Ladies and Gentlemen:
Thank you for inviting me to speak at your General Annual Meeting. At first, let me compliment the Investment Management Association on its achievements. Another year of growth of the industry. Another year of substantial and thoughtful contributions to policy making at the EU level. The European Commission's commitment to the Better Regulation agenda would be poorer without your responses and initiatives. They are much appreciated. Let me pay tribute here to the work of Sheila Nicoll, your Deputy Chief Executive who is a most effective representative of the British asset management industry in Brussels.
Preparing to meet you today I came across a 'Pocket Guide to Investing' produced by IMA together with Evan Davis. It describes various investment options by using holiday trip analogies. Bank saving accounts are compared to holidays in Blackpool: safe but with limited fun, whereas investing in shares is compared to a trip to Peru: risk is higher, but what excitement! Let me assure you that my objective is to make the European financial markets safe like Blackpool, exciting like Peru – with opportunities for all.
Tonight I will talk about several Commission initiatives, starting – of course – with our plans in Asset Management after the Green Paper. I will also mention the MiFID, clearing and settlement, and corporate governance. If you are still with me after all that, I will share with you some memories from one recent exotic trip at the end.
Plans in Asset Management
Let me turn to the main focus of my statement here tonight on EU level work in respect of investment funds...
A successful and dynamic industry...
Nowhere is the new-found dynamism and strength of European financial markets more apparent than in investment funds. 2005 was the third consecutive year of strong growth. Assets under management grew by 23% in 2005. They now stand at 6,500 billion €. These headline-figures testify to strong growth in underlying equity, bond and related markets. They also testify to a strong business concept which has survived testing market conditions at the start of the decade: a product which has earned the continued trust of the European investing public.
In Europe we have tended to focus on the funds section of the asset management business because that is where the difficulties around Europe lie. I am conscious of course that here in the UK the funds industry is dwarfed by other forms of asset management . I understand there are £3 trillion in assets under management of which £350 billion are in funds and I have no doubt that you will continue to provide a global centre for asset management of benefit to the whole of Europe.
Turning specifically to investment funds, they have now firmly established themselves as a core pillar of the financial system. In some member States, investments in funds are comparable to those observed in US. Indeed I detect growing interest on what is happening in Europe from our American friends.
The European fund industry has become a powerful business in its own right. Its stature is set to grow. It is a business with a lot to be confident about. Is this as good as it gets for the fund business and asset management more generally? – I don’t think so.
If anything, opportunities for talented managers will only increase. A page has been turned. European investors are no longer content to lock up their savings in low-return accounts or products. A new generation of discerning retail investors is looking for more attractive risk-return propositions. There is ample opportunity for fund managers who are capable of responding to this demand, and intermediaries to help investors make sense of the bewildering range of investment options. A properly functioning single EU market can provide the best managers and products the opportunities to build the scale and product solutions to remain world-beaters.
... needs an appropriately adjusted regulatory framework
The UCITS Directive of 1985 has provided the foundations for the take off of fund business in all EU markets. Now, this industry is at a cross-roads. Distribution systems are evolving; product innovation is rapidly increasing the range of products offered to retail investors. The geography of the business is starting to change. Markets are becoming increasingly pan-European. "True" cross-border UCITS funds managed out of a small number of hubs are emerging as market leaders – particularly in equity funds. Their share in the total number of funds went up to about 17% in 2004.
However, it has been an uphill struggle to get here. Cross-border marketing of funds has not been as straightforward as the authors of the Directive foresaw. Many of you bear the scars.
Now the Commission is determined to make the regulatory framework better. The Commission's role is that of a pilot and a facilitator of domestic and cross border market access – enabling the fund industry to organise itself to better serve the needs of its investors. Not a promulgator of useless red-tape, nor an agent for futile bureaucratic regulatory change. I will be faithful to this objective. So how can appropriate EU level action add value?
Fine-tuning measures to the existing directive are underway...
First, resolving unfinished business. We are putting our shoulders to the wheel. Over the past 18 months the Commission has launched a series of initiatives with a common purpose – to ensure the consistent and effective implementation of current UCITS Directives:
- We have resolved uncertainty over the treatment of funds launched in the transitional period before entry into force of UCITS III amendments.
- We are building a common legally binding understanding of the types of asset that properly belong in a UCITS portfolio. We hope to secure formal adoption of implementing legislation on this point in the autumn.
- Efforts are underway to streamline the UCITS notification process. It should become a simple filing process – not an expensive and time-consuming machine for collecting fancy coloured product visas in each Member State.
- We will clarify the scope of remaining powers of host country authorities when funds passport into their jurisdiction.
All of this should eliminate much of the uncertainty and frustration that has plagued the UCITS passport in recent years. To reduce the hassle and time in rolling out new products across the EU market. But a properly functioning product passport is no longer sufficient on its own to satisfy the aspirations of a maturing and consolidating business.
...and further improvements currently being discussed
Responses to our Green Paper reveal a demand to strengthen and complement the current legislative framework. This is to help funds and their managers take full advantage of scale economies and specialisation benefits that a continental scale market can offer. To foster competition by giving investors the means to make informed choices between best-available products. Through sensible and clearly targeted changes, working with the flow of market developments. That do not destroy value or get in the way of progress. There is therefore a need for a fresh look at some of the challenges facing the European fund market – and to see whether there are useful steps that can be taken at European level to make further improvements in the pan-EU fund industry.
What does this add up to in concrete terms?
Starting with the demand side, we must make sure that investors have access to the products which best suit their needs. Effective cost disclosures are a precondition for the marketing of investment funds to retail investors. Subject to availability of effective disclosures, European investors should not be denied access to the full range of products. We are already giving some thought as to how we can rectify identified shortcomings of the simplified prospectus. All Member States should also begin as a matter of urgency to consider how to better educate consumers on financial matters and specifically on financial risk – from early school upwards.
Our second focus must be on the supply side of the market: how can we better use single market opportunities to bring down high costs in the European fund industry? The European fund industry is hamstrung by legal, regulatory and tax barriers which hamper consolidation at the level of funds and managers. Which prevent exploitation of specialisation benefits. Which impede competition between products from different fund domiciles. There is broad agreement on the main bottlenecks to greater efficiency in the industry. The onus is on the Commission to come forward with solutions. We have asked an industry expert group to help us with this task. Its considerations focus on five areas:
- A no holds barred rethink of the UCITS notification procedure;
- Ways to remove legal, tax and other obstacles to cross-border fund mergers;
- Removing regulatory resistance and legal barriers to different types of pooling;
- Allowing fund managers to manage funds domiciled in other jurisdictions;
- Pragmatic steps to increase access to competitive custodian services.
The recommendations of the retail fund expert group will be published in June. We will analyse these recommendations - in the light of other stakeholder reactions - before deciding how best to translate them into action.
The expert group did not focus on the area of fund order processing. This is not because we do not believe that there is no scope for improvement. Nothing could be further from the truth. We currently have a 'spaghetti junction' for finalisation of orders in cross-border funds. This is a recipe for extra cost and operational risk. However, the fund industry has identified this as an area where it is best placed to take the lead. I understand providers are developing new solutions which may eliminate some of the complexity and cost.
Alternative investment funds are also developing quickly
We must also look beyond traditional investment funds. Private equity funds are driving change right across the investment fund industry. They initiate a rethink of portfolio management strategies by retail fund managers. They are now well-established and powerful actors in European financial markets.
The Commission believes that there is currently no case for specific EU legislation on hedge funds. There is no evidence of cross-border risks which need to be addressed. As these asset classes become established in the European financial system, there may be ways to help them to organise parts of their business on a pan-European footing. We have asked a high-powered expert group to look at whether this would make Europe an even more hospitable home for alternative investment industry.
One area under discussion in this group is the need for an EU-wide 'private placement' regime. The idea would be for local supervisors to permit the placement of investment products with qualified investors without requiring compliance with local requirements on product registration, marketing or conduct of business.
A second issue for discussion is the extent of industry interest in broadening its investor base. This is already happening through use of listings and structured notes to reach mass affluent investors through private banking networks. The far-reaching question is whether and under what conditions the broadening of the market should be formalised.
I believe that the forthcoming expert group report on hedge funds will be an important contribution to an enlightened and shared understanding of how we can support the further success of this business in Europe.
Next steps
What are the next steps? We await the industry expert group reports in June and the reactions to them – including the open hearing on 19 July in Brussels. We will also draw together the other strands of our exploratory and remedial work – on simplified prospectuses, etc. The Commission's conclusions will be presented in a White Paper to be published in the autumn – accompanied by a comprehensive impact assessment. We will then immediately set about delivering the agreed measures.
This emerging agenda for improvement is the fruit of close and open concentration with the industry and others.
As I signalled at the beginning, in the second part of my speech I will talk about some current Commission initiatives closely linked with the Asset Management agenda. The Markets in Financial Instruments Directive should intensify competition in the capital markets and improve standards of service to investors. Our policies in corporate governance are also aimed at increasing competitiveness of the capital markets, by improving business environment for investors and lowering the cost of capital.
MiFID
MiFID will update the "single passport" for investment firms, enhance the transparency requirements and harmonise the investor protection rules.
Adoption of the so-called MiFID "level 2" measures is now in sight. This has been heavy toil for everyone – merging different regulatory philosophies and different financial traditions is no easy task. Intensive negotiations are still underway in the European Parliament and with Member States. But a good, workable compromise is now emerging.
But if MiFID is an example of the difficulties we face, it is also an example of how hard work and professionalism can overcome these difficulties.
The level of consultation carried out by the Commission was unprecedented – 11 separate consultations in the last 2 years alone. The preparatory papers made available for everyone to see and comment on. Listening to Member States, Parliament, regulators, firms and consumers. Being open to new ideas. And we will continue to listen to all interested parties right up to the last minute. The European Commission does not have all the answers.
I am struck at this stage by how widely attitudes to MiFID differ. There are those who, positively, relish the challenges it will bring. They want the potential business rewards. And they have spotted the first mover advantage. On the other hand, there are those who seem resistant to MiFID. I have no doubt that the benefits of the MiFID will far outweigh the costs. However, these benefits will not be evenly spread. There will be winners and losers. The winners will be those who look to exploit the opportunities and are first.
Your preparations should be well advanced by now. It is true that the application date has recently been pushed forward to November 2007 – but there will be no further delays.
Corporate Governance
As far as the field of Corporate Governance is concerned we have just gone through a thorough consultation exercise on what the Commission's priorities should be in the next years. I think we can say that this consultation was a real success – nearly 300 respondents replied in writing to our consultation paper, including IMA, and more than 300 persons attended the public hearing that took place in Brussels on 3 May.
In your written observations you have been evoking two projects that – as you know – are also particularly dear to me.
The first one is the famous principle of one share – one vote. You may have noted that the call for tender for an external study on the subject has already been published in the meantime – I am attaching priority to this issue. We want the study to be as comprehensive as possible in order to take account of all sides of the problem. This means it should identify existing deviations from the principle of proportionality and evaluate the economic significance of these deviations and their potential impact on EU financial investors. We are intending to launch the study in the Summer and to complete it by early 2007.
The second project that you have emphasized in your contribution is the proposal for a Directive on the exercise of shareholders' rights.
This proposal is currently examined in the European Parliament and in the Council. The plumbing of cross-border voting badly needs fixing. This can be done to a large extent by eliminating obstacles and complexities which are currently clogging the pipes and by lifting restrictions on proxy voting that tend to limit the influence of non resident shareholders. This latter point for me is essential: any such tendencies for me have no place in the Single Market.
Clearing and Settlement
The other piece of plumbing I have my eyes on at the moment is of course Clearing and Settlement. The Commission Services have now put on their website a draft working paper which is intended to form the basis of the final Impact Assessment for any proposal I may bring forward. I am currently looking further at where exactly we can get the big wins- what actions will deliver most benefits and what are the associated costs: Nobody disputes that the total costs of trading are too high in the EU. There are many reasons for this pertaining to market fragmentation, differences in national practices and legal and fiscal requirements, and weaknesses in cross-border industry infrastructures. I am certain of one thing: Member States and industry, along with the Commission, have a big role to play in sorting things out. You don’t need a PhD in accountancy to deduce from the accounts of clearing and settlement providers that reductions in costs that have been achieved to date through technology, volume growth, and scale economies have not found their way through to users.
This has to change. In all the consultations I have undertaken no one has doubted what needs to be done, including improving access and inter-operability, more price transparency and competition, and getting back office cost down, through addressing the many Giovannini-identified barriers. Some of these things, by their nature, are long term. Others can be dealt with more quickly.
As people know, I am not a fan of regulation where other lighter touch options can deliver the solutions. The benefits of a directive – if I decide to introduce one - would be dwarfed by the benefits that could flow from industry and Member State actions to address the current imperfections and inefficiencies in the practices and structure of the industry. There are also many different ways in which we can deliver transparency and competition into the market aside from regulation.
The introduction of the MIFID will bring competition to Stock Exchanges in respect of share trading. It should also open up to a certain extent more choice and competition in clearing and settlement. The question is will this be enough to deliver the savings that most observers believe can be realised and if not what else can and should be done – of a legislative or non-legislative nature? It is to try to answer these questions that I have authorised the Commission Services to publish the draft of the Impact Assessment in the form of a working document for comment. I undertake to take careful note of stake-holders observations on the working document before announcing my decision on the way forward with my colleague Neelie Kroes ahead of the Summer break. Our final Impact Assessment must be rigorous, objective, and grounded in commercial reality. There will be no short cuts. This is a complex area – and the market landscape is changing rapidly. The Commission has not been slow to show leadership. My preference now is for an overall approach in which industry also plays its part and takes a lead role. We have to move this issue on and I am pleased to say that I will be giving careful consideration to some constructive suggestions and ideas that I have received in recent days. But we cannot sit around forever waiting for the proverbial Godot to arrive. To take from the title of my speech “It is time to turn words into action”.
Your call to "slow down the rate of change" in other areas has been and will continue to be heard. Regulatory fatigue is widespread. We will therefore pay particular attention not to overburden companies in Europe with new initiatives – and we will continue the present process of regulatory dialogue in line with our Better Regulation approach.
Far East
I would like to say just a few words on relations with our major partners in the Far East – Japan and China.
I am just back from my first official visit to China. I must say I have been impressed by the vitality and the remarkable development of the Chinese economy. At the same time, I am aware that in such a booming environment any imbalance or structural deficiency could rapidly propagate and be amplified, with serious consequences for the global financial markets.
That is why we need to deepen the EU-China relationship in the area of financial services. We are making good progress on that front. Last week, the 2nd meeting of the EU-China dialogue was held on major regulatory issues in the banking, insurance and securities sectors. I strongly encouraged our Chinese partners to pursue reforms of the financial sector, in particular as regards market access for foreign companies.
As China is undergoing major structural changes, the EU experience in integrating its financial markets can be of great help, notably in implementation of global standards such as IFRS or Basel II.
I am confident that, over the coming years, we will develop a fruitful and friendly relationship with the Chinese authorities. I would like you to be in the industry vanguard with us as we develop our relations.
We also have a very close and growing relationship with Japan – again which I want to develop further.
Conclusions
To conclude let me come back to the topic of Asset Management.
Our vision is of an efficient and innovative fund industry; attuned to the needs of its traditional retail investor base; reaping all the commercial opportunities in a fully integrated European market; able to compete globally. The best way to improve matters may be through concrete well-focused changes to the existing legislative framework. This does not mean that we are settling for second-best. There is a lot that we can do through targeted and calibrated adjustments to the existing legislation as I outlined tonight.
We hope that you see merit in this work. We look forward to your continued engagement and support as we move beyond prognosis to policy delivery and execution.
In the end, what is the real challenge we face? To be simply the best in the global market.
