Investment Managers Warn Of 'Misplaced' Financial Regulations
Tuesday, November 29, 2011

In a speech to The Lawyer’s recent Funds Summit, Richard Saunders, Chief Executive of the UK Investment Management Association (IMA), focused on the high volume of financial regulations now being introduced, particularly at European level, many of which are the result of a 'misplaced analysis' of the financial crisis.

Saunders said: “The wave of European legislation is breaking. At last count I made it 35 separate legislative measures. Much of it is good, for example the forthcoming Packaged Retail Investment Products initiative and many parts of the new Markets in Financial Instruments Directive (MiFID), but others, such as the proposed financial transactions tax and some of the detailed provisions in MiFID, will have unintended consequences and will not achieve their objectives.”

He explained that “it is partly to do with the sheer volume of measures now coming out – the European Commission are not giving themselves enough time to get each measure right. But there is also an element of misplaced analysis of the financial crisis – an analysis that has underplayed the role of the banks and overplayed that of hedge funds, notwithstanding that it was the banks and not hedge funds which created the crisis.”

A mission to protect consumers has also, he added, been misused as the basis for some of the measures, while “policy-makers’ less than perfect understanding of the markets had led to ill-judged proposals, not least of which is the current proposal for a financial transactions tax (FTT). Far from being a tax on the City of London, this would be a tax on individual savers.”

Saunders commented that: “Although the stated intention behind the FTT is to increase taxation of financial institutions, it will miss its targets. It will be customers, not banks, who will bear the cost. And it risks a flight of trading out of the European Union (EU).”

He also saw the powers to be given to the European Securities and Markets Authority to ban short selling as “another example of misplaced targeting of hedge funds".

"Short sellers don’t create volatility, though they may profit from it. Indeed IMA research has shown that short selling bans don’t have any impact on volatility, neither do they lead to falling prices,” he observed.

“Much of what is now on the table would be damaging to the EU economy as a whole,” Saunders concluded. “It would impact the UK particularly hard, but I for one do not buy the theory that it is a concerted plan to undermine London as a financial centre. Rather I believe that the problems arise from too much haste and insufficient consultation.”

While the need for reform should not be ignored, he believed, “it should be appropriate and proportionate".

"Education of and engagement with policy-makers therefore remains critical,” he said.