SFE CALLS FOR RE-THINK ON EUROPEAN DIRECTIVE
August 27, 2009
SFE CALLS FOR RE-THINK ON EUROPEAN DIRECTIVE
Industry body Scottish Financial Enterprise today wrote to EU Commissioner Charlie McCreevy calling for a re-think on plans to change the regulation of alternative investment fund management.
Owen Kelly, chief executive of Scottish Financial Enterprise, said:
" This response represents a Scottish view, reflecting Scotland's standing as an international financial centre. Investment management is one of our great strengths, and while better regulation is something we all support, many of the proposals in the Directive will mean over-regulation, not improved regulation.
" The proposals try to cover too broad a range of companies, and do not take into account the regulation already in place.
" The proposals would also mean a restructuring of many funds for no tangible benefit, and mean increased costs. And at a time when there is increased concern about pension funding, the Directive could have a negative effect on their investment opportunities, with no improvement in their protection."
Mr Kelly urged that the Directive should not be rushed through, but should instead be discussed further with the industry. He did welcome the provision in the Directive of a European passport for funds, which many in the industry had supported for some time.
A full copy of SFE's submission to the Commissioner is attached.
The EU Directive on Alternative Investment Fund Management has been submitted to the Commission and the European Parliament. If approval is reached by the end of 2009 the Directive could come into force in 2011.
LETTER TO COMMISSIONER CHARLIE MCCREEVY
Commissioner Charlie McCreevy
European Commissioner for Internal Market and Services
European Commission
B - 1049 Brussels
Belgium
SCOTTISH RESPONSE TO DRAFT DIRECTIVE ON ALTERNATIVE INVESTMENT FUND MANAGERS
I am writing to express the strongly held views of the Scottish investment and financial community on this draft Directive. Essentially, we believe much more needs to be done to determine and describe what problems it is trying to tackle. As currently drafted, it lacks coherence and, if implemented, could seriously damage some parts of our industry for no obvious benefit either to customers or to the financial system as a whole.
Scottish Financial Enterprise
Scottish Financial Enterprise is the representative body for the financial services industry in Scotland. Our membership includes a wide range of companies from banks and building societies to insurance and pensions firms, fund managers, asset servicing companies and business services organisations.
As a global financial centre, one of our great strengths is the truly diverse nature of our industry. We have a particularly successful asset management community. Edinburgh alone is 11th in the world for asset management according to the City of London's latest global financial centre's index, managing approximately £500 billion. Many of our companies are international names in the pension funds and insurance sectors. Therefore this directive is important to us.
In drafting our response, SFE has taken account of the publicly declared views of a number of other industry bodies such as the Investment Management Association (IMA), the Association of Investment Companies (AIC), the Association of British Insurers (ABI), the National Association of Pension Funds (NAPF), the British Private Equity and Venture Capital Association (BVCA) and the Alternative Investment Managers Association (AIMA). We do not repeat the views of these bodies here but we firmly believe that the points they make demand a considered response.
The Scottish investment community deals with many different kinds of investments and has a long and proud history of doing so. This directive touches on the interests of many of our members and will unquestionably affect Scotland, a leading centre for investment management. This response therefore presents a Scottish view, reflecting Scotland's standing as an international financial centre in its own right, separate from though associated with the City of London.
Our response
We are in complete agreement with the view that lessons must be learned from the recent past. We understand the momentum behind the Commission's directive. But we feel it is right to raise concerns where we believe that the changes that are being planned are in danger of further damaging our industry for the future, rather than bringing improvements for customers and companies.
One concern is that, while the directive has been characterised as introducing the regulation of hedge funds and private equity, it goes much wider, defining an alternative investment fund as any non-UCITS* funds in the EU, whether retail or institutional. It includes UK unit trusts and open-ended investment vehicles not covered by the UCITS directive, close-end funds**, real estate funds, potentially some pension products and many others. In turn this means that all of these funds will have to, for the first time, appoint depositaries and valuators. In many cases, these investment vehicles are subject to existing regulatory regimes which have been refined over time to address appropriate investor protection requirements. We understand the difficulty in precisely defining the hedge fund and private equity markets, but the directive will need to be revised to reflect the existing regimes in operation in respect of certain investment vehicles.
A more welcome aspect of the directive is that these funds will have a pan-European passport, which is something some in the industry have been seeking for a long time. But it won't be available for three years after implementation for funds offshore to the EU, and those centres will need to demonstrate equivalent regulatory standards.
Specific concerns
- - The directive would mean over-regulation, not better regulation.
- - It would require all alternative investment fund management firms to be authorised and subject to the same regulatory standards. By doing this, it covers too wide a range of companies, from hedge funds to all other non-UCITS funds and their managers.
- - By taking this sweeping approach, the directive does not acknowledge the EU or domestic regulation already in place for many investment companies. Examples would be in relation to the UK listed investment trust industry and the UK's regulation of collective investment schemes under the FSA's COLL sourcebook.
- - It would increase industry costs. Not because those costs would bring about a better system but because, by going for an all-encompassing approach, the directive is simply not capable of being compatible with many alternative investment management business models. This means that managers would have to restructure their funds for no tangible benefit other than to fit the directive. For example, the directive does not recognise the governance structures of a UK- listed investment trust with its independent board overseeing the activities of its appointed fund manager, already governed by the Transparency and Prospectus Directives, amongst others.
- - A further example of the proposals as they stand increasing costs is that there should be an independent valuator. The mechanisms to oversee valuations of fund assets already exist for example through independent audit. It would be excessively onerous to require independent
- - daily valuations of for example straightforward assets, such as listed securities held by an investment trust. Existing governance mechanisms may well be sufficient in many cases, and the blanket requirement should be reconsidered.
- - At a time when there is increasing concern about pension funding, we believe the directive could result in pension schemes' investment opportunities being restricted, through the proposed investor protection measures (where, for example, emerging markets are deemed a risk). This protection is better suited to retail investment, not pensions schemes' investment. And it will not, in any case, improve their protection. As drafted, after the three year transition period, in effect it would be illegal for an EU investor to invest in an investment vehicle that does not comply with the directive, which seems excessively onerous.
- - The directive does not appear to take account of the Turner Review or the de Larosiere report, both of which conclude that hedge funds played a peripheral role in the global financial crisis. And it does not take account of the work being undertaken now by the G20, IOSCO and the Financial Stability Board. We are also concerned at the vast volume of regulatory change initiatives which are concurrently underway, including revisions to the CRD regime; proposals regarding UCITS depositaries; and UCITS management company level two provisions; not to mention the regulatory changes which will flow from the above-mentioned Turner and de Larosiere reports.
- - Financial services is one of Scotland's most important industries, with approximately 90,000 people directly employed and a further 100,000 indirectly employed by the industry. The directive will cause further instability and disadvantage at a critical time as we seek to get through a recession, and remain competitive and viable for the future.
We welcome
- SFE welcomes the provision of a European passport for funds, which will cut through a maze of differing arrangements across Europe. It is something that many in the industry have sought for some time.
What do we suggest?
- SFE urges that the directive should not be rushed through, but should instead be discussed further with the industry. The inconsistencies and lack of clarity highlighted in this paper and in the detailed responses of the industry bodies referred to above must be addressed before it is taken further. Otherwise it may result in lost business, an unfair system and a further blow to an industry that is seeking to recover stability.
Owen Kelly
Chief Executive
*UCITS - Undertaking for the collective investment of transferable securities.
These funds can be marketed within all countries that are a part of the European Union, provided that the fund and fund managers are registered within the domestic country. The draft directive recognises that each country within the European Union may differ on their specific disclosure requirements.
** closed-end funds - e.g. a publicly traded investment company that raises a fixed amount of capital through an initial public offering . The fund is then structured, listed and traded like a stock on a stock exchange.
