Further, offshore firms are generally able
to come to the UK and carry on business with High Net Worth clients
without having to comply with the FSA's rules, whether under an
EU financial services passport or in reliance on exemptions under
the UK regulatory regime.[130]
Given the international mobility of their High Net
Worth customers, JP Morgan then highlighted the problem London
based banks may now face given the implementation of the rules
governing adviser charging under the RDR, including potentially
either higher costs for UK based customers, or a restriction of
the products available. JP Morgan suggested that:
Under the proposed changes to the adviser charging
rules, regulated firms will no longer be able to accept trail
fees from funds, even if they are appropriately disclosed to clients.
If RDR has the effect that the global funds industry moves to
develop RDR compliant products, then we can see that a key step
forward will have been achieved in terms of fees transparency.
However, we believe that there is a considerable risk that the
majority of non-UK funds will not restructure their products in
line with RDR and clients are unable to invest in such funds.
This will have the effect of limiting the range of products available
to UK-based investors. Alternatively, the funds could retain such
fees in relation to UK clients, thus making the funds more expensive
for a UK client than a non-UK client. As this regulation will
affect UK clients only, UK based private banks will need to apply
different fee charging schedules to UK clients to those outside
the UK.[131]
94. One of the suggested remedies was to exclude
High Net Worth individuals from the requirements of the RDR. Barclays
made the following point:
We have not seen convincing evidence of the FSA's
claim that "the landscape of retail investment advice is
broken" applying to our HNW individuals, despite the FSA
extending these rules to cover private wealth management; nor
do we believe some of the measures being introduced via the RDR
are appropriate for the specificities of the HNW market which
is highly competitive, and involves internationally mobile clients
who are often more financially sophisticated than retail clients.[132]
JP Morgan also had a similar recommendation, and
provided further evidence on how the FSA were dealing with this
issue:
As a potential solution, an exemption from the adviser
charging elements of RDR should be applied in relation to HNW
clients as those clients are able to understand more complex products
and charging structures. These clients should be given the freedom
to elect to stand outside the new regulations.
The RDR is designed to protect UK consumers. The
HNW client base that we service wants a full range of products
and therefore should be permitted to opt out of the RDR protections
in order have these available to them. We have attached a letter
from Freshfields to the FSA on this point. We note that the FSA
responded with the view that firms could "Opt Up" such
clients to "Professional" status, thus eliminating the
need to apply the RDR standards. However, this is not always possible,
as the MiFID standards require a number of quantitative tests
to be passed that do not necessarily apply even to extremely wealthy
clients, for example, the requirement to transact more than 10
trades in a specific product per quarter, which is extremely rare
in the case of Private Equity and Hedge Funds. The FSA is free,
if it chooses, to apply a different standard, as RDR does not
derive from EU regulation.[133]
95. However, when asked whether the RDR might
lead to such customers leaving London, Ms Nicoll replied:
I would be very surprised by that because I think
in many ways the RDR is going in the direction of the sort of
ways that high net worth individuals expect to interact with their
advisers in the sense that I think you would find that the high
net worth individuals—there is more fee business, for example,
and, therefore, I think it would be going with the grain of the
way that high net worth individuals already operate in the market.[134]
When we asked what research the FSA had done in this
area, Ms Nicoll noted that "The research that we have done
has covered the whole area. The consumer research that we have
undertaken has been across a cross-section of types of consumer".[135]
Following on from Ms Nicoll's comments, Mr Sants however told
us that:
It is not obvious to us—and again when you
come to make your report if you want to spell something out here
we can take a look at it—how the high net worth model would
be adversely affected by the RDR. There are various different
types of models, but they don't seem to be particularly at variance
to the RDR. So no, we haven't specifically done research in that
area, being absolutely open about it. If there were grounds for
so doing again, we could take a look at that.[136]
96. We note the concerns of
certain firms that the RDR may have a deleterious impact on their
ability to provide a full service to High Net Worth individuals
from their London offices. The FSA has not done specific research
on the RDR's impact on this specialised area of business. We ask
that the FSA as a matter of urgency review the evidence we have
received related to these matters, and the proposed remedies,
and report back to us on both the potential scale of the issue,
and whether modification of the RDR might be possible to mitigate
those concerns. We recommend that the FSA examines how to allow
High Net Worth individuals, as determined by the FSA, the opportunity
to opt out of the requirements of the RDR should they wish. This
should also mean they opt-out of most or all protections that
retail customers receive.
117 Treasury Committee, Financial Regulation: a
preliminary consideration of the Government's proposals, Seventh
Report of Session 2010-11, Volume II, HC 430,, Q243 Back
118
Q 68 Back
119
Ev w24 Back
120
Ev w26 Back
121
Q 70 Back
122
Q 69 Back
123
Q 70 Back
124
Ev 36 Back
125
Ibid. Back
126
Ev 35 Back
127
Ev w295 Back
128
Ev 35 Back
129
Ibid. Back
130
Ev w232 Back
131
Ev w344 Back
132
Ev w316 Back
133
Ev w345 Back
134
Q 49 Back
135
Q 50 Back
136
Ibid. Back
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