My speech at the IMA annual dinner, London – 22 May 2007
- It’s a great pleasure to be here this evening.
- I would like to begin by thanking Simon for that introduction, and for his contribution as IMA Chairman over the last two years.
- He leaves the IMA in a strong position, and well established – I’d like to congratulate you all on your fifth anniversary earlier this year. And he leaves the IMA with an increasingly strong relationship with Government, and a relationship that is seeing real benefits, both for us and for you.
- I’m pleased that Simon will continue to work with us, through his membership of the Chancellor’s High Level Group on city competitiveness. And I’m also very pleased to welcome Robert Jenkins as the IMA’s new Chairman.
- Robert and I have already spoken about the need to maintain the strong relationship between the IMA and the Government over the coming years. And it’s that relationship that I want to focus on this evening.
The UK asset management industry
- That relationship is crucial, because it allows the Government to understand the UK’s asset management industry. And this is an industry that is vital to our economy.
- It looks after assets worth over £3 trillion – that’s £50,000 for every person in the UK – and contributes around three quarters of a percent of UK GDP. And the industry is also a key link in the investment chain, giving investors access to investment opportunities, and firms access to capital.
- That’s why the Government needs to understand the asset management industry, as well as your concerns and challenges. And there are challenges to face – in asset management as elsewhere, the UK faces competition from abroad.
- The world economy today is globalised and fast moving. Increasing internationalisation of markets and technological change present new opportunities and challenges. And in all sectors of our economy, from manufacturing to financial services, we’re seeing change around us.
- We’re seeing new entrants from abroad locating in the UK. Four major Indian banks have already established operations here, and this month a fifth – Punjab National Bank – announced that it will open its international headquarters in London this summer. And there’s investment from India, and other new countries, in high-tech sectors too – like biotechnology and software.
- We’re also seeing UK-based companies off-shoring parts of their operations. Aviva pioneered the use of high quality off-shoring, to the benefit of both its customers and its shareholders.
- And we’re seeing emerging financial centres, like Shanghai, Mumbai and Dubai, aggressively marketing themselves to compete with London and New York.
- We are determined to ensure that the UK remains competitive. But our challenge is not to stand in the way of these changes – that’s not the way to compete.
- Our challenge, and our goal, is to ensure that the UK’s economy, and our asset management industry – the third largest in the world and one of the strongest – continues to grow from strength to strength.
- So while we accept that things will change, and that we can’t expect to fight that, we need to focus on ensuring the UK’s competitiveness, and on enhancing and capitalising upon the UK’s many advantages.
- And doing so means creating the best possible environment for the asset management industry in the UK. Here, the Government and industry can work together – and we are already doing so.
High Level Group
- We set up our High Level Group to allow us to work with members of the financial services industry – so that we can work together to find the best ways to meet the challenges of global competition, and to promote the City throughout the world.
- That means looking at a range of themes – and the group has already identified asset management as a key area to focus upon. At our meeting earlier this month, we talked about the proposal to facilitate paperless settlements that we believe could save the asset management industry up to £290 million a year. I want to come on to that later.
- We also talked about the work of Lord Levene and the London Insurance Market Review Group, on modernising the wholesale insurance market. And we announced the launch of a prospectus to set up a new, world-class International Centre for Financial Regulation here in London.
Government and the IMA working together: Tax
- On both of those issues, the Government is working closely with the financial services sector.
- And in the same way, we’ve also been working closely with the IMA. We’ve been developing an even stronger relationship, and a better understanding of the industry. And that relationship is bringing concrete benefits.
- I’m particularly pleased by the closer working that we’ve been able to develop on the taxation of funds, and the steps forward that we’ve taken over the twelve months since your last AGM.
- When I met Robert recently, he asked what most concerned me. I told him that it was only finding out about problems that are developing in the industry when it’s too late. Through working together more closely, we can try to avoid that happening. But we can also avoid it by groups like the IMA bringing issues to our attention.
- So I very much welcomed the IMA proactively commissioning KPMG to report on how taxation was affecting the competitiveness of UK funds – in response to your concerns that the tax regime was driving funds abroad.
- This is clearly as important an issue to the Government as it is to the industry. The KPMG report provided an opportunity to look at it in detail, and I wanted to make sure that we could do that. So I announced in December that we would set up a working group between IMA, the Treasury and HMRC, to consider the report’s recommendations.
- I made clear in December that I couldn’t promise change on every issue raised by the KPMG report – and that’s still true. But I did promise we would take these issues seriously. And five months on, I’m pleased with the progress we’ve made.
- The working group has now led to the development of four workstreams. The first has focussed on improving consultation, trust and understanding between Government and industry; the second on addressing the inability of AIFs to invest tax efficiently in property; and the third on looking at Schedule 19. And the final workstream is covering the distinction between trading and investment, and the issue of tax exemption for funds.
- I’m pleased to report that all four workstreams are moving forwards. And we’re already seeing some firm outputs – like the announcement at Budget of a framework for the future taxation of Property Authorised Investment Funds.
- Of course, there’s still detail to be developed. But that framework made clear that we will give these funds tax parity with UK-REITs, allowing them to compete on a level playing field. That was a huge step forward, and so it was a success on policy – Dick Saunders called it the “first fruit” of the dialogue that followed the KPMG report, and like him I hope that more will follow.
- It was also a success in terms of how we reached that policy. There was a regular dialogue; meetings at short notice; a willingness to engage and an openness that I, and my officials, really appreciated. Without that collaboration, we might not have made the progress that we have. I hope that we can carry that through to other areas, and I’m sure that we’ll be able to as we develop the detail of how the framework for property AIFs will operate.
- We’ve now got a more technical group looking at that detail, and we’re confident of having a new regime in place by next April. The next step towards that aim will be the publication of a technical paper this summer, and I look forward to your engagement and involvement on that.
- As well as on property funds, we’re also seeing progress on our other workstreams. On improving consultation, trust and understanding between Govt and industry, we’re well on the way to developing an action plan and we plan to complete that work by autumn. On Schedule 19, we’re getting a better understanding of the ways in which we might move forwards. And on the fourth workstream, although the issues are wide-ranging and complex, we have engaged in a useful debate that will continue over the coming months.
Government and the IMA working together: Regulation
- But it’s not just on tax that we’ve been working together. For a number of years now, we’ve also been finding ways of reducing the regulation that the asset management industry deals with.
- Effective regulation – well-regulated markets that give UK firms a reputational advantage, but proportionate regulation that keeps burdens on them low – is one of the UK’s main advantages against its competitors in financial services. And it’s an advantage that we need to maintain.
- The Government has always recognised that – it’s one of the reasons why we overhauled the regulatory framework between 1997 and 2001, establishing the FSA in the place of nine previous regulators. And it’s why we continue to resist regulation that we see as unnecessary.
- We’re also willing to listen to ideas from others – like the IMA – about how we can reduce regulation. And so I was delighted by the publication this month of the consultation on facilitating paperless settlements that we discussed at the High Level Group – an idea that was proposed by the IMA, and has since been developed by the Treasury.
- Again, that consultation shows our willingness to take on suggestions and, on regulation as well as on tax, that can achieve concrete results by working together. Now we want to hear the IMA’s views on the detail of the proposal, to ensure that it can be made to work effectively – and I’m sure that we will.
- In Europe too, joint working between the Government and the IMA has been vital. The IMA played a major role in driving the debate on reform of UCITS in the early stages. And more recently, co-operation between the asset management industry and the Government has helped us to win arguments in Europe and advance these proposals further.
- We now have what I believe is an excellent package of reform proposals on the table. Both we in Government and you in the industry now have to keep up that hard work to ensure that the Commission’s proposals are implemented without being watered down.
Working together in future
- That’s one example of the challenges that remain, and there are others. I’ve talked about working out the detail on property AIFs, and on paperless settlements. There are also issues to resolve on Schedule 19 and, in the medium term, about the boundary between trading and investment. And we won’t agree on everything.
- But by working together, I hope – and believe – that we can overcome these challenges, and that the strong relationship we’ve developed can benefit us both.
- And because we’ve set up the right processes and principles to take this work forward in future, I can reassure you that there will be no reduction in the Government’s commitment to this agenda.
- We now know that the Chancellor will become the next Labour leader, and the next Prime Minister, next month. I have seen first hand his commitment to the competitiveness of the UK economy and the City – that will continue, and so will the High Level Group that he’s established.
- And whatever the changes of personnel, the Government will be strongly committed to ensuring the UK’s competitiveness in asset management; committed to maintaining the strong position that you have developed for this industry; and committed to our relationship with the IMA.
The Investment chain
- So in tax and regulation, we’ve identified principles that we will continue to follow through. And we’ve done the same in other areas, too. In a speech earlier this year, I set out the actions we have taken since 1997 to promote long-term investment and strengthen the investment chain – the chain of relationships that links investors with their investments in companies, through savings products, institutional investors and fund managers.
- We need the investment chain to work efficiently to ensure the effective allocation of capital, and so the UK’s productivity and long-term economic performance. And we’ve done a great deal, building on the work of the previous Government, to ensure that the chain is working. But we believe more can be done.
- And one area where we want to do more is in ensuring greater accountability for the exercise of voting rights attached to shares.
- There are clear reasons for the Government to promote voting disclosure: it minimises the potential for conflict of interests within institutional shareholders, and provides the necessary transparency for anyone who is concerned about them. And for pension fund trustees who use engagement as a criteria for selecting fund managers, it allows them to see the actual voting records of individual managers.
- That general principle – greater accountability – is widely accepted. Of course, we recognise that there are some specific concerns – particular problems that voting disclosure is thought to cause. But during the passage of the Companies Act, we debated whether those concerns outweighed the arguments to generally disclose, and decided that they did not.
- Our challenge now is to develop a voluntary ‘comply or explain’ code that will allow non-disclosure where there are valid reasons, but that will provide for disclosure in most situations, where those specific problems don’t exist.
- The Government believes a voluntary code is the best way forward on this issue, and so will give the industry the time it needs to develop that. We expect the industry to do so – and so I’m encouraged by the indication from the ISC that this code should be in place by the end of the summer.
- So on voting disclosure – as on reducing the regulation and improving the tax environment of the asset management industry – we want to continue to move forward together. And we want to do so by working with the asset management industry as a whole, and with the IMA specifically.
- By working closely, we have delivered some clear outcomes already and – more importantly – a positive relationship for the future.
- Again, I’d like to thank Simon for him contribution to that over the past few years, and welcome Robert’s commitment to it.
- I’m confident that if we can maintain that strong relationship, we can continue to deliver positive outcomes for both the Government and the industry in the years to come. Thank you