Investment Management Industry

– in the Scottish Parliament at 5:00 pm on 13th January 2010.

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Photo of Trish Godman Trish Godman Labour 5:00 pm, 13th January 2010

The final item of business is a members' business debate on motion S3M-5419, in the name of David Whitton, on Scotland's investment management industry. The debate will be concluded without any question being put.

Motion debated,

That the Parliament recognises the heritage, international standing and continuing success of Scotland's investment management industry; is concerned by the serious risk that the industry's capacity to serve its customers by providing a choice of investment opportunities to meet their needs will be impaired by the proposed Alternative Investment Fund Managers Directive, currently before the European Parliament and the Council of Ministers, and hopes that the directive will be amended so that it is proportionate, practicable and sufficiently flexible and can support the continued provision by companies in Scotland, and in particular areas such as Strathkelvin and Bearsden, of a range of investment vehicles, including investment trusts.

Photo of David Whitton David Whitton Labour 5:01 pm, 13th January 2010

This is the first occasion on which I have been fortunate to hold a members' business debate, and I am grateful to those who signed my motion and have taken the trouble to attend.

The effects of the global financial recession have been discussed many times in the chamber, but I want to draw attention to a particular piece of proposed European legislation that could seriously impact on a successful part of the Scottish financial sector. I am, of course, fully aware that the regulation of financial services is not within the competence of this place; however, since the Parliament's inception, European Union affairs have been recognised as occupying an important place in our deliberations. It is therefore right that we examine the serious implications of this particular proposal.

My concerns relate to the draft alternative investment fund managers directive—better known, perhaps, as the hedge fund directive—that was published by the European Commission last April. I am not here to defend hedge funds, but it is widely accepted that the process was flawed and the usual consultations bypassed to comply with political urgency. At the time, politicians and Parliaments everywhere were facing demands for immediate action to deal with the global financial crisis. However, the failure to consult and the Commission's adoption almost in its entirety of what was essentially the work of one MEP has left a legacy with which member states and the European Parliament are still wrestling. There have been many protests about the directive's content since its publication and I will attempt to explain why it is important that we in the Scottish Parliament should also voice our concerns.

Although it has been characterised as introducing the regulation of hedge funds and private equity, the directive goes much further than that. Its definition of an alternative investment fund would capture a very broad range of companies from large multinationals to small employee-owned operations. Moreover, it does not take into account the regulation that is already in place for the diverse range of companies that lie within the new definition.

The directive is important to Scotland because of its potential impact on our fund management industry. Although the reputation of our financial services industry has been hit hard, criticism has focused primarily on the banking sector. However, Scotland's financial industry is about much more than banks. Indeed, with its history of success and innovation, our investment management sector, the part that will be most affected by this directive, is the jewel in the crown of our financial services.

Let me give the chamber a few quick facts. Scotland has an internationally recognised investment management industry, the origins of which date back to the 19th century. We are one of the leading centres in Europe, with around £500 billion of funds under management. Edinburgh is ranked around 11th in the world for asset management in the City of London's global index. Company names such as Baillie Gifford, Aberdeen Asset Management, Martin Currie, and Standard Life Investments might not be familiar to everyone, but they have huge clout in the industry and in Scotland's and the United Kingdom's economy. If someone wants to raise money in the financial market, they come to Scotland to talk to those companies. They are very influential decision makers and they employ many highly experienced, skilled and dedicated specialists who operate on the world stage.

My primary concern—and I know that it is the industry's primary concern—is about how the new directive, if it is approved unamended, would affect customers such as savers, pension holders and investors. For example, if it is not amended, the directive would restrict asset managers who are investing clients' money outside Europe—say in Asia—and we could see EU investors being denied the opportunity to invest in the areas of greatest growth potential around the world. The proposals would also mean a restructuring of many investment vehicles to no real benefit and at increased cost. Indeed, an evaluation commissioned by the European Parliament estimates that the one-off compliance costs would be in the billions of euros and that there would be significant and permanent increases in transaction costs. It even estimates that the EU's gross domestic product could fall by around 0.1 to 0.2 per cent simply because of the directive.

Much of that would happen because investment would become more difficult and expensive. That makes little sense when economies in Scotland, the UK and the EU are still in the out-patient department, and the investment performance of pension funds and other savings could be hit. According to Scottish Financial Enterprise, the body that represents Scottish financial interests—I am delighted to welcome its chief executive, Owen Kelly, to the chamber this evening—the critical overall weakness of the draft directive is that, while it tries to cover too broad a range of companies and structures, it takes no account of what is already in place. For example, with investment trusts, which were created here in Scotland and now exist in many other countries, it does not recognise the existence of public listed companies as a possible structure. There is confusion over the directive's possible impact on property funds, lack of clarity on hedge funds, and it overlaps with other EU regulations. That is a serious flaw.

If the directive goes through, there could be an impact on financial sector jobs in Scotland, as it would mean that less capital would be available for investment in growing companies at a critical time. To lose jobs in one of the most successful and highly respected parts of our financial services industry at no benefit to the customer and with no improvement to regulation is just plain daft.

Those concerns are widely shared across the EU. My Labour Party colleague Catherine Stihler MEP, as well as MEPs from many other political groups, have raised serious questions about the draft directive. Even as we are debating the directive, I know that Catherine Stihler and other MEPs are questioning Michel Barnier, the new financial services commissioner in Brussels, and raising the matter with him. Under the Swedish presidency that ended in December, member states failed to reach agreement, although the need for revision is not disputed. The Spanish presidency is now looking for a compromise, and the focus is now the European Parliament.

I urge my fellow MSPs to use their influence with their party colleagues in Europe to encourage a rethink on the directive. The EU needs to look at regulations that already apply, and at alternative investment fund structures individually. It should not attempt to enclose a wide range of operations under a one-size-fits-all banner. It needs to understand the skills and expertise in this sector of the industry, and ensure that its proposals do not have a detrimental impact for companies that are operating in Europe. It also needs to look again at whether its proposals will really mean better regulation and a better deal for customers.

I am aware that Mr Swinney, the Cabinet Secretary for Finance and Sustainable Growth, has been engaged on the issue and has written to the Brussels authorities; I welcome that, as I know the industry does. I hope that Jim Mather, the Minister for Enterprise, Energy and Tourism, will give us an update on progress. A rethink is under way, but the deadline for amendments to the directive is in seven days' time, on 21 January. I know that Catherine Stihler is on the case, but we need to keep an eye on it, and a strong message from the Parliament tonight that we want changes to be made to protect Scotland's asset management sector would add weight to the campaign.

Photo of Nigel Don Nigel Don Scottish National Party 5:09 pm, 13th January 2010

I congratulate Dave Whitton on bringing the motion to us and I note its urgency. I pass on the apologies of my colleague Joe FitzPatrick, whom members might have been expecting to speak but who unfortunately had to disappear to his constituency on urgent business. His constituency is in Dundee, which is also part of my region and which is home to one of the United Kingdom's largest generalist investment trusts—the Alliance Trust, which was founded in 1883 and is one of the 10 largest companies based in Scotland, as well as being listed in the FTSE 100. It currently manages more than £2 billion and employs about 300 people. In 1982, my home city of Aberdeen generated the previously mentioned Aberdeen Asset Management, which employs about 1,800 people in 31 offices across 24 countries. I mention those businesses partly to localise them in my region but also to make the point, if it is necessary to do so, that Scotland has major players in international finance.

I will discuss briefly the draft alternative investment fund managers directive, as it is important that we put a little flesh on that. As drafted, it will cover all non-UCITS funds. For those who are not familiar with the issue, UCITS stands for undertakings for collective investment in transferable securities. The draft directive covers investment trusts, private equity funds, hedge funds and property funds. As the previous speaker pointed out, that is a pretty wide-ranging set of institutions with different characteristics. A single draft directive that is designed to cover all those is absolutely bound to fail. It is therefore not surprising that the issue demands our attention.

My friend and colleague Alyn Smith MEP is on the case. He is a member of the European Parliament committee that is considering the fall-out from the financial crisis. His view is that the issues are now being understood and worked on and that the necessary amendments are being brought forth. I sincerely hope that that proves to be the case. However, it is important that we keep our eye on the ball and that we ensure that our colleagues in Europe do everything that they can to protect what is an extremely important part of the Scottish economy.

Photo of Gavin Brown Gavin Brown Conservative 5:12 pm, 13th January 2010

I congratulate David Whitton on securing this important and timely debate. I also thank Scottish Financial Enterprise for all its work in getting the matter on the agenda. As we heard from Mr Whitton, we should be proud of our financial services industry. He made the valid point that about 50 per cent of that industry is not banking. We have pensions, insurance, asset servicing and, of course, tonight's topic, which is investment management.

David Whitton set out the figures firmly and starkly—about £500 billion-worth of funds are managed directly here in Scotland, and Edinburgh alone is ranked 15th in the world as a place in which to conduct investment management business. Investment trusts were invented here; they are a Scottish success story and the origins go back all the way to the 19th century.

As has been said, the challenge that we face, and the reason for this urgent debate, is the draft alternative investment fund managers directive. That draft directive was rushed—always a bad start—and was not subject to the usual consultation procedures, which exist for good reasons. It is also based on a report that was prepared by a single member of the European Parliament. When we combine those three factors, we have an extremely blunt instrument.

It has been mentioned that the draft directive is nicknamed "the hedge fund directive". The nickname says it all. The objective and purpose was to be seen to be doing something about hedge funds. The directive certainly will attack hedge funds, but because of the wide definition that it uses, it also inadvertently captures the investment trust industry and could, as a consequence, cause serious damage to the Scottish economy. Bill Jamieson of The Scotsman put it rightly when he said that investment trusts were

"an innocent bystander to the events that rocked the banking system of America and Europe."

The negatives of the draft directive have been outlined already: the fact that it restricts investment trusts from investing in Asia, where the recovery is gaining momentum, which means that investors would miss out on potential gains there; the sheer cost of restructuring investment vehicles, which David Whitton put at billions of euros, with little benefit for investors, savers or pension funds; the fact that it duplicates not just one, but several existing sets of regulations; and the fact that it could, in effect, prevent the sector from having any new product launches or expansion. That is bad news for the industry and, most important, for the customers—pension holders, pension funds and individual investors. It restricts choice and access to areas of investment growth.

We welcome the movement from the European Parliament thus far and we welcome the revisions that happened during the Swedish presidency, but we ask that the same direction of travel continue during the Spanish presidency. As other members have, I call on all MEPs across the spectrum to influence a rethink on the draft directive.

The origins of the financial crisis were complex, many and varied, but one of the key factors was a total lack of diligence by banks, regulators, companies and others. It would be doubly awful if a directive with its own total lack of diligence were to inflict yet more pain upon the Scottish economy.

Photo of Sarah Boyack Sarah Boyack Labour 5:16 pm, 13th January 2010

I congratulate David Whitton on securing the debate. [Interruption.] I will move, because my microphone is not working—there is a minor gremlin there.

As colleagues have said, this is a hugely important issue, which I remember discussing with Catherine Stihler several months ago—not long after the European elections. She was seized of the importance of getting clear Scottish representation on the issue. As colleagues have said, the draft directive would be seriously damaging to the industry in Scotland.

I know from the briefing that we had from Scottish Financial Enterprise that it is, with the UK financial services industry, deeply critical of the proposals and has alerted representatives to the dangers that are inherent in the proposals.

It is vital that we stand up for our financial services industry which, as colleagues have said, is absolutely crucial to Scotland's economy. As the MSP for Edinburgh Central, I am deeply aware of the importance of the quality and range of jobs in our financial services industry. As we have said in debates about banking, the industry does not just provide the top-line jobs, but supports a raft of other high-quality jobs in the city—such as in the legal services industry, which is related to the financial services industry, and in the hotel and catering sector—that are vital to the strength of the economy as a whole.

Seven of the top 20 Scottish companies are in the financial services sector, so it really is an important sector that we would lose at our peril. Colleagues have talked about the importance of the industry; it represents 6 per cent of our gross domestic product—a significant proportion of the country's wealth.

We need changes to be made to the proposals. As an Edinburgh MSP, I am acutely aware that Edinburgh is a hugely successful centre. We need to talk up the success that we have had in the city and we need to help to sustain it through whatever measures we can use, for example in respect of education and housing developments.

Major life companies, such as Scottish Widows and Standard Life, are here because they want to be here. They have chosen to be in this city and we have to keep encouraging them to be here. It is not just about the big companies that we all know. In addition to the major life companies are related asset managers and smaller, but successful, specialists who all thrive as part of a constituency here in Edinburgh. We need to ensure that those companies are supported. We must take seriously the real fears that this directive could damage our companies by imposing restrictions on their business.

The global financial services index shows our competitors rushing up that scale and, as other members have commented, it is the countries that, ironically, our companies would be restricted in trading with that are doing well. China, in particular, is doing well and is potentially a major threat. The directive must be changed.

David Whitton outlined very effectively the new barriers—the increased costs and bureaucracy—that would be created. As Gavin Brown observed, there has not even been proper consultation on the draft directive. When we are formulating incredibly complex regulations that aim to regulate an incredibly complex industry, the last thing we want is to get them wrong and to create unintended consequences.

I am worried about the impact of the directive and hope that decent changes will be made to it. It has been an incredibly tough year across Scotland for jobs, particularly in Edinburgh, not just because of the recession but because of the fallout for jobs in the banking sector. Although some of those have been replaced by welcome new jobs, we would let more jobs go at our peril in what has been a thriving sector. The issue is not just the jobs but, crucially, the people who have savings, investments and pensions in those companies. We need to look out for them as well.

For a number of reasons, we need to work together. This is one of those occasions on which there is a strong feeling across the chamber that we are all singing from the same hymn sheet. I hope that we can send a powerful message to Europe, and I am sure that the minister will have comments to make about what more can be done to lobby. I hope that the cross-party support that exists will send a clear message from Scotland that the directive must be changed. It was drawn up in haste and we will repent it at our leisure. I hope that the strong voice with which we are speaking tonight will have an impact in Brussels.

Photo of Iain Smith Iain Smith Liberal Democrat 5:21 pm, 13th January 2010

I add my congratulations to David Whitton on his securing this members' business debate on an extremely important subject. I also thank him for the informed and valuable speech that he made in opening the debate. As has often been said, one of the problems of speaking in members' business debates is that, when there is consensus, members are left with very little to say towards the end of the debate. I am sure that the minister will have plenty to say, but I will try to add a little to what has already been said.

We are all aware of the importance of the investment management sector to the Scottish economy. More than 3,000 people are employed in the sector in Scotland and we manage £468 billion of assets here, of which £251 billion is invested globally in equities and £135 billion is invested in bonds. We have a broad sector with extensive experience in different areas. As several members have said, we invented the investment trust sector.

However, there are other areas where we are also very strong, which may be impacted on by the proposal. It is important to recognise that, although we need regulation—regulation that applies across Europe ensures wider protection than regulation that applies only in the United Kingdom—that regulation must be proportionate and focused on the end user. Part of the problem with the draft directive is that it does not address the impact that the regulation might have on the end user—the person who owns the shares in the investment trust and who relies on them for an income. I am thinking of the consumers, the pensioners and the other people who rely on that income. The directive does not address the implication for the ability of the investment trusts to make money to provide that service to the end consumer. That is where it is signally failing in its responsibility to be proportionate regulation. It is not proportionate; it is overly burdensome, it will add unnecessary costs to the sectors and it will not deliver what is required.

It is valuable that we have cross-party support for what the motion proposes not just in Scotland, but across Europe and in the United Kingdom. I am slightly concerned that the reporter to the European Parliament's Committee on Economic and Monetary Affairs has come up with a report that takes the legislation backwards slightly from where the Swedish presidency had got it. I hope that that situation will be reversed when the directive goes before the committee. We have good sources not only on the committee. My colleague, George Lyon, is also involved and is working with Sharon Bowles, the chairman of the committee and a Liberal Democrat member of the European Parliament, to ensure that the concerns of the Scottish investment trust industry, as well as those of the wider UK industry, are taken on board in the final debate.

It is important not to lose sight of the need to continue that lobbying. Perhaps the minister can give us some indication of what the Scottish Government has been doing and of how successful it has been to date in its lobbying. What discussions has the Scottish Government been having with the UK Government—including the Treasury—and the Financial Services Authority regarding their lobbying? The Treasury has indicated its concern that the proposed directive goes beyond what is necessary.

Bad examples always make bad laws—that is a well-known adage. In this case, people have been rushing to be seen to be doing something rather than concentrating on getting things right. The failure to consult properly before introducing the directive is unacceptable. Perhaps the proposed directive should be withdrawn and properly consulted on, rather than just amended. We must do all that we can at least to ensure that the directive is amended in the right direction.

Again, I congratulate David Whitton on securing the debate.

Photo of Jim Mather Jim Mather Scottish National Party 5:25 pm, 13th January 2010

I congratulate David Whitton on his first members' business debate and on his expert assessment of the impact of the proposed alternative investment fund managers directive. It is an important issue. I appreciate the contributions of members from all parts of the chamber, and I am delighted that we have full support from all parties.

The current financial crisis and the many complex issues that led to it have taught us hard lessons about the need to understand and mitigate risk, which we all accept. The Scottish Government is supportive of measures to increase transparency and to avoid difficulties that occur in one country impacting on others. However, at the same time, we must ensure that our industry can remain successful and offer the services and choices that are demanded by consumers.

The assessment that was made during the debate, which started by noting the failure to consult, is that the directive does not recognise the level of current regulation and does not capture the broad range of companies that operate in the sector. Indeed, it would limit the potential that Scotland has to do much more and attract more business from elsewhere, as well as to invest appropriately overseas. In combination with that, there are issues to do with forced restructuring, increased costs and duplication. Iain Smith spoke about proportionality, and we note the impacts on performance for the end-user investor, which provide the case for the eloquent call that has been made for a rethink on the proposed directive—particularly in what is such a significant sector.

David Whitton is right to point out that the sector contains more than just banking. Fund and asset management is very much the jewel in the crown, but it sits alongside life and pensions and our actuarial, legal, accounting, audit, arbitration and mediation capabilities, which make Scotland an excellent location for investment.

Sarah Boyack spoke about the need for us to stand up for this sector of ours, which has a good track record. I was taken with the fact that Aberdeen Asset Management rewarded those who lost out on split capital trusts, thus reinforcing that image. For us, the sector is of enormous significance, and it is a success story, as Gavin Brown said—current and historical. That is because people try hard. The vigilance and the action taken by Scottish Financial Enterprise are helping with that.

The rush in introducing the proposed legislation without the normal checks and balances, together with the fact that it was sourced from one person, means that it is a blunt instrument, which could strike innocent bystanders here in Scotland. We must therefore be vociferous in our response and our action. That is exactly the case. In October, the Cabinet Secretary for Finance and Sustainable Growth wrote to Commissioner McCreevy supporting the misgivings that had been expressed by SFE and others about the possible damage to investors and pension holders in the EU that would arise if amendments were not made to the draft directive. Mr Swinney stressed that, unless the proposed directive was amended, the interests of those investors and the companies that serve them would be materially damaged, to no evident benefit. I do not want such an own goal to be scored on our watch. Hence, we have already activated our MEPs on the matter, as is evident from other members' speeches.

On 28 October, Mr Swinney met SFE to stress the Scottish Government's support for the industry's efforts in lobbying the EU on the matter.

He also stressed the need to present European legislators with amendments to the draft directive. I am delighted that SFE has done that so professionally. What it has done will help the directive not to place burdensome overheads on our sector, including our AIFs, which patently do not pose a systemic risk or endanger the integrity of markets. Iain Smith was right in his comment on the proportionality principle, particularly given the chemistry of unintended consequences. Proportionality has to be hardwired into the model.

SFE believes that preserving choice and access to global investment opportunities at an affordable cost to investors while putting in place appropriate and proportionate safeguards is exactly the right thing to do and will lead to a robust and fair investment environment. We all agree. SFE believes that its proposed amendments are consistent with creating and preserving that environment. We all agree with that, too. Equally, SFE believes that it is inappropriate for the European Parliament to frustrate or prohibit investment opportunities in circumstances where there is adequate disclosure of the risks and rewards available. David Whitton outlined that in his speech. Again, we agree.

The key issue, which was voiced right from the start of the financial crisis, is the need not to go overboard with regulation, particularly regulation that acts as a blunt instrument. We need to ensure that we put in place regulation that has the scope and compatibility to maintain economic stability and growth.

Photo of David Whitton David Whitton Labour

As I pointed out, the deadline for amendments is 21 January. Does the cabinet secretary plan to write again to reinforce the point? He wrote in October, but will he do so again to back SFE's amendments?

Photo of Jim Mather Jim Mather Scottish National Party

It would be seemly for us to write to say that the debate has taken place and that consensus on the matter is total. We will do that. We will say that we have cross-party judgment on the issue and that we back SFE and its amendments to the hilt. SFE and its members have worked diligently to produce a set of amendments to the directive. We are delighted to support the motion. Along with other parties, we want to provide a clear and positive message to the EU on this crucial issue. We will do that in writing.

Meeting closed at 17:32.