Member News
18th March 2011
'Maybe it's high time that our MPs stepped up their scrutiny of EU legislation', says chief executive of the Investment Management Association, Richard Saunders.
One of the less appreciated facts about the investment management industry is that most of the rules and regulations by which it operates are not made in London but instead by European-level bodies in Brussels and Paris.
Eurosceptics will be disappointed to hear that for the most part this has worked pretty well. Europe-wide rules for retail funds ('UCITS' funds in jargon) have resulted in something approaching a European single market, which has been to the benefit not only of consumers but also of the industry. Indeed, UCITS funds are accepted in a wide range of markets far from Europe, and have become the global fund brand. And the UK, as Europe's leading asset-management centre, has been a major beneficiary.
But you can sometimes have too much of a good thing. Since the financial crisis there has been a deluge of new regulation from the EU. Much of this impacts asset management, notwithstanding that the crisis was in banking, and the asset-management industry by and large came through it unscathed.
We recently counted up the current European legislative measures on our plate. There were over 30 – and that's only counting once the legislation required to deal with the 35-odd subsidiary issues coming out of last year's Alternative Investment Fund Managers Directive. Yet the Brussels legislative process is still opaque to many people in the UK, and the importance of engaging early is not widely appreciated. In particular it by-passes the UK Parliament almost completely, so that MPs are never involved in legislation that profoundly affects one of our most important industries.
These draft directives are being produced at such a rate that much of the content is ill-considered. The proposal on derivatives that could massively increase costs for pension funds and other long-term investors, for example, or the funds legislation which might prevent European investors from being able to invest in emerging economies. But one of the most worrying is to be found in the Markets in Financial Instruments Directive (MiFID).
One of MiFID's aims is consumer protection. That's an important aim, but two of the ideas tip over into the impracticable.
The first is an outright ban on sales of funds without financial advice: the extraordinary notion that people shouldn't be allowed to decide how to spend their own money on a product whose marketing is heavily regulated.
The second is a division of UCITS funds into 'complex' and 'non-complex' products. That is like saying you can buy a car from Exchange & Mart if it has manual transmission, but you must go to a dealer for an automatic. Just because the latter has more complex technology doesn't make it any less safe – both are still subject to the same safety rules. It's the same with funds: the UCITS structure gives comfort that your investment is safeguarded, but you can use that structure to take on all types of investment risks.
And how would you define what is 'complex' and what is not? The answer appears to be the Elephant Test – I can't define one, but I know one when I see it. That is not a basis for sensible financial regulation. It's also the sort of thing the UK Parliament would tear to shreds. Maybe it's high time that our MPs stepped up their scrutiny of EU legislation.
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