FEFSI COMMENTS ON CESR S CALL FOR EVIDENCE (II) ON THE FORMAL REQUEST FOR TECHNICAL ADVICE ON POSSIBLE IMPLEMENTING MEASURES ON THE FIM DIRECTIVE The European investment management industry, represented by FEFSI 1 welcomes the opportunity to respond to CESR s call for evidence with regard to the Commission s Formal Request for Technical Advice on Possible Implementing Measures on Directive 2004/39/EC 2. FEFSI believes the European investment management industry will be affected by CESR s work on the implementation of the revised ISD at different levels: Firstly, investment management firms operating under the ISD offering individual portfolio management services; Secondly, investment management companies under the UCITS that carry out individual portfolio management as well as collective portfolio management services - are directly subject to the ISD; Thirdly, a significant number of units of funds are distributed through intermediaries, which in the future will be subject to the FIM (as investment advice is set to become a core activity); Fourthly, collective portfolio managers that offer as a non-core activity investment advice under the ISD; GENERAL COMMENTS We fully agree with the Commission s mandate to CESR to take full account of three key objectives: The protection of investors and market integrity by establishing harmonised requirements governing the activities of intermediaries; The promotion of fair, competitive, transparent, efficient and integrated financial markets, as well as the promotion of competition; 1 2 FEFSI, the European Fund and Asset Management Association, represents the interests of the European investment management industry (collective and individual portfolio management). Through its member associations from 19 EU Member States, Liechtenstein, Norway, Switzerland and Turkey, FEFSI represents the European asset and fund management industry, which counts some 41,100 investment funds with EUR 4.7 trillion in net assets under management. For more information, please visit www.fefsi.org. CESR/04-323 of 29 June 2004 18 Square de Meeûs, B-1050 Bruxelles +32 2 513 39 69 Fax +32 2 513 26 43 e-mail : info@fefsi.be www.fefsi.org
2 The right balance between the objective of establishing a set of harmonised conditions and the need to avoid excessive intervention as well as a carefully case by case evaluation of the amount of detail included in the advice. Already when commenting on the Call for Evidence with respect to the Commission s preliminary mandate in January of this year 3, FEFSI underlined that CESR should contemplate the possibility that technical advice can also consist of recommending that no detailed rules be drafted, or that some issues are best left to the market place or participants to agree on with or without the option of European regulators endorsing industry standards where feasible. Against the background of the recently issued 140 pages Consultation Paper 4, which followed that Call for Evidence, we can only repeat what was said six months ago by emphasising that overly detailed and prescriptive Level 2 rules necessarily lead to overregulation. From our point of view, Level 2 rules should be principle-based and only when necessary and/or if regulators see that this is not sufficient and may distort competitive forces should details be elaborated. We therefore welcome the Commission s statement that Particular attention should be paid of the level of detail required by market participants to be included in level 2 legislation. We urge CESR to take this qualification to heart, esp. against the background of the above-mentioned Consultation Paper, which, indeed, is anything other than broad risk-oriented principles-based rules that can be absorbed into the diverse national contexts and regulatory environments with clarity and legal certainty. At the same occasion, we also raised two other issues that can only be repeated: That the rules, which will be drafted for investment service firms, should take into consideration the specificities of portfolio management as a particular investment service. Portfolio management as an investment service is a fiduciary activity representing the buy side of the market; That adequate attention should be paid to achieving a high level of consistency between the implementing measures of the FIM/ISD2/MiFiD as far as they are relevant for individual portfolio management - and regulation under the UCITS Directive, given the strong similarity between collective and individual portfolio management and the fact that many investment management firms are also fund managers. Lastly, we believe it extremely important that the CESR technical advice takes into account the nature of the client who is to benefit from the investor protection envisaged. The levels of protection should vary quite considerably depending on the professional or private/retail nature of the (potential) clients, whereby it is imperative that the former benefit from a lighter regime than the latter. To date, we believe these distinctions have not been made very clearly or consistently. 3 4 CESR/04-021 of 20 January 2004 CESR/04-261b of 17 June 2004
3 SPECIFIC COMMENTS At this stage, we will not offer proposals for wording on specific issues, but we will highlight the areas where in our eyes shunts must be set in the right direction to ensure that the specificities of individual portfolio management are taken into account and that a maximum level of consistency between the new FIM and the UCITS Directives is achieved. Our attention has focused on three key areas: Article 4.4 on the definition of investment advice; Article 19.1 on the general obligation for the investment firms to act fairly, honestly and professionally and in accordance with the best interest of the client; Article 19.4 and 19.6 on suitability test and execution only business. 1. Definition of investment advice We welcome the request for advice by the Commission as it would be useful to differentiate advice, as defined in Article 4 FIM/ISD2/MiFiD, from other types of communications to investors, and in particular to differentiation from and between general recommendations, marketing communications and simple offers. However, we are conscious that this will be rather complex as definitions are often very different from country to country, thus rendering the formulation of common notions across all CESR jurisdictions challenging. The quest for common notions must in our view accommodate definitions that apply across a multitude of financial services directives, starting with the unspecified distinction between advertising and marketing under the UCITS Directive. The e-commerce and Distance Marketing Directives also build on these notions without necessarily clarifying their definitions. In fact the e-commerce Directive permits a differentiated cross-border treatment of UCITS products on the Internet, whilst it is practically impossible to distinguish between marketing and advertising in the virtual world. Any definitions considered for the FIM/ISD2/MiFiD must be consistent and coherent for the purposes of these other directives or risk themselves becoming internal market obstacles rather than promoters. In this context, we do not understand what is meant by differentiating a personal recommendation from the activities carried out by tied agents as the latter are also allowed to provide advice (see Article 4.25 of the new Directive). The only difference between an (independent) intermediary and a tied agent is the question of who bears the responsibility. In addition, from our point of view it would be of particular importance to underline that, in relation to the simplified prospectus included in the UCITS Directive, neither the document itself nor any of its contents should be considered in any way to constitute advice. It only constitutes a marketing communication.
4 2. The general obligation for the investment firms to act fairly, honestly and professionally and in accordance with the best interest of the client The problem is that the general obligations laid down in Article 19.1 apply for all investment firms, irrespective of the very different services offered. For the investment management industry two of them are of particular importance: portfolio management and distribution/advice. From the point of view of portfolio management, the new UCITS Directive includes in its Article 5h similar requirements, which in our minds very much reflect the responsibilities of the fund manager. If it is right that collective portfolio management under the UCITS Directive and individual portfolio management under the FIM Directive are very similar, consistency would be particularly important in this case. For the sake of consistency this would mean for an investment firm under the FIM Directive that it should: Act honestly in conducting their business activities; Act with due skill, care and diligence; Have the necessary resources and procedures to effectively conduct the proper performance of their business; Try to avoid conflicts of interest; When conflicts of interest cannot be avoided, make sure that the clients (investors) are fairly treated; Comply with all regulatory requirements applicable to the conduct of its business activities so as to promote the best interests of its clients and the integrity of the market. Taking into consideration the variety of investment services that can be offered under the FIM/ISD2/MiFiD it also strikes us that it will be difficult to arrive at more detailed notions that can apply to all circumstances without detriment to the consistency between European directives. At the end of the day the integrity of the investment service offered will always depend on the particular circumstances of individual cases. Consequently, we urge CESR to consider principle-based rules that allow individual circumstances to be judged adequately in their setting as well as ensuring consistency across EU directives. 3. Suitability test and execution-only business We agree with the European Commission that CESR s advice regarding Article 19 should take into account in particular: The nature of the financial instruments being offered or considered; The retail or professional nature of the (potential) client. As far as the nature of the financial instrument being offered or considered, we believe that it is important for CESR to recognise that there are a number of financial products which from the investor s point of view serve a similar purpose (eg. investment funds,
5 certain types of life insurance, certificates, structured bonds, etc.) but where, at present the regulatory requirements are significantly different. From FEFSI s perspective, we believe that such products should be treated in the same way with respect to, for example, transparency and product information. As far as the differentiation between clients is concerned, we believe the needs of retail and institutional investors are significantly different and this has to be taken into account in the CESR s thinking. Suitability test FEFSI has two interests in relation to the suitability test. The first is in relation to the distribution of units in a UCITS when advice is being provided where it will be important to ensure consistency between the requirements of the UCITS directive and the requirements of FIM since it will be covered by the former if undertaken by a FIM authorised entity and covered by the latter is undertaken by a UCITS manager. Similarly, a manager is able to undertake individual portfolio management under both the UCITS directive and FIM. Again, it will be important to maintain consistency between the requirements of these two directives. Concerning the minimum information to be obtained from the client regarding his knowledge and experience in the investment field, we can only underline that judging investor knowledge is a very complex issue and a very multi-faceted process. One of the aspects that might be sensible to take into account when matching the characteristics and needs of the investor is risk tolerance and capacity. However, we believe that it will be very difficult to lay down fixed and detailed rules. Furthermore, from our point of view CESR should not go beyond the existing wellestablished practices that seem to work adequately. Execution only At least, UCITS as highly regulated, supervised and transparent savings vehicles should be by definition always be considered a non-complex instrument for the purpose of this rule. One of the possible criteria for determining a service as execution only should be the fact that the distributor makes explicit reference to the fact that it does not provide advice. One of the criteria for determining that a service was provided at the initiative of the client should be the fact that the client seeks to or considers to act on a very specific product or type of product/instrument and that the client wishes to persevere despite the disclaimer that the service is provided without advice.
6 In conclusion, FEFSI is appreciative of the indicative work plan for the second set of provisional mandates and we look forward to the scheduled possibilities of two rounds of public hearings and consultations. We are highly appreciative of the inclusion of the indicative work plan for the first set of provisional mandates along side that of the second set, but we do have some concern over the disparate dates for final approval as some elements from the two sets of mandates are interlinked and may need to be balanced against each other prior to final approval. The current timetable does not seem to allow for such a step. We hope that you find these comments helpful and we would welcome an opportunity to explain them in more detail should you desire such. 29 July 2004 F:\MB\04-4000-notes&memos\04-4029-FEFSI COMMENTS ON FIM (II)bis.doc