OUR PROFESSION

CONSULTATION RESPONSES

 

 

Our Profession

Consultation Responses

Response to the FSA consultation paper 06/21 Investment Entities Listing Review

AIFA is the trade association that represents UK regulated independent financial advisers (IFAs). Membership of AIFA is voluntary and on a corporate basis. AIFA currently represents over 70% of IFA firms in the UK.

IFA firms are the leading distribution channel for retail financial products in the UK. They generate over 60% of business by monetary value and are the major sector advising and arranging private pensions in the UK. As such, IFAs represent a dominant force in the maintenance of a competitive and dynamic retail financial services market.

In our response, we would like to focus on the question which has the potential to impact directly on our members and their customers, in particular question 15. Our general views is that we do not support the decision to allow overseas investment entities to list under Chapter 14, which would effectively lower the level of consumer protection for investors in these firms. We believe that all investment entities listed in the UK should be subject to the same regulatory standards. We therefore support the AIC's proposals for a unified listing regime for all investment entities which would require the simplification of the chapter 15 regime and the introduction of additional rules for chapter 14 entities.

Of particular concern is the imbalance caused by the proposals which give higher risk investment entities a lighter touch regulatory approach whilst imposing more stringent regulatory requirements on lower risk firms. This will lead to significant consumer risk.

Whilst most IFAs do not make recommendations for direct investment in listed companies, many will offer access to investment trusts via packaged products and collective investment schemes. Our concerns are twofold. Firstly, transparency for both IFAs and consumers - it is essential that consumers and their advisers are aware of the chapter 14 listing regime for overseas investment entities, that they are subject to a lower level of regulation and as such, that they potentially present an increased level of risk to the investor.

Secondly, we are concerned about the competitive effects of the principle that overseas investment entities are subject to a lighter regulatory regime to UK based firms. It would appear that overseas investment entities would have a regulatory advantage over UK based firms. This could lead to a distortion of the market as investment entities begin to set up overseas rather than within the UK, thereby by-passing the need to meet the Chapter 15 requirements.

Very few consumers will be aware of the significant differences between the two listing regimes and will naturally expect the same level of protection as when investing in a UK listed investment company. This puts increased responsibility on our members when advising investors. IFAs will need to be aware of the differences in the two regimes and be able to easily identify which applies. When advising on collective investments, IFAs will have to rely on the fund managers to fully disclose the status of the investment entities held within the fund and correctly describe the associated level of risk. The track record of certain fund managers in this area has not been good as FSA well knows from the splits crisis.

In the event that investors in overseas entities suffer financial loss, any lack of transparency over the listing regime could lead to systemic complaints from investors, as happened with splits, which would inevitably affect consumer confidence in the UK market. The FSA's decision to treat offshore companies differently can therefore not be based on the perceived risk to investors.

FSA is currently espousing the importance of a level playing field in its implementation of the Markets in Financial Instruments Directive. It is proposing to roll out a significant number of the Directive's requirements to non-MiFID firms in the interest of consumer protection as well as ensuring that such firms do not have a competitive advantage over MiFID firms. This brings significant costs to these firms with very limited consumer benefits. We therefore find it difficult to accept that FSA is not using the same guidelines for investment entities listing rules where a level playing field will not only ensure that UK domiciled entities are fairly treated but also and more importantly that consumers can expect the same level of protection.

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