Sent by email:
27 November 2012DearSirs
We welcome the opportunity to respond to the issues raised in the Consultation on a Possible Recovery and Resolution Framework for Financial Institutions other than Banks.
By way of background, Baillie Gifford & Co is an independent investment management firm based in Edinburgh. We manage about €103bn, almost wholly on behalf of institutional clients, and employ about 744 staff. The firm is a private partnership established under the laws of Scotland and includes a group of companies which are authorised and regulated by the Financial Services Authority.
Baillie Gifford and Co is registered in the Interest Representative Register and our ID number is 2196343364-01. We acknowledge our response will be published.
The Baillie Gifford group provides one essential product to its clients, namely fund management. Whilst different legal structures have been established to accommodate various different client types, the essential services remain the same.
The parent company, Baillie Gifford & Co and four of its subsidiaries are limited licence investment firms1 (LLIFs). Another firm is a UCITS Firm, and we expect at least one firm within the group will be designated an AIFM, under the Alternative Investment Fund Managers Directive. It would be completely disproportionate to apply the resolution regime to asset managers, who are not systemically important, do not extend credit, accept deposits or deal on their own account. No asset manager failed as a result of the crisis and there was no provision of any government support unlike the banks.
Another subsidiary Baillie Gifford Life Ltd provides investment only insurance services to institutional clients by way of unit linked life funds. The key point is the ability to wind down the business of the company in an orderly fashion. It does not have systemic implications and therefore there is no justification for including it in a comprehensive resolution regime.
The current consultation considers what arrangements could be needed to prevent financial institutions’ failure from compromising financial stability, the focus being on the ‘extraordinary measures which could be necessary to contain the fallout from failure.’ There is no justification for subjecting asset managers to such a regime by virtue of their business models. Investment management firms are not systemically important given that they merely act as agent for their clients and not on own account. Clients’ assets are invariably segregated and placed with a custodian, thus are not affected by the firm’s insolvency. Moreover, their business models do not involve provision of credit or acceptance of deposits, which makes it clear they cannot be considered potential sources of systemic risk.
We have limited our response below, to expanding on this key theme, of not extending the Recovery and Resolution Frameworkto asset managers.
RESPONSE TO CONSULTATION QUESTIONS
4. Insurance and Reinsurance Firms
- Are the resolution tools applicable to traditional insurance considered above adequate? Should their articulation and application be further specified and harmonised at EU-level?
Yes, the current resolution tools applicable to traditional insurance are adequate. No, there is no need to articulate or further specify and harmonise their application at EU-level.
We agree with the assessment of the International Association of Insurance Supervisors, that traditional insurance business does not generate or transmit systemic risk across the financial system. Insurance policies are generally long term; insolvency of an insurance company tends to take place over a longer time periodallowingorderly wind down of the business. The Solvency II regime should already adequately address the risks posed by insurance activities without another layer of regulation needing to be implemented.
With reference to our insurance subsidiary, which provides investment only insurance services to institutional clients by way of unit linked life funds,the key points are that as a unit linked life insurer, its investment activities are relatively straightforward and the types of investments it can hold are restricted by current regulationand that the business of the company is set up in such a way that it may be wound down in an orderly fashion. It does not have systemic implications and therefore there is no justification for including it in a comprehensive resolution regime.
- Do you think that a further framework of measures and powers for authorities, additional to those already applicable to insurers, to resolve systemically relevant insurance companies is needed at EU level?
No, as detailed in our response to question 1, we do not think a further framework of measures and powers is required.
5.2 Other nonbank financial institutions
- Do you think that recovery and resolution tools and powers other than existing insolvency rules should be introduced also for other nonbank financial institutions?
The current Commission legislative proposal published in June 2012, ‘establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directives 77/91/EEC and 82/891/EC, Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC and 2011/35/EC and Regulation (EU) No 1093/2010’ does not apply to investment firms that are not authorised to provide the investment services listed in points 3 and 6 of Section A of Annex I to Directive 2004/39/EC (being dealing on own account and underwriting or placing on a firm commitment basis) – i.e. limited licence investment firms, (LLIFs).
There is no justification for extending the regime to LLIFs or the funds they manage.LLIFs are not systemically important either on an entity or sector basis, and merely act as agents for their clients and their activities do not extend to the provision of credit, the acceptance of deposits or dealing on their own account. Any client money that is held is segregated from the assets of the manager and would not be impacted in the event of any financial difficulty being encountered by the firm.
As an agency business model, a LLIF already maintains a comprehensive wind down plan as part of its current prudential regime. Under this, an assessment of relevant contract terms and other firm commitments is undertaken with a view to ensuring the adequacy of resources, including capital, to effect the orderly termination of contracts with clients and wind down of the entity.
We see no justification for including LLIFs in a legislative proposal aimed at systemically important sectors, as LLIFs risk of failure is sufficiently mitigated by their current wind down arrangements as part of the Individual Capital Adequacy Assessment Process.
There is similarly no justification for extending the scope to firms regulated under UCITS, or those that will be within the scope of the AIFMD. These sectors are not systemically important and their activities do not extend to the provision of credit, the acceptance of deposits or dealing on their own account. The funds they manage are held in segregated accounts with a custodian, in the name of, and under the oversight of the respective depositary.
We believe that extending the Recovery and Resolution Framework to such entities and the funds they manage would increase cost, administration and complexity with no evident benefit to the general economic well being and would distract investment firms from focussing on more relevant prudential measures.
We would welcome the opportunity to engage further with the Commission on these proposals.
Yours faithfully
Katherine Moses
Regulatory Developments Manager