COMMISSION OPEN HEARING
ON INVESTMENT FUNDS
Centre Borschette, Brussels
October 13th 2005
Overview:
The conference brought together 250+ industry participants, stakeholders and public authorities for a first exchange of views on the issues raised in the Green Paper.
The open hearing allowed stakeholders to hear a number of different perspectives on challenges facing the European fund industry. It provided an opportunity to demystify some of the issues facing the fund industry and to begin exploring practical solutions. The hearing marked an important milestone in the move from problem definition towards design of solutions.
There was broad consensus that the Green Paper has identified the right issues. The open hearing revealed that industry and other stakeholders are anxious to bring about clear operational improvements to the European single market framework. In this regard, concerns were repeatedly voiced concerning the simplified prospectus. This is not delivering comparable, investor-friendly disclosures and in some Member States is grossly inflated in terms of information required. Hearing participants also focused on the need to eliminate unnecessary delays, uncertainty and costs arising from the way in which UCITS notification procedures are currently implemented.
Industry was vocal in its demands for improvements in the area of fund mergers and asset pooling, and for provision of a management company passport. Participants from the regulatory community were more reserved on these points: they emphasised the need for confidence that effective supervision and investor protection would not be hampered. The challenge now will be to deliver cost-effective solutions in time-frames that are relevant to industry – and which satisfy the concerns of regulators. Consumer representatives stressed that innovation in product design had made many financial products increasingly hard to evaluate. The introduction of UCITS III has added to this complexity and highlighted the need for more effective levels of disclosure and transparency.
There was intense focus on distribution as a cost-centre for the European fund industry. Representatives of fund managers repeatedly pointed to the heavy price that had to be paid to purchase ‘shelf-space’ in the leading retail bank outlets. This was a major drag on competition and efficiency in the retail fund business. Discussions also identified back-office considerations as contributing to higher costs which arise as the industry progresses towards more ‘open architectures’. The industry, itself, needs to drive change in these areas.
There were some calls for extensive modernisation of UCITS law – to update core regulatory principles and to transform it into a Lamfalussy Directive. This was tempered by realisation that this would be a long and painstaking task. The majority view was that attention should focus on gathering ‘low hanging fruit’.
Concern was expressed about encroachment from substitute investment products (life-insurance and listed certificates). Consideration needs to be given to bringing disclosure and transparency requirements for these products onto a par with those for UCITS.
HIGH LEVELPANEL:
Chair: David Wright, Director European Commission. Panel members: Daniel Trinder, Her Majesty’s Treasury, UK; Wolf Klinz, Member of the European Parliament; Stefan Bichsel, President, EFAMA; Paul Salvidge, UK FSA Consumer panel/FIN-USE; Carlo Biancheri, CESR/CONSOB.
Daniel Trinder (UK HMT) cited UCITS as an example of a working single market. The UK welcomes the approach of the Green Paper – in a first instance, to fine tune the existing framework and avoid rushing to fundamental changes that generate costly uncertainty. In line with the post-FSAP strategy recently agreed by ECOFIN, action should only be pursued in areas where market failures have been identified. The comparison made in the Green Paper between efficiency levels in the US and the EU is striking. Whilst there are important differences between the EU and the US markets, the EU industry must be allowed to take advantage of potential scale efficiencies in order to remain globally competitive. The EU legal framework should allow businesses to centralise their operations. This could also facilitate effective monitoring and compliance. A harmonised regime for private placement and an effective management company passport would be two such examples.
Dr Wolf Klinz: (MEP and rapporteur for future European Parliament report on investment funds) stated that the Green Paper asked the right questions. The product passport is not delivering effective cross-border access. He questioned whether the simplified prospectus is working as envisaged. National gold-plating and divergent implementation means that it is not delivering comparable information for investors – only a massive paper-chase. However, the challenges facing Europe’s fund industry do not consist solely of defective implementation of existing rules. There are wider challenges – particularly the need to provide a coherent regulatory response to competition from new investment products.
Stefan Bichsel (EFAMA): The industry needs a coherent cross-sectoral regulatory approach to investment management. Regulation should not be heavy handed. It should only be considered when self regulation has not worked and if a clear case is made for the single market, investor protection and following cost-benefit analysis. The Green Paper does not recognise sufficiently the role that the investment fund industry can play in solving Europe’s pensions crisis; in addressing taxation issues; and on the international competitiveness of the EU funds industry. European asset management is handicapped by fragmented, inconsistent and patchy rules. Distribution of different products (funds, life-insurance, structured securities) is governed by different arrangements on product, fee and risk disclosure. Individual and collective portfolio management are governed by different rule-books. Stefan Bichsel outlined the contours of a coherent regulatory framework covering all aspects of the asset management industry.
Paul Salvidge (Fin-Use): Consumers are a long way from fully grasping the impact of UCITS III revisions on the products they buy. Regardless of the criteria by which the Simplified Prospectus is evaluated, it has been a failure for consumers. Improved information at the point of sale is a priority area for consumers. In this respect, the rise of less regulated substitute products is an additional concern. The Commission should assess the degree to which consumers are well served by financial intermediaries. Paul Salvidge challenged the industry’s proposition that self-regulation is inherently superior to statutory regulation. In practice, self-regulation generally fails to find the right balance between rule-making, and effective enforcement. Industry based standard setting also fails to accommodate the views of other interested/affected stakeholders.
Carlo Biancheri: (CESR) stressed supervisory convergence as the key to unlocking a single fund market. However, he acknowledged the scale of the challenge. Regulatory approaches to UCITS have developed along different lines; they have diverged in particular between those Member States that have traditionally been net exporters and those who are net importers of UCITS funds. Aligning national enforcement practices on a common approach will not be easy or cost-free. However, new legislation should not be seen as a better alternative to regulatory convergence. A new Directive cannot legislate trust and supervisory co-operation into existence. Even so, focusing on making the existing framework operate more effectively should not exclude reflection on the need for legislative changes further down the road. Although more far reaching alterations may be needed in the longer term, we must avoid repetitive modification to the legal framework. This merely creates unbearable uncertainty and additional costs for industry and for consumers.
Session II. Getting the most from UCITS:
Chair: Alain Leclair, Chairman AFG. Panel-members: Thomas Balk, President, Mutual Funds Europe, Fidelity Investments; Gary Palmer, Chief Executive, Dublin Funds Industry Association; Jarkko Syyrilä, CESR; Luitgard Spögler, Banca d’Italia.
Alain Leclair (AFG) outlined that in France UCITS was a brand-name which enjoys high recognition amongst savers and distributors. UCITS regulation ensures high levels of transparency. UCITS also offers an efficient, ready-made investment formula which could be put to work in the context of European occupational pension schemes. Cost-reduction and efficiency gains are necessary to keep UCITS competitive. This should not be postponed to the next century.
Gary Palmer (DFIA). Uncertainty is the enemy of innovation. It gives advantage to competing products for which there is more certainty. Fund mergers and pooling should be seen as a short term priority to generate more efficiency for the fund industry. A true passport for the management company and the depositary are important single market freedoms. Progress on key operational issues should not be delayed until answers to less important matters had been found. It is not necessary to get everything to achieve anything. He also noted that EU legislation should provide for greater differentiation between types of investors and types of products.
Thomas Balk (Fidelity investments) observed that the debate concentrates too much on the harmonisation of the product and the fund management companies. This misses the point. Further harmonisation at that level will not necessarily advance integration of fund markets. He placed the focus squarely on bottlenecks in the distribution system. A few large retail banks in each (continental) Member State control access to the household investor-base. These banks are able to extract large margins from fund managers and/or investors, driving up costs of European funds and foreclosing access to markets to those fund managers that can not finance expensive retrocessions. He also thinks that alternative investment products with their 20%-30% of the market do not deserve too much attention. There should be a clear focus by policy makers on traditional investment funds which represent the lion share of the market.
Jarkko Syyrilä, Rapporteur of the Expert group on Investment management said that mutual trust between regulators is a pre-requisite to achieve an integrated European market for investment funds. This trust must be delivered irrespective of the content of the EU legislative framework. Therefore CESR work to build a convergent understanding of the Directive in a pragmatic way is crucial to create an integrated market for UCITS in Europe. The expectations of the industry are high. However, the UCITS-Directive is not a Lamfalussy Directive. The possibilities of CESR in this respect are thus rather limited. CESR has mainly to rely on level 3 agreements. Therefore, if and when it proves necessary to amend the UCITS Directive, adaptation to the Lamfalussy procedure would be required..
Luitgard Spögler, Banca d’Italia, said that efforts should be made to promote the uniform application of the current Directive. The current CESR level 2 and level 3 works offer potential for responding to many regulatory or market access problems. Regulators and fund industry need more time to digest recent changes and evaluate the opportunities provided by the current framework before significant change should be envisaged. As regards non-harmonised products, a light touch EU regulation would be welcome to ensure the reliability of such products.
Session: A(I) What are the barriers to an efficient fund industry?
(Chair: Thomas Seale, ALFI. Panel members: Jean Baptise de FranssuInvesco Europe; Travis Barker, UK IMA; Xavier Thomin, Axa Investment; Bernard Delbecque, EFAMA; Martina Kelly IFSRA)
Thomas Seale (ALFI) recalled that a much larger number of funds manage assets in Europe than in US. As a consequence, the average size of a European fund is only one-fifth of that of its American counterpart. This translates into higher TERs. However, size is only a part of the question. TERs in Europe remain higher than in the US even when larger funds are compared. Transparency is crucial in fostering progress. Information disclosed by companies such as Morningstar on the American funds allows for comparability and enhance competition. Thomas Seale presented a breakdown of costs for the average European fund. It showed that remuneration of managers and distributors represented 75% of costs. Attention should therefore focus on those parts of the value-chain responsible for a higher share of the total cost, in particular distribution, in order to increase their efficiency. Increased transparency at the point of sale, and making it easier to distribute funds across borders, will help reduce fund costs through natural competitive forces.
Bernard Delbecque (EFAMA) described the situation at the level of fund order processing. Many different market practices exist. These result in higher operational costs and risks. They hamper the efficient development of cross-border sales in particular. The industry has already started working on this: EFAMA’s Fund Processing Standardization Group (FPSG) has produced recommendations on ways to enhance the efficiency and standardisation of processes. Bernard Delbecque thinks that this work will bear fruit in a reasonable time span. To achieve this, it is important that all players endorse and implement the FPSG recommendations. There may be a role for the Commission in encouraging all market players to engage in this process – but this is an area where industry needs to show its commitment to improve efficiency.
Jean Baptiste de Franssu (Invesco) stressed the importance of the sector for the future prosperity of the EU, in particular in view of the ageing of the European population. UCITS is an important global benchmark. However, economies of scale are not fully exploited; the average fund is too small. As a result, investors are paying annually € 6bn of additional charges. Asset managers are forced to act nationally because of the legislative and tax framework. This translates into costly proliferation of locally domiciled funds. These overheads will increasingly weigh on the industry’s ability to compete globally. Cross-border fund mergers would produce considerably savings. Savings would help to modernise the industry infrastructure and offer a better service to the client. However, cross-border fund mergers are not a magic potion. Much will depend on the action taken by European groups to consolidate their product range.
According to Travis Barker (IMA) the potential expected savings argue strongly for quick action to facilitate cross-border fund mergers and pooling. Travis Barker challenged the perception that mergers or pooling are substitutes: they are complementary solutions and offer different strategic options to fund managers. Concerning pooling, the industry has already studied the obstacles hindering the implementation of pooling techniques. They are not insurmountable. The exact solution will, however, depend on the type of pooling technique considered. In the case of entity pooling, tax considerations will be primordial; in the case of virtual pooling, ‘regulatory’ considerations are more to the forefront.
Xavier Thomin (Axa Investment) believes that EU legislation is unnecessarily constraining asset managers and putting them at a disadvantage at a global level. Asset managers need to be more competitive and to be able to provide the services the clients are requesting. In particular, management companies should be empowered to manage UCITS in another jurisdiction - through creation of a management company passport. This will allow for a more efficient organisation of the industry. The economies of scale thus generated would greatly reduce costs. A clear definition of roles should help to reduce concerns re. split supervision.