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Ladies and gentlemen,
You could be forgiven if you are feeling a sense of déjà vu. Five and a half years after the adoption of the UCITS III amendments, here we are again - talking about possible further improvements to European fund law. But let's be honest : continued attention to the European legislative framework for this business is essential.
First, the growing importance of this sector. Over the last decade, investment funds have come from nowhere to become one of the core pillars of our financial system. The UCITS market now comprises more than 30,000 funds managing over €5 trillion – circa 50% of EU GDP. The sector is not just direct sales of fund units, but also a key component in other investment products - unit linked life insurance and private pension products.
Second, we are back wrestling with UCITS law because asset management is in massive flux. Commercial horizons of market participants are broadening. Business models being reinvented. Risk parameters changing. The single market framework must accommodate these changes. Foster competition and efficiency on a continental scale. The UCITS Directive is struggling to keep pace.
So getting the EU framework right is crucial. But delicate. We want to nurture a successful European fund industry. Keep it at the cutting edge of financial innovation. In the vanguard of global competition. True to the needs of the traditional retail investor base. All this within the constraints of a complex EU policy-making process. The task is not easy.
As you see we are proceeding carefully and systematically. Tackling the implementation failures that have undermined the effectiveness of the UCITS passport. Rooting out the bad administrative practices that have hindered cross border marketing of UCITS.
Working in close partnership with people on the ground – market participants and competent authorities. Consulting widely. Listening to the European Parliament. Continuing to work openly with all interested parties as we move ahead.
That is why we are here today. To hear first reactions from all interested parties to the three industry reports on retail investment funds, hedge funds and private equity funds.
Before going further, let me correct any misunderstanding on the status of these reports. These reports express industry views and recommendations on how the European regulatory environment can be improved. They do not bind the Commission. I will take all views into account. And I want to hear from consumers.
I would like to salute the three sets of experts. They have brought clear and fresh insights to many challenging issues. And they will be an important input to our thinking as we prepare the November White Paper on improving the single market for investment funds. So let me give you some preliminary thoughts from my side.
I. Report of the Expert Group on Hedge Funds
Let’s start with hedge funds. This is the first opportunity that the EU hedge fund industry has had to express its views on the commercial and regulatory challenges. Their first plea is for an objective, fact-based debate.
The group describes how the regulatory patchwork in Europe is hampering the development of a scalable onshore business. European hedge fund managers are not always able to choose service or liquidity providers from across Europe. The Group argues that, if the European Union wishes to be home to a successful hedge fund business, it must tackle these frictions. But any remedial action should stop short of introducing hedge-fund specific initiatives.
What about the most hotly debated recommendation concerning the marketing of hedge fund investments to the mass market?
The recommendations represent a departure from existing national approaches to controlling retail exposure to hedge fund investing. We need to study this carefully. There are two issues which need scrutiny:
First, whether the MiFiD Directive is compatible with the interpretation that underpins the expert group report. This is not cut-and-dried and is currently the object of careful legal analysis by my services;
Second – more fundamentally – whether retail access to hedge fund investments on the recommended terms would be desirable. Let's be realistic: If part of the industry wishes to make hedge fund investing available to the mass market there will be close regulatory engagement. The hedge fund industry cannot expect to have red-carpet access to the mass market while the rest of the fund industry is subject to strict regulatory controls.
These are some of the thorniest problems facing European financial regulators. Expect no rush to quick judgement. The Commission and national authorities will need reassurance that the recommendations represent a viable and secure basis for broadening investor access; that they do not have unintended consequences for the broader investment fund market. However, we recognize these issues are here. Hedge funds are now an established feature of the European financial market. And finding their way into the portfolios of affluent investors. We will have to work towards some kind of resolution.
II. Report of the Expert Group on Private Equity
A successful private equity industry can make a critical contribution to economic growth by nurturing new enterprises and re-energising existing companies. In so doing, it can lay the seeds for sustained growth and job-creation. This report makes a compelling case for cultivating Europe’s growing private equity business.
If the EU is to build on recent progress, many Member States and at the EU level need to understand better the way in which the private equity industry is organised. Not always the case in the past. We must be sure that cross-cutting financial and company law does not generate unintended consequences for the private equity industry.
Member States regulate part or all of the private equity value chain. But, Europe's national regimes do not interlink. The industry is internationalizing. The cross border dimension of this business could be significantly enhanced if a number of legal and tax barriers were tackled.
The first set of issues concerns fund structuring. Cross-border capital-raising is hampered by failure to recognise partner country funds as fiscally transparent. The second set of issues concerns the cross-border placement of private equity funds: The Group calls for a common private placement regime to provide a safe harbour for private equity managers and qualified investors to negotiate freely, without handholding by the local supervisors.
Proposed solutions build on the concepts of mutual recognition of existing national laws and fund structures – rather than new harmonising measures. There is no need to super-impose European harmonising measures on the industry. What is needed is to free the industry from punitive double taxation and legal uncertainty that currently hold back onshore business – to the advantage of offshore structures.
Most answers are in the hands of the Member States. This is true, in particular, with regard to the fiscal barriers cited in the report. A lot of lip-service has been paid over the years to addressing Europe's failure to develop financing for unlisted companies. This report gives Member States a chance to turn rhetoric into action. If Member States are prepared to make small adjustments to their tax and regulatory systems, they can promote European private equity clusters. A significant step forward. This segment has been singled out for particular attention by the Finnish Presidency of the European Council. My services have been drawing attention to industry needs as expressed in the present report. If Finance Ministers are serious about doing something to improve the regulatory and tax environment for private equity, here is a ready-made agenda.
III. Expert group on retail investment funds
The expert group on retail funds (UCITS) identifies regulatory failures or gaps which are hampering the efficiency of the European industry: lengthy delays in fund authorisation and notification; absence of a management company passport; no possibility to merge funds on a cross-border basis or pool assets; national rules which preclude cross-border delegation of custody functions.
The report makes a powerful case for urgent action to remove these bottlenecks. This will foster efficiency gains all along the fund value-chain. It will reduce time to market, harness scale and specialisation benefits and provide more flexibility for industry players to organise their business on a pan-European basis. Some efficiency savings will accrue directly to investors: others will trickle down to the end-user under the benign influence of competition.
The particular contribution of this report is the detailed explanation of the need to realise these benefits. Many of the recommendations require revision of articles of the existing Directive, or the introduction of provisions to give effect to new enabling mechanisms. In isolated instances, flanking measures will have to be taken in other fields such as taxation of fund mergers. The latter in particular poses a daunting challenge.
However, we now have a detailed road-map to help us to implement these ideas. The onus is on EU authorities and Member States to act quickly on these recommendations. Yes, this will imply adjustment of regulation and enforcement practice. Yes, there will be complex technical challenges to be resolved. But, it is up to us to find the solutions. We have two decades of single market experience behind us. We have new infrastructures to support cooperation and build trust and confidence between supervisors. It is time to start trusting each other and our ability to find solutions to what are – at the end of the day – 'low-tech' problems.
We want to hear your views on these recommendations. We think their time has come.
The expert group did not cover all the questions. It focussed essentially on tackling bottlenecks in portfolio management and fund administration. It has not focussed on inefficiencies in fund distribution. Distribution costs account for around 0.9% of assets under management for active equity and capital protected funds. They exceed all other costs in the fund industry combined. The Commission has not lost sight of these issues. We have organised workshops – bringing all stakeholders together - to discuss improvements in standardised fund disclosures. We will also be looking at how to use new MiFiD rules to ensure that inducements paid by fund promoters to ensure that products are carried by distributors do not work to the detriment of the end-investor. These important issues will also be at the heart of the White Paper agenda.
IV. Next steps
We must now deliver concrete improvements. The three expert group reports have provided us with valuable input. They explain how the European regulatory environment is holding back the development of the different businesses. In clear and constructive terms. The Commission will lay out its policy in the November White Paper. We look forward to receiving all views on these reports by September 20th.
I would like to conclude this hearing by thanking the experts, once again, for their sterling work. And to thank all participants for their interest and efforts in building a world-beating asset management business.
That is the real challenge: to build the best regulatory framework in the world. Nothing less.
