It is tempting not to bother with the reams of paper which flow out of Brussels. Everyone knows that...
It is tempting not to bother with the reams of paper which flow out of Brussels. Everyone knows that the bureaucracy and red tape associated with the European Commission means that it sometimes takes years for all the nations to agree on issues.
Look at Ucits: it is incredible to think that the first ruminations of a Ucits law began decades ago. But it is only now we are beginning to see the implementation of Ucits III, which incorporates ' finally ' bog-standard money market funds and funds of funds.
Of course, this sluggish pace does not help those companies aspiring toward entrepreneurial ideas. Until now, companies who have wished to create a fund of funds, for example, have done so under a country's domestic laws, which naturally meant they could not enjoy the cross-border passport obtained under Ucits.
Yet it would not be possible to be completely oblivious of the debates, counter-debates, consultations, post-consultations, pre-proposals, post-proposals, and it goes on and on, oozing out of the Commission with regard to various Directives.
The Capital Adequacy Directive is one to note. Ironically, although this particular Directive has the word 'adequacy' in it, the contents of its proposed update demonstrate the Commission's inadequate understanding the financial services sector.
Until now, the CAD has really applied to banks. They are the custodians of vast sums of money, and therefore it is reasonable to expect their capital adequacy levels should be substantial enough to protect customers from a bankruptcy or closure.
The Commission has now decided that it is a good idea for the upgraded directive (so-called CAD 3) to be as severe on fund managers as it is on banks. Why? That isn't exactly clear, particularly when you consider that fund managers are not the principal holders of clients' cash.
In any case, according to the EC, the purpose of having a capital requirement is to cover operational risk exposure, such as, in the case of investment management companies, errors in processing subscriptions or redemptions. The more errors are made, the higher the capital requirements are likely to be.
The EC has also come up with the bright idea of calculating this capital requirement based on a company's gross income.
As Philip Warland at PriceWaterhouseCoopers explains, the gross income for an investment manager of index funds will be lower than that of manager of, say, active funds, however, the volumes of transactions in either case will be equally high and equally prone to the same number of operational errors.
He believes a more accurate calculation would based on a firm's assets under management.
But perhaps a better proposition would be to get rid of the proposal in the first place.
At least Ucits III, with its interminable delays, will encourage entrepreneurship when it finally comes into effect. CAD 3 has no such saving grace and will simply stifle new participants in the industry.
Warland says small companies will find it difficult to start-up under these austere conditions. And without small companies, the fund management industry will lose some of its most creative, innovative, young and enthusiastic participants.
While the intention might be good, the EU's approach is questionable.
Perhaps this is a good time for the EU to copy the Americans model on this matter, and simply require fund managers to take out some insurance.
Went into administration April 2018
Threat of legal action looms over Woodford IM
View from the front row
Retirement Planner Forum 2019