For Immediate Release: Thursday 19 June 2003

 

 

        

IMA response to CP173: Consolidated Supervision

(Solvency of Financial Groups)

 

The IMA has responded to FSA proposals concerning consolidated supervision[i].  It has four main concerns regarding the application of consolidated supervision to investment management firms:

1.      The degree to which the proposals take account of the specific risk profile of investment managers

Unlike banks, IMA members do not take deposits or lend and all client assets are segregated from those of the firm.  Imposing consolidated supervision requirements across all investment management firms will not ensure a level playing field and will increase the burden for those groups with a lower risk profile.  The IMA has requested that the FSA uses the waiver that is permitted by the Capital Adequacy Directive (CAD)[ii] to exclude investment firms from consolidated supervision, where this is appropriate, taking full account of the risk profile of the firm and the group to which it belongs.

2.      The timing of the implementation of the rules

The issues concerning consolidated supervision will be impacted by both the revised CAD[iii] proposals and the implementation of the Financial Groups Directive (FGD)[iv].  Neither of these Directives has been taken into account by CP173, which focuses on clarification of the existing rules.  The IMA requests that all issues concerning consolidated supervision be considered before enforcement is implemented.  This will allow investment management firms to implement solutions to address all three simultaneously.

3.      The degree to which the proposals take account of the specific financial profile of such firms

The IMA suggests that when a firm makes consolidated supervision returns, the treatment of goodwill at the consolidated level should be reviewed on an individual basis to take account of the specific financial profile of the group.  If all purchasers of investment management firms were required to have sufficient capital to “write-off” goodwill, this would discriminate against stand-alone investment management groups.  This could result in a restructuring of the industry where consolidation of firms would only take place within the larger banking and insurance groups. 

4.      The FSA’s approach to the granting of a waiver

IMA is concerned that detailed guidance provided by the FSA with respect to waivers appears to be setting conditions above those required by the CAD and appears to pre-judge certain situations.  Again, the IMA believes that each case should be judged on its own merits.

Julie Patterson, Director of Regulation and Taxation at the IMA, commented:

“Our main concern is that the proposals do not take account of the specific risk profile of investment management firms, compared to banks and insurance companies.   In light of the many issues concerning implementation, especially in current market conditions, the IMA is urging that the extension of consolidated supervision to investment management firms not already subject to such requirements should not be enforced until due consideration has been given to all EU legislation impacting on this matter. 

“Moreover, requirements over and above those imposed in other EU states are clearly detrimental to the competitiveness of the UK industry and will effectively increase costs for consumers.”

For further information, please contact:  

 

Julie Patterson, Director, Regulation & Taxation, IMA, 020 7831 0898
 Bruce Offergelt, Senior Adviser – Financial Regulation, IMA, 020 7831 0898

Clare Arber, Head of Communications, IMA, 020 7831 0898

Notes to Editors:

Investment management firms that are part of a banking group are already subject to consolidated supervision.  The proposals in CP173 apply to firms that are not part of such groups.  Under the old IMRO regime, investment managers were granted a general exemption from consolidated supervision.  When the FSA gained its full powers under the Financial Services and Markets Act came into effect on 1st December 2001 (commonly referred to as N2) there was a change in the regulatory regime.  With effect from N2, firms that do not wish to submit consolidated returns must apply for a formal waiver of the rules.  The FSA has identified a general need for clarification of the purpose of consolidated supervision and of the existing rules, and for guidance concerning the factors that it will take into account when considering waiver requests.  CP173 has been issued to address these issues.

- Ends -

 

[i] Consolidated supervision is defined as “the monitoring of the solvency of, and of the adequacy of systems and controls in, a financial group”.

[ii] The Capital Adequacy Directive (CAD) has provided for a waiver to be granted to investment firms that are part of a group that does not include a credit institution (bank).  Each firm subject to the waiver has to fulfil certain obligations, including the notification of all group “large exposures” and any serious risk that could undermine the financial stability of the group.  The CAD recognises that the regulator is still able to monitor the systems and controls in a group, in a manner that is less burdensome but no less effective.

[iii] The EU is expected to issue a consultation paper concerning the revision of the CAD to take account of the revised Basel proposals in June 2003.  The amended CAD will be approved by the European Parliament for implementation at the end of 2006 at the same time as the revised Basel Accord.

[iv] The Financial Groups Directive (FGD) considers the financial strength of groups in order to reduce systemic risk and the risk of contagion arising from failure in one part of the global financial system.  This Directive primarily affects financial conglomerates but also affects single sector groups, i.e. banking-only, investment-only and insurance-only groups.  As the scope extends beyond the EU it also requires an assessment of consolidated supervision for groups where the regulator is outside the EU.  This Directive will take effect for the supervision of accounts for financial years beginning in 2005.

 

 


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© IMA 2002. Last Updated: 01 November 2006