AIC views
11 June 2009
Winds of Change
Annabel Brodie-Smith, Communications Director, AIC looks at how the current economic and political environment has brought with it a changing regulatory mood.
When Harold Macmillan was Prime Minister, someone asked what worried him most. His infamous reply, “events, dear boy, events”, seems especially pertinent today, both politically and economically. The side effects of an unraveling banking system - difficult stockmarkets, recession, even perhaps the recent political tumult – means these are eventful times indeed.
However the winds of change have also brought with them a very different regulatory mood, the Alternative Investment Fund Managers Directive being a case in point. This was conceived to tackle systemic risk to the financial system by identifying and regulating against potential sources of risk. Sadly, it has provided ammunition for those who dislike the “Anglo Saxon Model” of capitalism and the primacy of London as the world’s leading centre of financial services, and we need a robust and united Government to fight the corner for UK Financial Services on this issue.
For the investment company sector, the directive could have profound unintended consequences. Treating any fund which is not regulated under the UCITS Directive as an “Alternative Investment Fund”, brings the managers of virtually all the AIC’s Members within the scope of the proposed new regime. Investment companies who separate their investment management function from their administration, or have a multi-manager structure, are similarly overlooked by the directive, which also fails to recognise the role of the independent Board, something that could have serious structural implications for the sector. The ramifications stretch further still.
Further potential headwinds could come from the Foot review of British offshore financial centres. The AIC strongly believes that HM Treasury should support the continued operation of offshore financial centres which are today the home of nearly a third of investment companies whose shares trade in the UK. There is a common misconception that offshore financial centres are damaging to the UK’s interests and should not receive continued support from the UK government. The AIC believes the reverse to be true.
Indeed the AIC estimate that the offshore investment company sector contributes some £300m to the UK economy each year in fund management fees and an additional £400m has been paid in commission to bankers and brokers for new issues since 2001, revenue and employment which could easily have gone overseas had the current status quo not applied. The offshore investment company sector has enabled investors to diversify tax efficiently into alternative assets, but this should not be confused with tax avoidance. Indeed the offshore domicile simply avoids the problem of double taxation - once inside the fund and then again when they receive investment returns since all dividends and returns are taxed in the usual way.
The AIC’s whole purpose is to help members add value for shareholders over the longer term. A healthy offshore sector helps create competition in the market and enables investors to diversify their investment. The ability of investment companies to use offshore jurisdictions is key to allowing shareholders to diversify their portfolios, and ultimately shareholders need to have the freedom to choose. From a regulatory perspective, it is indeed ‘events, dear boy, events’ which occupy the lion’s share of our work. Let’s hope that the extraordinary events of the last year do not allow protectionist instincts to grow unchecked as shareholders, ultimately, will pay the price.
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