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 timeframes 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 crossborder access. He questioned whether the simplified prospectus is working as envisaged. National goldplating 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, lifeinsurance, 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 Franssu Invesco 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.
Concerning the management company and depositary passports, Martina Kelly (IFSRA) considered that
the absence of legal basis for the host regulator to act would still be a problem - even with greater
convergence among supervisors. On the expected economic benefits of the depositary passport, she
challenged the potential for savings. According to Martina Kelly, economies of scale are only important in
relation to the custody function: these are already exploited via sub-custodian arrangements. With regard
to free provision of fund administration services, Martina Kelly stressed the importance of allowing home
regulators to do their job. Delegation arrangements should not lead to empty boxes. Finally, with regard to
pooling, she considered that if regulatory requirement in relation to virtual pooling were harmonised, there
may be scope for cross-border pooling, on the basis that the “pool” would be subject to regulatory
scrutiny. While master/feeder structures would not raise issues in relation to split supervision, they were
not permitted under the existing Directive and therefore only virtual pooling could be considered..
SESSION A(II)– INVESTOR PROTECTION UNDER THE UCITS FRAMEWORK:
Chair: Philip Warland (Price Waterhouse Coopers). Panel: Dan Waters, UK FSA; Francois Delooz
(BNP Paribas); John Pauly (Moventum); Tania Verrier (DBAG and FIN-USE).
Dan WATERS (UK FSA) opined that traditional product manufacturers are not necessarily equipped to
use the complex instruments made available by the UCITS revisions, nor effectively manage the risks
arising from more complex portfolios. However, fund promoters have not rushed to adopt the increased
investment freedom provided by UCITS III. Consumers need better disclosure - the simplified prospectus
is not meaningful for retail investors (and was apparently never tested on them), so in many cases is not
read. On the firms side there is a need for improvements in risk management disciplines.
Tanya VERRIER (FIN-USE) noted the mounting calls for increased levels of consumer education.
Any such development should not mask the need for industry to take greater responsibility for the
products they sell to consumers. The onus for what is sold to retail investors should rest squarely on the
shoulders of financial institutions. Product literature and simplified prospectus require further
simplification. Tania Verrier expressed concerns regarding the strong growth in substitute products. These
products are subject to lower levels of investor protection. Policy makers should also recognise the
realities in the new Member States, where levels of consumer understanding are even lower and where
incumbent distribution channels are closed to third party product offerings.
John PAULY (Moventum) argued that consumers seeking independent financial advice must be
prepared to pay for it. Furthermore, a Simplified Prospectus should present clear information on the level
of exposure, the risks taken and the potential rewards which that can be expected from an individual
product.
Francois DELOOZ (BNP Paribas) supported a functional risk based approach to the UCITS sector,
focusing on managing risks at the level of the management company. These disciplines would be
particularly helpful in addressing risks related to investment in derivatives. UCITS Directive with its
product approach does not cover the sales process. It is also too prescriptive. It should therefore be
improved, by recasting it as a Lamfalussy Directive. There is a clear need to clarify the interaction between
UCITS and MiFID. Progress must also be made towards a level playing field in terms of documentation
to be provided to investors by providers of competing investment products such as structured notes and
funds sold with a life insurance wrapper.
Philip WARLAND (Price Waterhouse) emphasised that responses from the industry to the Green
Paper must not lose sight of the need for industry to meet consumer needs. He cautioned against industry
focusing solely on a Christmas list of efficiency improvements. He was worried that discussions in the
hearing had tended to focus on delivering easier market access and operational savings – with scant regard
to how these would impact investor interests. Issues raised in the investor protection panel were critical to
the further success of the industry.
SESSION: OPPORTUNITIES AND RISKS ASSOCIATED WITH NEW TRADING STRATEGIES.
Chair: Paolo Cuniberti, JP Morgan. Panel members: Rupert Rossander, Man Investments ; Fabio
Galli, Assogestioni; Javier Echarri, EVCA; Carlos Arenillas, Vice president, CNMV.
Rupert ROSSANDER (Man Investment) identified two main risks in the hedge fund sector: valuation
of complex instruments and quality of Hedge Fund administration. Operational risk may be a greater
source of potential disruption than instrument or trading strategy risk. In Europe, national hedge fund
regimes may soon limit the development of panEuropean product solutions and offer. But Regulators
need to avoid creating new barriers with wide ranging legislation and thoughts of “retailisation”. There
have been no significant changes in client base structure for hedge funds. Despite growing familiarity with
the hedge fund industry, the sector will not stand still, it will remain fluid and innovative. If it is to deliver
the expected high returns, the ability of hedge funds to innovate must not be constrained.
Carlos ARENILLAS (CNMV) highlighted that the term hedge fund relates more to a management style
(use of leverage, short-selling, etc.) than to a new type of asset class. The border between traditional asset
management and alternative management may become more and more blurred in the near future.
Increased regulation of hedge funds is inevitable, although there is, as yet, no consensus on the form
or content. It might take the form of a European Private Placement regime. However,
there is also a need to recognise increasing interest in hedge funds among retail
investors. Regulatory dialogue on hedge funds inside the European Union is
crucial.: financial stability; operational risk; conflicts of interest; valuations and increasing
retail investor demand: these are all real issues that should be kept un der
review. Some of these risks will be more pronounced for hedge funds than with traditional
management.
Fabio GALLI (Assogestioni): UCITS needs to be redrafted. In some respects, UCITS III broadened
investment limits too much. On the other hand, it should have gone further. It went too far as regards
eligible assets to be held in a UCITS portfolio. Although a UCITS can invest in liquid closed-end funds,
the directive does not define what liquidity is, thus creating room for divergent interpretations. So
depending on your interpretation, in some Member States, hedge funds or real estate funds may be eligible
assets in which a UCITS III portfolio may invest. In other respects it did not go far enough. It failed to
provide overarching principles regarding, in particular, organisational risk management procedures,
definition of liquidity of eligible assets, and fees structures.
Javier ECHARRI (EVCA): Private Equity funds are unlike other types of investments. Private Equity is
much more than just another investment strategy. Private Equity funds are bespoke investments, the
product of careful negotiation between the investors, the fund managers and the owners of the underlying
portfolio companies. Investing in private equity funds typically implies a long term commitment (from 7
to ten years). A secondary market (for fund shares) is developing but it is still very small. This is not a
suitable market for retail investors. Currently 0.2% of funds are raised from retail investors. However, if
provided through an intermediary structure (such as UCITS III), exposure to these investments could be
provided to a wider investor base. From a Single Market perspective it is clearly desirable to have a
common vehicle for fund raising. However, this remains extremely complicated in Europe.
Paolo CUNIBERTI (JP Morgan) concluded that hedge funds and private equity are 2 industries whose
successful development will be of significant importance for the EU economy. There is industry demand
for sensible regulation. But misguided intervention in these areas could kill an important source of capital
and liquidity. Policy makers should focus on the risks that arise along the value chain (operational risks,
administration, independence of valuation, etc.). They should not attempt to regulate the investment
strategy.
SESSION: CHANGES IN FUND DISTRIBUTION
Chair: Wolgang Mansfeld, Union Asset Management AG. Panel members: Elizabeth Corley,
Allianz Global Investors Europe; Bruno Prigent, AFTI; Stefan Duchateau, KBC; Benoît de
Juvigny, Autorité des Marchés Financiers.
Wolfgang MANSFELD (Union asset management) asked participants whether (i) transparency and
comparability should be a priority at EU level to improve and enhance the internal market for funds and
investor protection; (ii) whether enhancement of advice and/or product disclosure for retail investors will
contribute to this objective; and (iii) whether ongoing MiFID work on conduct of business rules was
overlooking certain fund specific issues. Wolfgang Mansfeld added that cross border fund distribution is
currently working better than some would admit. Recent figures from EFAMA show that 50% of new
flows go into cross-border funds. On open architecture, the Commission should not be prescriptive and
allow market forces to play their role.
Benoit de JUVIGNY (AMF): From a French point of view, distribution is crucial as around 65% of
French GDP is invested in collective investment funds. As regards the simplified prospectus, it is not
adequate. The narrative sections are often too long. For instance, it would be better to introduce a
hierarchy of the risks. On the issue of costs and fees, partial or non implementation among a significant
number of Member states of the Commission’s recommendation on the simplified prospectus is clearly a
concern. The TER should at least become binding. Concerned also by the absence of level playing field on
disclosure, conflict of interest and eligible assets between UCITS and substitute products (certificates,
notes), where requirements are not so stringent. MifiD is the only way to circumvent this, but only
partially. TER does not apply to structured products. There is an urgent need for clarification of
interaction of MifiD requirements with UCITS .
Stefan Duchateau (KBC): As regards client suitability, it may be appropriate to transpose this concept to
UCITS, but every word weights heavily, meaning a need for a methodological approach. Some
requirements are very hard to put in practice, notably on risk. It assumes that a client has investment
objectives, which is often not the case. What is meant by expected returns? Should receiving information
from investor turn into a box ticking exercise? Risk is by far the trickiest issue. What do you mean by risk
aversion? Some basic information is needed: on net wealth, net income, education and age. This should be
sufficient, together with rules on product information equivalent to Belgian rules (1994) on ranking of risk
for product. Finally, there should also be a suitability test for the adviser himself. Comparability based on
disclosure is a difficult exercise. TER can vary even between companies from the same country. On open
architecture, Stephan Duchateau recalled that the asset manager is working along with the distributor in
traditional distribution networks. They are engaged in a long term relationship, which is not the case for
asset managers using open architecture.
Elizabeth CORLEY (Allianz) addressed the issue of conflicts of interest head-on. Costs of
distribution are as opaque as inducements, although they represent 60% of the management fees. This is
the cost of access to closed distribution markets. MifiD provides a good framework for the management
of conflicts of interest. Elizabeth Corley singled out the problem of level playing field with life insurance
products and certificates, and how easy it is to wrap up a UCITS product in insurance to avoid costly
regulatory requirements. There should be no further tightening of disclosure or transparency obligations
for investment funds . MifiD level 2 rules should not prevail over UCITS. UCITS law has become a
worldwide standard, not MifiD. However, a level playing field should not mean lower standards of
disclosure. Disclosure and transparency rules, in themselves, are not enough for comparability. This relies
ultimately on an informed, educated customer. Disclosure rules are now sufficiently developed and further
enhancement is likely to benefit substitute products. On suitability, Elisabeth Corley highlighted the need
for clarity and simplicity, the difficulty of risk assessment, and a need to segment the client base.
Bruno Prigent (AFTI): Development of open architecture has a cost for all back office activities. Costs
include: the use of registrars or of a Central Securities Depositary; a lack of standardisation for value dates
(essentially a manual process with increasing risks of human errors), the absence of a funds database, and
other associated operational costs. This all adds up to significantly increased costs. Bruno Prigent cited
some striking figures. The processing of sales/redemption orders for domestic funds sold via third party is
5 to 10 times more expensive than an average in-house product. The equivalent figure for a foreign fund
sold via third party channel is 10 to 15 times more expensive. The main areas for improvement are:
promotion of the CSD model, electronic processing, and standardisation and availability of static data.
There is a need to look more closely at costs as open architecture develops. In this regard, Wolfgang
Mansfeld mentioned the EFAMA-led industry initiatives in this field. Benoit de Juvigny agreed that costs
have been underestimated so far and that economies of scale had to be redistributed to the investor.
CONCLUDING REMARKS:
Mr Gerd Häusler: Counsellor and Director, Capital Markets Department, International Monetary
Fund: [1]
In a powerful tour d’ horizon, Gerd Häusler closed the hearing with some reflections on the broader
challenges facing the European asset management industry. He developed a thesis on the importance of
the asset management industry to help households cope with their increasing financial risk due to pension
reforms and a dilution of entitlements to annuities. It is a consequence of the “gigantic” underpricing by
governments and the corporate sector of annuities payable for pensions, having underestimated the
effects of early retirement and rising life expectancy. This development is in part responsible for the
household sector becoming ‘the shock-absorber of last resort’. He singled out the provision of annuity
products to retirees as a major challenge for European financial markets – especially in terms of the design
of products to deliver annualised pay-outs over the length of retirement.
The development of a sizeable pillar 3 sector (self insurance) is unavoidable. But the de facto partial
“outsourcing” of what used to be pillar 1 and 2 will lead to growing “political contamination” and
performance pressure for the asset management industry, notably on the need for higher returns. The
asset management industry might well become the target and the focus of anger in case of expectations on
the part of savers that turned out to be frustrated. In the European context, Gerd Häusler pointed out
that tolerance for deficiencies will be much lower than in the US.
Creating “alpha” for ordinary pension savers will be desirable and necessary, given the extremely low
returns on risk free assets. Diversification needs as a corollary to higher risk levels will meet low standards
of financial literacy. Financial education will be expensive and difficult but equally possible as drivers’
education. Without it, uneducated investors could become a political time bomb. Consumer protection
will go beyond protection against fraud, etc. An asset management industry for retail investors will need
high level of integrity and the absence of conflicts of interest. Open architecture will be the cornerstone of
the separation of producing and distributing mutual funds. Portability of pension claims as well as of
financial assets across Europe at a reasonable cost is another crucial challenge, in this case to support
labour mobility.
Mr Häusler also set out his views on hedge funds. All in all, he welcomed such alternative investment
vehicles for providing liquidity and facilitating the price discovery process. Unfortunately the debate was
taking place on many levels at the same time. Gerd Häusler distinguished between three sets of issues. As
to systemic issues, it would be hard to make a call for intervention. Neither the size of individual funds
nor the degree of leverage made a compelling case in that direction. But given the lack of transparency, he
supported the idea of “large position reporting” as was advocated in the latest Corrigan report. Should a
hedge fund foil, it would be essential for reasons of market discipline not to bail it out. As to shareholder
activism, there was no specificity in the role of hedge funds as opposed to other institutional investors.
For the benefit of pension savers Gerd Häusler advocated funds to be more ‘activist’ on shareholder
issues. As to investor protection, transparency and disclosure, there was a clear need for appropriate
health warnings, but, at the same time, investors should not be put into a “nursing home environment”.
Overall, the growing exposure of household investors and employees to alternative investment strategies –
particularly through investments by pension funds and life insurance companies – would lead to a growing
politicization of the hedge fund industry as well, as part of a much wider trend.
On a broader point, mature capital markets such as the EU are setting best practice standards for
Emerging Markets that badly need domestic financial markets, quick but not dirty institutional investors,
an appropriate legal framework and financial infrastructure to shield themselves better against the vagaries
of international capital flows. These huge markets will be the prize of very large asset management
companies, with assets under management of more than US$ 100 billion, approaching US$ 1000 billion
soon. Access to such markets will be worth enormous sums of money. But money will never be enough to
win the hearts and minds of such countries. Ultimately the defining factor will be transparency, integrity
and professionalism on the part of the asset management industry.
The opinions expressed are those of Mr. Häusler and do not necessarily reflect the views of the
International Monetary Fund or of its Executive Directors.
[1]