BLACKROCK
Mr. Jason Pope
Conduct Policy Division
Financial Services Authority
25 The North Colonnade
Canary Wharf
London E145HS
23 November2012
CP1 2/1 9: Restrictions on the retail distribution of unregulated collective investment
schemes and close substitutes
Dear Mr. Pope
BlackRock is pleased to have the opportunity to respond to the above Consultation Paper and
include summary comments and our response to the individual questions raised in the paper
below.
BlackRock is a leader in investment management, risk management and advisory services for
institutional and retail clients worldwide. At 30 September, 2012, BlackRock’s AUM was $3.67
trillion across equity, fixed income, cash management, alternative investment and multi-asset
and advisory strategies including the industry-leading iShares® exchange-traded funds (ETF5).
Through BlackRock Solutions®, the firm offers risk management, strategic advisory and
enterprise investment system services to a broad base of clients with portfolios totalling more
than $13.7trillion
BlackRock is a member of European Fund and Asset Management Association (EFAMA), the
Investment Management Association (IMA) in the UK and a number of other European and
national industry associations
1 reflecting our pan-European activities and reach.
Summary Comments on the Consultation Paper
We would commend the FSA for its’ extensive work in an area where there is significant
evidence of market failure in the past. In general, we believe that the focus areas of FSA’s
policy approach are appropriate in seeking to address the key areas of risk set out in the
consultation. However, we have some concerns around the timing of this consultation in the
context of a number of parallel initiatives arising from the broader European regulatory reform
agenda which have relevance to the proposals set out in this consultation, in particular the
requirements for marketing of non-UCITS CIS to retail investors under the Alternative
Investment Fund Managers Directive (“AIFMD”), the drive to greater transparency at point-ofsale under the Packaged Retail Investment Products Regulation (“PRIPs”) and powers of
product intervention under MiFID. We believe it is therefore critical that the beneficial impact of
these European initiatives are set against the proposals in this consultation to ensure that a
harmonious outcome is achieved. We fear that failure in this regard may result in a fractured
regulatory framework which will only serve to perpetuate confusion in the application of various
rules and requirements leading to risk of further market failure and continued poor outcomes for
consumers.
We are also concerned that the definition of a “Non-Mainstream Pooled Investment” is too
widely drawn and appears to capture investment vehicles that have very similar characteristics
to products that will benefit from an exemption and also other mainstream retail investment
products which do not benefit from an exemption by virtue of the underlying reference asset.
BLACKROCK
We hope that our comments are useful. We would of course be pleased to discuss any aspect
of this consultation directly.
Yours sincerely,
Stuart Wilson
Director, EMEA Compliance
Direct Line: +44 (0)20 7743 5683
÷44 (0)7894 787 154
Mobile
:
BLACKROCK
12 Throgmorton Avenue
London EC2N 2DL
Mail:
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BLACKROCK
CP12!19: BlackRock Resoonse
01. Do you agree that we should look to impose restrictions on the promotion of nonmainstream pooled investments to ordinary retail investors?
Agree that certain NMPI linked to unusual assets, for instance those noted in para 1.13 of the
consultation paper, are unlikely to be suitable for ordinary retail investors although see our
comments below on Q3 in relation to investments which may be more commonly-held by
ordinary retail investors that may be caught by the definition of NMPI.
Whilst we agree that the restriction on the promotion of NMPI is likely to prevent the sort of
undesirable outcomes identified in para 1.13, we do have some concerns on whether this
measure alone will address the issues identified as it is equally important for firms distributing
such products to correctly classify their clients.
02. Are there any other investments that should be treated in the same way?
No immediate observations. However, it should be ensured that the asset management
industry is on a level playing-field with insurers and banks.
03. Are there any other investments caught by the non-mainstream pooled investment
definition in the draft rules that you believe should not be?
We are concerned that the definition of NMPI is too widely drawn. As currently drafted, it would
appearto capture certain exchange-traded products where the issuer’s payment obligations are
linked to assets other than shares or bonds, for instance exchange-traded commodities
(“ETC5”) and other exchange-traded products (“ETP5”) which are listed instruments and are
subject to the listing rules and requirements of the Prospectus Directive. In this respect, it is
unclear why there should be a differentiation made between ETCs/ETPs (or Venture Capital
Trusts) and investment trusts. The ability for retail investors to gain efficient access to
affordable and transparent products such as ETCs/ETPs is an essential component in the
design and building of a diversified portfolio and to restrict such investments to only retail
clients meeting the criteria under the PCIS/FP orders would put ordinary retail investors at a
disadvantage with less choice available to them. It should be noted that ETPs are often
designed so as to be eligible investments for UCITS and Non-UCITS retail schemes and
therefore may be indirectly accessed by retail investors, subject to issuer concentration limits.
We would propose that ETCs and ETPs subject to the requirements of the Prospectus Directive
(in particular specific disclosure requirements) should be excluded from the scope of NMPIs.
Separately, the definition of NMPI would also appear to capture UCITS and other retail
collective investment schemes which are capable of being “recognised schemes” territories but
have not been registered for marketing to the public in the UK under section 264, 270 or 272
and are therefore considered to be unregulated collective investment schemes under the
Handbook rules. The view expressed by FSA consistently in the consultation paper is that
NMPI are not suitable for distribution to ordinary retail investors, However, this quite clearly
could not be the case for non-UK UCITS or other retail collective investment schemes.
04. Do you agree that we should remove the general ability of firms to promote UCIS
under COBS 4.12.1 R(4) category 1?
Given the concerns outlined by FSA and evidence of market failure in relation to historic misselling of UCIS, this would appear to be a reasonable approach.
05. Do you agree that firms should still be able to promote replacement UCIS to retail
customers where the original product is being replaced or liquidated?
We agree this would be a more preferable outcome than enforcing a compulsory redemption
which leaves the client with no immediate investment solution. However, as FSA notes, there
remains a risk that the original investment may have been mis-sold and the replacement
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investment may not be any more appropriate. There is perhaps an argument that investment in
replacement products by existing clients should only be permitted where the firm has taken
steps to confirm the suitability of the replacement product, so removal of category 2 of
COBS4.12.1R(4), as covered under the next question, would remove an existing mechanism
that, where applied diligently, could mitigate the risk of retail clients remaining in unsuitable
products.
06. Do you agree that we should remove the ability of firms to promote UCIS under
COBS4.1 2.1 R(4) category 2?
Notwithstanding FSA’s concerns on historic practices, we do not agree with the removal of this
exemption particularly given the drive towards a greater quality of advice and standards of
professional qualifications in the advised market through the implementation of reforms
introduced through the Retail Distribution Review.
07. Do you agree that we should remove the exemption in COBS4.1 2.1 R(4) category 8?
We agree that the procedural steps set out in Article 23 of the PCIS Order, including the
requirement for independent certification that the investor is considered to be sophisticated will
provide a more robust framework compared to the potentially uneven application of the
category 8 exemption in COBS4.12.1R(4).
08. Do you agree that we should limit the ability of firms to promote QIS, securities
issued by SPVs and TLPIs in the retail market?
With regard to QIS, the existing requirements in COLL8.1 requiring a firm to take reasonable
care to ensure that ownership of units in a QIS may only be held by the categories of investors
set out in COLL 8 Annex 1 R are adequate in our view. However, we agree that the table of
exemptions should be updated to be consistent with those in COBS4.12.1R, although note our
comments on the removal of the category 2 exemption in 06.
We agree that TLPIs are unlikely to be suitable for ordinary retail investors.
We agree that certain structured products are unlikely to be suitable for promotion to ordinary
retail investors due to the complex nature of the reference asset. However, we do not agree
that such a limitation should apply to all SPVs. Please see our response to Q3 concerning the
scope of the proposed application of the restrictions in respect of SPVs that relate to asset
classes such as commodities that may already be accessed through packaged retail
investment products, for instance UCITS and Non-UCITS vehicles.
09. Do you have any comments or suggested improvements for our approach to SPyissued securities, including structured products?
As noted above and in our response of Q3, we would request that FSA provide further
clarification on the treatment of ETPsIETCs and in particular, comment on why it is considered
that the Prospectus Directive does not already provide sufficient protection.
010. Do you have any comments on the Handbook guidance we propose to add
regarding the use of exemptions in the FPO and PCIS Order?
No other comments.
011. Do you agree that we should require firms to retain a record of the basis on which
the promotion of a non-mainstream pooled investment has taken place for each financial
promotion?
Agree. In principle, if a firm is making use of the exemptions under the FPO or PCIS, it would
seem sensible that a record of the basis on which the financial promotion is approved should
be maintained. In many respects, depending on the nature of the firm’s activities, this should
already be the case. In practice, there should be documented compliance policies and
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procedures which govern this activity and the classification of specific financial promotions
should be embedded within the approval process with appropriate education measures taken to
educate staff within the compliance function overseeing the process and individuals within the
business involved in preparation and issuing of the promotion.
012. Should we require confirmation of compliance with the marketing restriction for
each promotion?
The confirmation of compliance should form part of the overall approval process for financial
promotions so should be embedded within procedures in a similar way that the requirement for
the promotion to be clear, fair and not misleading, is assessed and authorised. However, it
would seem sensible that it is made clear in the firms procedures and controls specifically what
the approval consists of.
013. Do you agree that the CF1 0 individual is the correct person to confirm compliance?
Agree, but for larger firms it should be acceptable for this responsibility to be delegated to an
individual or group within the Compliance function with the necessary expertise and
competencies, subject to the approval of the firm’s compliance oversight function holder.
014. Do you have any comments on the Handbook guidance we propose to add
regarding the link between promotion and advice?
Agree that the link between making financial promotions and provision of advice should be
clarified and the guidance inserted to COBS4.12 provides an appropriate signpost for firms.
015. Do you agree with our proposed update to the retail in vestment product definition?
Given that most of the products classified as NMPI are also RPIs, it is appropriate that the
definition of RPI includes a suitable cross-reference. However, we are concerned that the
introduction of an additional definition (NMPI) and the interaction between the requirements
relating to this and to RPls, packaged products (ultimately PRIPs) and definition of an
Alternative Investment Fund under AIFMD will still potentially create confusion for the industry.
It is particularly Important that the core definitions of an AIF and UCIS/NMPI are aligned as
closely as possible.
016. Do you have any comments on the impact of our proposals on existing customers
and the distributor firms serving them?
No specific observations.
017. Do you have any comments on our analysis of non-mainstream pooled
investments?
No specific observations.
018. Do you have any further data on the size of the market?
No specific observations.
019. Do you have any comments on our overall strategy to deal with the risks to retail
customers of investing in UCIS?
As noted in our summary comments, we would commend the FSA for its extensive work in an
area where there is significant evidence of market failure in the past. The four pillars of FSA’s
policy approach identified in paragraph 18 of Annex 2 of the consultation paper appear
appropriate in order to address the key areas of risk set out in the consultation. On the last
point concerning the longer-term benefits of a change in the rules following this consultation, it
is important to factor-in to FSA’s policy approach the forthcoming regulatory reforms arising at
European level which have relevance to the proposals set out in this consultation, in particular
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the requirements for marketing of non-UCITS CIS to retail investors under the AIFMD, the drive
to greater transparency at point-of-sale under PRIPs and powers of product intervention under
MiFID. It is therefore critical that the reforms proposed by FSA in this consultation achieve a
harmonious outcome set in the context of these parallel initiatives to avoid a fractured
regulatory framework which will only serve to perpetuate confusion in the application of various
rules and requirements leading to risk of further market failure and continued poor outcomes for
consumers.
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