EU Regulations Constraining Investment, Says Andrew Pollard Of Stewart Asset Management

In a new report, Andrew Pollard says that we are drowning "in a sea of regulation". Mr. Pollard is a director of Stewart Asset Management Group, an IFA and independent fund manager. Mr Pollard believes that the financial services industry

By None

In a new report, Andrew Pollard says that we are drowning “in a sea of regulation”. Mr. Pollard is a director of Stewart Asset Management Group, an IFA and independent fund manager.

Mr Pollard believes that the financial services industry needs to think about the claim that the mission of the EU, as its leaders say, is to become the world’s “most competitive and dynamic economic area.” Apparently, its task is to encourage competitiveness, create business efficiency and liberate the market for everyone.

Despite the transparency and dynamism brought by technology, there are few EU financial sector companies with more than a toe-hold outside their traditional geographies. Mortgages, loans and pensions are solely the preserve of local providers. Mr Pollard questions why this is the case, and finds that most of the problems lie in the vast array of different regulations. Taxation of income from capital is still far from being a level playing field, and tax rates seriously alter the relative returns on financial assets and are at least as important in restraining investment as transaction and settlement costs.

Mr Pollard examines the capital tax rates across the EU, which vary widely. The capital gains tax rate in Lithuania is 6.3 per cent whereas in Denmark it is 43.8 per cent. The average is 25.8 per cent. Different classes of investment and individual capital allowances also vary. Although differential taxes on residents and non-residents are slowly being swept aside in European Court judgements, any decision to invest across borders is complicated by this uneven tax burden. National capital markets are also far from integrated. There are more than 30 exchanges and some 20 national clearing and settlement institutions. This sort of inefficiency, claims Mr Pollard, may be costing up to 3.2 billion Euros a year.

If Europe really wants more investment, he believes, then its member states need to let go and allow financial institutions to build the systems that take compliance seriously but do not stand in the way of increased competition.

It is accepted that the 60+ regulators and all the associated procedures add hugely to the cost of business. Mr Pollard thinks that it is also unbalanced. He cites the example that the Independent Financial Advisors in the UK must complete at least five examinations and be approved by the FSA’s vetting process, whereas Spain has no such process, and takes no steps at all to regulate this market. The fragmented legislation governing what financial products may offer means limited offshore bonds in Spain, no hedge funds in Belgium, no annuities in Poland and no non-status mortgages in France.

Mr Pollard calls for the private sector to also play its part in improving efficiency and competitiveness by consolidating its own infrastructure, for example by pruning trading platforms and payment, clearing and settlement systems. In order for this to happen, governments and state bodies should not interfere, for they must realise that the days of building national champions are gone, as the UK has had to. International success stories include Spain’s Santander acquisition of Abbey, France’s Pernod Ricard take-over of drinks group Allied Domecq, and China’s Nanjing capture of Rover. A third of UK listed companies are not owned by UK investors. These larger groups, products of a free market, can compete better globally, says Mr Pollard.

His next example is the so-called UCITS (Undertakings for Collective Investment in Transferable Securities), which have to comply with relevant EU laws and hold the European passport. UCITS funds make up 70% of the five trillion Euro worth of assets managed by the European fund industry. There are nearly 29,000 of them in the EU with more than 16% sold on a cross border basis. But the rules are interpreted differently by the member states creating a barrier to an efficient ‘passport’ regime.

UCITS is a qualified success but it took a long time in coming and is now obsolete. The first Directive was issued in 1985 and was met by a wall of national obstacles that took until 2001 to demolish. That pace is just too slow for effective market reform. With its ‘vanilla only’ formula, UCITS doesn’t meet the needs of today’s investors. It is the nature of financial markets to continuously invent new products yet the strait-jacket of UCITS restricts choice, increases compliance costs and has been used to protect domestic companies.

Mr Pollard also highlights some positive moves. He says that MiFID should bring dramatic change to EU markets, harmonising much of the national legislation designed to protect the customer. This harmonisation will cost more in IT systems, training and implementation but it will also make it easier for firms to compete in foreign markets. Another directive, IORP, seeks to provide a framework for institutions which provide pre-funded occupational pensions. It harmonises rules in areas such as prudential supervision, capital adequacy, investment risk management and cross border operations.

Mr Pollard thinks that the success of these directives depends on how much the individual states and regulators ‘gold plate’ their implementation. Each national regulator feels compelled to tamper with Directives, the rules governing their local application and how they are applied. However every minor change presents another obstacle to free trade and undermines the whole point of the exercise.

Mr Pollard asks whether we should care about yet more Brussels Directives. His answer is that in this case we should care a great deal. MiFID has been fast-tracked to deliver reform rather more quickly than the 16 years of procrastination that it took UCITS. Success here will do much to open up financial markets to cross-border competition, but will also demonstrate that Directives can deliver benefits in a commercial timescale.

Financial services providers are nothing if not innovative, believes Mr Pollard, who clearly has faith in the free market. As truly independent private wealth managers, he says, the Stewart Asset Management Group sees great opportunities in pan-European financial services catering for the complex tax and investment needs of our clients. The UK is the financial centre for Europe and should see enhanced competition as an opportunity to develop products and services that are not hamstrung by unnecessary red tape.

Mr Pollard concludes by exhorting regulators to recognize that if we can grow the pot, everyone gets a bigger share, so that in this marketplace, freedom should be allowed to ring.

«