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Comment: Current Challenges and the Hedge Funds debate: John Tiner, Chief Executive, UK Financial Services Authority

Key extracts from a speech by John Tiner, Chief Executive,FSA at the Annual Asset Management Conference, London,19 September 2005.

The asset management industry is a cornerstone of the British financial services marketplace with around GBP 3 trillion in assets being managed inside the UK. This makes the UK the 3rd largest country in the global industry after US and Japan, with about 7% of global assets.

The UK industry enjoys rich diversity, but with critical mass in each of its main components. The numbers are impressive: Defined Benefit Pension schemes continue to be a mainstay of the industry with over GBP 1,000bn in assets under management. We estimate that unit-linked life and pension funds have grown to over GBP 400bn surpassing with-profits life and pension funds which are just under GBP 400bn.

Authorised collective investment schemes (CIS) continued to recover in 2004, to reach GBP 308bn by July 2005 and Investment Trusts had total assets of around GBP 60bn by the middle of this year.

The value of private client assets under management in the UK (covering execution only, discretionary and advisory portfolios) stood at around GBP 300bn at the end of 2004 and industry sources indicate client confidence is improving in this important sector.

And finally, the fastest growing area, hedge funds - where assets managed from London are estimated to have more than tripled in the past 3 years from USD 61bn to USD 190bn. Close to three-quarters of European hedge fund assets are managed from London.

And, as the most international financial centre in the world, UK-based firms provide a host of asset management services to global owners of assets generating 10% of the increasingly important net exports of financial services of this country. This impressive array of market statistics evidence the fact that London is the world's premier international financial centre and explains why so many of the key decision makers in transactions in global market instruments are located here. And they in turn ensure that London is the major location of investment banks and other service providers offering a range of global products and services.

With such a substantial sector in aggregate it is perhaps a surprise that the UK asset management industry does not always have the impact it could have in Europe and with the UK government. This is perhaps due to its more fragmented nature. We have tried to bring the whole industry together at this conference and host a biannual trade body forum to identify common regulatory issues. I am pleased to see speakers coming together from the institutional and retail players, the insurance industry, the private client investment managers and the hedge fund managers.

Hedge Funds
As mentioned earlier the fastest growing area in asset management has been hedge funds. The mainstream sector is developing with some organisations building up significant businesses and, as our authorisations department can testify, a specialist boutique manager sector is flourishing. Many of them are located in well-heeled addresses a few miles north of this conference centre.

Hedge funds are growing in importance in terms of their contribution to financial markets. They are a major source of liquidity and can significantly enhance market efficiency. While it is estimated that hedge funds only account for less 5% of total assets under management worldwide, they are at present estimated to account for between a third and a half of daily activity on the New York Stock Exchange (NYSE) and the London Stock Exchange (LSE). They are increasingly fundamental to the efficient reallocation of capital and risk. They can also provide a mechanism for increasing investment portfolio diversification. Hedge funds no longer seem quite so 'alternative' but rather seem like a core component of a modern and dynamic market place. A significant development has been the growing impact of hedge funds on the revenues of investment banks.

Returning to the themes outlined at the beginning of my speech in relation to the asset management sector as a whole, the FSA recognises that it would not be beneficial if regulatory action caused the hedge fund industry to move to more lightly regulated jurisdictions, both from the point of view of the asset management industry and the importance of London as a global financial centre.

Our regular 'hedge funds as counterparties' survey has shown London to be a global centre for prime brokerage. A recent report has estimated that bank revenues from hedge funds were up to around USD 25bn in 2004, or an eighth of their total revenues. Of this total, it is estimated that USD 19bn was generated from trading and sales business with the remaining USD 6bn coming from prime brokerage.

However, there are benefits to ensuring that we operate an informed, transparent and proportionate regulatory environment here in the UK. To achieve this in a structured and informed way, we published in June two discussion papers that focus on related but separate aspects of hedge funds and retail investment products. The papers look, respectively, at the impact of hedge funds on the UK's wholesale markets - Hedge Funds: A Discussion of Risk and Regulatory Engagement - and at the regulatory regime that applies to retail investment products - Wider Range of Retail Investment Products: Consumer Protection in a Rapidly Changing World.

The UK financial services industry has unrivalled depth, diversity and expertise and there are many opportunities ahead to be derived from the development of the EU Single Market, the upcoming changes to pensions legislation and most crucially from winning back the confidence of investors

I have outlined some areas where we could deregulate and where we have concerns. The bottom line is that we adopt a common sense approach and work with the industry to serve a better market for participants and their customers.

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