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Shake-up could hamper independent players

By Ian Fraser

Sunday Herald

December 5th, 2004

Leading fund managers say the governments investment overhaul may damage Scotland’s financial services sector. Ian Fraser reports

THE government’s long-awaited shake-up of the way investment products are sold will handicap financial services businesses in Scotland, according to a group of Scotland’s leading independent asset management companies.

By the same token, the independent fund management firms – which arguably represent the bedrock of Scotland’s ambitions to be a global financial services centre – claim the amended system is going to benefit their large bank and life insurance company-owned rivals.

Fund managers questioned by the Sunday Herald expressed concern that the new rules on distribution – sometimes known as depolarisation – will place independent firms such as their own at a disadvantage to larger rivals, because the latter generally have access to well-honed distribution networks through their bank or insurer parents.

Mark Tyndall, chief executive of Artemis Investment Management, says: “I think the whole notion of the tied salesman and even the multi-tied salesman that the government is moving towards is flawed.”

Last week, the government announced a shake-up of how financial products are sold in the UK. Under the new regime, banks and building societies will be allowed to sell rivals’ products alongside their own.

The legislation, intended to give consumers greater choice and better financial advice, swept away changes introduced in 1988 that forced financial advisers to be either fully “independent” – meaning they were expected to look across the market and recommend only products they believed to be in their clients’ best interests) or “tied” – meaning they were able to sell only one company’s products).

But Tyndall says: “Paradoxically [depolarisation] suits the big players. I sometimes think that the big businesses like government intervention and regulation because it gives them a source of competitive advantage over small players.

“Regulation can be a barrier to entry and is not necessarily an advantage to the investor. The big players tend to colonise the consulting process and ensure that what comes out is favourable to them and as unfavourable as possible to the competitors who are biting away at their ankles.”

Willie Watt, chief executive of Edinburgh-based “big boutique” Martin Currie, says: “I do believe there is a creeping burden that is making it harder to run an independent business.”

The sheer volume of regulatory change has also been creating a major headache for independent fund management businesses.

Tyndall says: “[What can be really harmful is] the uncertainty about what’s going to happen next. No sooner have you got everyone geared for a particular compliance regime when something else comes along.

“For example, what you can do in advertising has changed. And just as soon as you’ve got everyone trained to as to what is a legitimate advert, the rules change again. If that keeps happening, you get tired of learning new things. You don’t pay enough attention and you start to think there’s no point in learning about this.

However, Alex Callander, joint senior partner of Baillie Gifford, detects signs that the regulatory pendulum is starting to swing back after a recent period of intensive consultation and change.

He says: “There is some evidence that the pendulum has gone to the far extreme and is beginning to swing back. For example CP176, the FSA’s proposals on unbundling, have become much more pragmatic, and more generally the FSA is saying that it expects to have half as many consultations this year as it had last year ? All of which is to be welcomed. But undoubtedly hedge funds have a much easier time of it than the rest of us.”

He also welcomes the fact that the FSA has intervened to overturn the EU capital adequacy proposals, which he says would have been “ridiculous for asset managers because they were designed for banks”.

Alan Harden, who stepped in as chief executive of Dundeebased Alliance Trusts in January 2004, believes UK regulation must be seen in a global context.

“I agree that there is a bit of regulatory fatigue, and there’s no doubt they are in certain cases using a sledgehammer to crack a nut. But at the end of the day [the FSA] really is very low-touch compared with other regulators worldwide.”

Jim Fisher, founder and managing director of Glasgow-based fund management boutique Saracen, says: “The advent of risk-based regulation means that small firms such as our own, with fairly standard type products, are not regulated as heavily as in the days of the Investment Management Regulatory Organisation [whose powers were subsumed by the FSA in 2001]. It’s taken the burden off the smaller firm, which is good.”

But Fisher does believe that tight regulatory controls over what plc chief executives can and cannot tell their investors mean that there is now little to be gained from investment managers having formal meetings with companies – even though this is traditionally seen as a cornerstone of successful investing.

He says: “[Meetings with management] are much less important now, except for small cap companies, where there’s a lack of research, and where not much is known about the management.”

Asked if there was a danger that an investor would receive nothing but “spin” from a meeting with a company’s chief executive or finance director, Fisher says: “Yes, you might just get spin.

“The regulation has become more important and they know what they can and can’t say. They’re very conscious of their positions as company directors and just stick to the script.”

Tyndall disagrees, and says that meetings with management are more important – except in multinationals where opportunities to gain new insight can be very remote.

He says: “If you’re investing in small companies or very focused businesses then it is well worth spending quite a bit of time with the management. It’s also worth doing with companies that the stock market has given up on. In such cases it’s very, very helpful to meet the guy who is fighting to turn the thing around.”

Most of the participants in the round table event – held in the Scotch Malt Whisky Society in Edinburgh’s Queen Street – say that being based in Scotland was an advantage when marketing their investment expertise to a global audience.

Watt says: “Scotland has a heritage of being perceived as somewhere where they do investment well. I think we should use that and project that positively. You can do that without wrapping yourself in tartan and going down an overly folksy caricature of what we do.

Callander adds: “There is also some advantage in having a critical mass of fund managers: you probably get better access to companies than you would otherwise. And there is also an advantage in term of cost.”

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