It’s Spring again! - FECIF

TRUSTING

Gilles-Guy de Salins:“The French do not conductbusiness like other people”

CIFA, year three: “To create

a powerful platform”

Pierre Mirabaud: “Middlemen can be

strategically useful to banks”

The laborious hunt for terrorist money,

by Pr. Xavier Raufer

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1april 2004

TRUSTING – THE INDEPENDENTFINANCIAL ADVISOR3 Editorial. By Pierre Christodoulidis

INDUSTRY EVOLUTION6 Pierre Mirabaud, President of the Swiss

Bankers Association: “Yes, middlemen can be strategically useful to the banks”. Interview Didier Planche.

7 Angela Knight, CEO of APCIMS “Enforcing good standards will bring an added attraction to the industry”.Interview Mohammad Farrokh.

9 EU Legislation for cross-boarder services in the insurance sector.

LEGAL & REGULATORY CONSIDERATIONS11 The laborious hunt for terrorist money.

By Pr. Xavier Raufer

13 Does the EU Directive “on taxation of savings” violate the freedom of movement of capital?By Marc Dassesse

16 European Examination Framework:the EFPA Model. By Susan Middelboe and Michael Fawcett

19 The French business culture. By Gilles-Guy de Salins

20 The international center FAME. By Didier Perrin

INVESTING – HOW TO NAVIGATE22 Independent Asset Managers & Hedge Funds.

By Biagio Zoccolillo and Johan Olson.

25 It’s spring again. By Veronique Bühlmann.

28 Sarbanes-Oxley Act. By Mohammad Farrokh

SPECIAL REPORT30 Associazione Nazionale Agenti

Servizi Finanziari

34 Deutsche Gesellschaft für Finanzplanung e.V.

36 Association française de la gestion financière.

39 The advantages for Independent Investment Management of using a Universal Bank. by Jean-Pierre Lagane, Dominique Robin,Frédéric Lamotte and Jean-François Fouquet.

42 The role and importance of European IFA. By Vincent J. Derudder

46 Asian Markets for 2004. By Ray Jovanovich

TRUSTING – The IndependentFinancial Advisor

OwnerCIFA FoundationRue du Vieux Collège 3P.O. Box 3255 · 1211 GENEVA 3 SWITZERLANDTel: +41 22 317 11 11Fax: +41 22 317 11 77www.cifafound.ch

Editorial BoardPierre Christodoulidis,Vice-President of CIFAVincent J. Derudder,Secretary General of FECIFRené W. Rohner,Secretary General of CIFA

PublisherRoland RayPromoédition SA Quorum CommunicationRue des Bains 35 P.O. Box 5615 · 1211 Geneva 11SWITZERLANDTel: +4122 809 94 70Fax: +4122 809 94 00www.quorum-com.ch

Managing EditorDominique Flaux

Contributors Veronique Bühlmann, PierreChristodoulidis, Marc Dassesse,Vincent J. Derudder, Mohammad Farrokh, Michael Fawcett, Jean-François Fouque, Ray Jovanovich,Jean-Pierre Lagane, Frédéric Lamotte, Susan Middelboe, JohanOlson, Didier Perrin, Didier Planche,Xavier Raufer, Dominique Robin,Gilles-Guy de Salins,Biagio Zoccolillo

AdvertisingJohn J. RolleyCabinet Rolley Bd Helvétique 361207 GenevaTel: +4122 786 47 60Fax: +4122 786 47 [email protected]

Art DirectorMichel Klex

Production Maryse Avidor

Printed in Switzerland

Lead sponsors of CIFACrédit Agricole Indosuez (Suisse) SACrédit Lyonnais (Suisse) SADeutsche BankMirabaud & Cie

Sponsors of CIFABCVCredit Suisse Private BankingJulius BärLombard Odier Darier Hentsch & CieSG Private BankingUBS Wealth Management

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3april 2004

New York is crumbling,European markets havegone off the rails; this isthe unpleasant surprise thatgreets the beginning of thenew century. What a begin-

ning. Maybe you greeted these events withconsternation! Or maybe not – repetitionblunts reactions. Yesterday it was the collapseof emerging markets, followed by the implo-sion in Russia, just after the descent into hellin 1994 following a series of US interest-rate hikes.

Nevertheless, the articles peppering our news-papers are right and they ought to horrify us:the capitalist system is at the edge of theabyss. Just like in 1929. At that time it wasspeculators in raw materials, today it is onfictitious companies.

Who is the enemy? Speculation and the lureof gain. Vague terms hidden behind in thecomplexities of dark motivations by greedyoperators ready to profit from the dearth ofinformation for ordinary people. Anonymousand insatiable people, their ears pricked forrumours, ready to exploit windfalls and toprofit from the dearth of information for ordi-nary investors.

Yesterday it was Ponzi, Al. Wiggin and I. Krueger – today the CEOs of Enron,Worldcom, Vivendi and Parmalat. Ignoringwars and other natural disasters, I wonder ifthere is a more serious attack on the founda-tions of a socio-economic system than theseaggressions that challenge the living forces of nations.

I am none too sure that the penalties are inline with the indignation aroused. These arethe risks of the system. What system? Themisfortunes of small investors arouse farmore pity and if any accusations are levelledthey are aimed less at the instigators than attheir victims.

This raises the question of what the authori-ties and other monitoring bodies have done tocounter these professionals in the field offinancial aggression.

In the USA, the FBI “white-collar” crimesbrigade abandons securities crimes to theSEC. The SEC has too few people, albeitcompetent, to deal with the mass of cases.

As revealed in the US Attorney’s Annual Sta-tistical Report for 2000 there were 8,766prosecutions related to “white-collar” crimesof which 6,876 resulted in a sentence. Notbad, you might think. Of these, 4,000 weregiven prison sentences of up to three years(the average is around 16 months). But H. Pontell, professor of criminology(University of California – Irvine) after analy-sis of the cases concludes that only 226 sen-tences concerned stock market transactions.

What about the NASD or the American Insti-tute of Certified Public Accountants (AICPA),the regulatory body for auditors John C.Coffee Jr. of the Columbia Law School states:“They have a rule of not taking any actionagainst the auditors until all civil suits havebeen settled” because they “do not want theirinterventions to be used against their mem-bers in civil prosecutions”.

The disdain for the basic principles of hon-esty, encouraging the use of aggressive salestechniques and lies for the sole purpose ofaccumulating outrageous profits at theexpense of investors (with little or no infor-mation) is a serious and intolerable assault onour system. The core of the debate is notabout laws and regulations, but on the strictand relentless application of the existing laws.But despite the seriousness of the crises wemay doubt about the severity of sentences tocome as K. Schlegel a renowned Americancriminologist comments “In fact... govern-ments lack the will to bring these people to justice “.

So is there no solution, you may ask. Are thesmall players going to continue to find theirsavings threatened by the manipulations ofunscrupulous dealers? No. Better coordina-tion between corporate bodies anxious to pre-serve the reputation of their profession withthe monitoring authorities, backed by thejudicial authorities, could lead to a long-termeffective reduction in such crimes. No purelyrepressive system has ever succeeded withoutactive cooperation between all interested par-ties, namely the professionals, the monitoringauthorities and the judicial system.

This is the price that has to be paid to rid thesystem of shady lawyers, complacent auditorsand unscrupulous professionals, but only ifthere is the necessary will to cooperate.

I am all too aware that these proposals arebold. But when it comes to saving the life ofthe patient one must not hesitate to use allavailable treatments and remedies to protectthe health of a system that we all depend on,whether we like it or not.

Pierre ChristodoulidisVice-President of CIFA

Editorial

In the USA, the FBI “white-collar” crimes

brigade abandons securities crimes to the

SEC. The SEC has too few people, albeit com-

petent, to deal with the mass of cases

4 april 2004

INDUSTRY EVOLUTION

CIFA, Year Three

The Convention of Independent Financial Advisors, a non-profit Swiss foundation, was created in December at the initiative of a group of Genevan financial advisors to try to protect the profession from an increasingnumber of regulations and procedures which constitute a threat for the consumer’s privacy. Its mission is tostrengthen the role of IFAs at the international level in order to better defend the interests of private investors.CIFA has chosen Geneva, one of the world capitals of wealth management and headquarters of many interna-tional organisations, to establish its permanent organisation.

With the active support of international andnational professional associations, CIFAintends to play a coordinating role as regardsthe furthering of ethics and education as wellas the protection of the consumer. CIFA hasthus set up a structure which is able to imple-ment measures designed to increase the pro-fession’s reputation among national and inter-national authorities, to defend the professionby drawing on its unique network, to developproposals for harmonising national and inter-national regulations, and to create a code ofconduct designed to fight any illicit andunethical behaviour in the practice of finan-cial advice.

Supervised by a Foundation Board whose fivemembers also make up the Executive Com-mittee, CIFA can draw on the experience andnumerous contacts of an Advisory Boardcomposed of leading personalities. A perma-nent secretariat completes this structure.

PROMOTE THE IMAGE OF IFAAND ASSET MANAGERS

From its international platform, Geneva,CIFA benefits from the important and centralrole which the Swiss financial marketplacehas been playing for more than 100 years topromote the image of IFAs. As a communica-tion organisation par excellence, CIFA aimsto bring together IFAs of different countriesin order to enrich the dialogue between pro-fessionals. It gathers its partners and theiraffiliates around its values: independence,integrity, loyalty, competence and trust.

CIFA cooperates closely with many alreadyexisting international federations and nationalassociations. It wants to offer an effectivecommunication channel to its partners organi-sations, by giving them an opportunity to faceup to growing regulations and political pres-sures imposed on the financial sector.

SUCCESSFUL FIRST INTERNATIONAL CONGRESS

Following the creation of its website,www.cifafound.ch, CIFA held its first interna-tional congress on 14-15 April 2003 at theHotel President Wilson in Geneva. Chaired byRichard Smouha, a founding member ofCIFA, the congress took place under thetheme, “What challenges for the independentfinancial advisors?” and was attended bymore than 200 IFAs as well as numerous rep-resentatives of banks and public authorities.

In his introductory remarks, Jean-PierreDiserens, a founding member of CIFA,reminded the audience that its was the con-sumer (the private investor) who gave rise toindependent financial advice, and not theopposite. Today, independent advisors havebecome key players in the financial servicessector. During the recent steep financial crisis,their market share rose heavily, for clientsrequire nowadays very focused and constantattention from their financial advisors.According to FECIF, the European Federationof Financial Advisers and Financial Interme-diaries, there are more than 250,000 IFAs inEurope today. They will have to face the fol-lowing main challenges: develop the speci-ficity and complementarity of their servicescompared with those offered by traditionaloperators in finance (banks, brokers, etc.), andprotect their independence against growingand increasingly complex regulations.

The views shared by participants lead to thefollowing declaration of intent, made at theend of the congress by Pierre Christodoulidis,Vice-President of CIFA; Vincent J. Derudder,Secretary General of FECIF; Michael Faw-cett, Executive Director of EFPA; and AldoVarenna, Head of International Relations ofANASF: “Today, members and representa-tives of standard-setting organisations as wellas national professional associations gath-ered to discuss the concept of a Europeanorganisation which aims to create a powerfulplatform covering all the key aspects of ourprofession (communication, think-tank,ethics, standards and certification) and isexpected to bear considerable effects on theprofession of financial advisor. (...)

5april 2004

INDUSTRY EVOLUTION

The determination of the key players is a suresign that the future organisation will greatlybenefit both the consumers and the providersof financial advisory services.”

2nd INTERNATIONAL FORUM IN APRIL 2004

With the active support of 29 Europeanfederations and national associations (vs. only12 in 2003), CIFA will hold on 22-23 April

2004 its second international congress,renamed Forum, in Geneva. With the assis-tance of internationally renowned personali-ties, the Executive Committee of CIFA hasstriven to make this second Forum attractive:the programme covers burning topics, speak-ers come from all over Europe, debates willbe shown on a large screen, there will be anactive dialogue with the audience, and inter-pretation will include several languages.

WHERE DOES THE PROFESSION STAND?

Under the suggestive title of “ReinventingTrust”, this second Forum will begin withdebates on themes that are of major interest tothe profession: taxation of savings in Europe,protection of privacy, regulation of the profes-sion in Europe and the means to restore theinvestor’s confidence. The first day will endwith a convivial gala dinner.

The second day will begin with workshopsmoderated by leading Swiss and foreign spe-cialists who will discuss the evolution of reg-ulation and its application, the standards of

CIFA MAGAZINEYou are holding in your hands the firstissue of “TRUSTING, The Indepen-dent Financial Advisor”. This maga-zine, published in cooperation with Promoédition SA, a well-known Swisspublisher, is designed to become an important communication tool for the IFAs in Europe and the rest of the world. It will cover all action themesof CIFA:

• Harmonisation of regulations con-cerning the profession

• Implementation of new rules andprocedures imposed by authorities

• Establishment of ethical norms tofight reprehensible practices in thefinancial services field

• Education and certification of theprofession on an international level.

20,000 copies of this “test” issue will be distributed free of charge with theassistance of CIFA’s partner federationsand associations. If the readership’sresponse is positive and enoughadvertising support can be gained,“TRUSTING” will become a quarterlymagazine.

CIFA encourages all personal commentsand suggestions you may have on thisfirst issue. Your letter or e-mail shouldbe addressed to :

TRUSTINGc/o CIFAP.O. Box 3255CH-1211 Geneva 3, SwitzerlandFax: +41 22 317 11 77E-mail: [email protected]

education, and the investment techniques – inline with the work that has already been donein the working commissions created by CIFA.A presentation of the theoretical approachesand practical experiences in selecting invest-ment vehicles will be given by experts. At theend of the morning, the delegates will havethe opportunity to learn all about the technicalintricacies of hedge funds before discoveringan innovative concept related to for the trans-fer of funds and securities, and participatingin the final debate. ■

Franz A. Blankart, partner Banque Mirabaud.

6 april 2004

INDUSTRY EVOLUTION

Yes, middlemen can bestrategically useful to banksNow a permanent feature on the financial landscape, financial middle-men are both partners and competitors of banks actively involved inwealth management. They keep their larger counterparts on their toes. On the whole, these “middlemen” play an important role in the bankingsector. The following is an interview with Pierre Mirabaud, president ofthe Association suisse des banquiers (the Swiss Bankers’ Association).

Do middlemen compete with banking estab-lishments actively involved in wealth manage-ment or is their presence complimentary, likepartners even? Pierre Mirabaud: They are both. For a bankinvolved in wealth management, middlemenare obviously a source of some competition as both players provide the same basic service.However, they both stimulate the industrybecause, in general, they’re both extremelydynamic. Reliant on one or two trustees, theyare also partners and clients of banks. Besides,they can promote the reputation of banks. One must note that banks essentially have dif-ferent long-term goals. If middlemen are oftenreputable professionals whose relationshipwith clients is bound to their personality,banks, on the other hand, are primarily institu-tions. Clients of middlemen remain loyal todepositaries that have some semblance of arelationship with their preferred middleman.

Are middlemen strategically useful to banks?Also, in terms of outsourcing, do they alsoprovide lucrative business to banks?P. M. Yes, middlemen can be strategicallyuseful to banks. A partnership of that sort cansave banking establishments money inreduced costs by reducing the need to hiremore staff, while sharing the returns withmiddlemen by way of retrocession. For a rela-tionship of this kind to be profitable to banks,it is nevertheless important that the clientelenot be limited to “retail”.

PRINCIPLES OF THE TRADE

How do you explain why more and morebanks are turning to them to do business? P. M. One of the reasons is that managersevolving within the banking sector are having

to devote more and more time to administra-tive tasks due to the over-regulation of Swissbanking. Alas, they also would like to spendmore time attending to the needs of theirclients and conclude that by referring thisresponsibility to others, they are more likely toget the job done. Other factors such as careergoals, the job’s visibility within the market,and at times, remuneration help to explain thisgrowing trend.

In comparison with banks, are middlemenmore valued by clients because of their avail-ability and more personalized service? P. M. It is possible if one were comparingmiddlemen to some larger banking entities.However, in comparison to average or smallerbanks that focus primarily on asset manage-ment, the argument is not as valid.

Do they fulfill their promise to put the needsof the client first and protect investors? P. M. The degree of priority that a clientreceives depends more on the work ethic ofthe manager than on the objective characteris-tics of a given economic sector or on suchand such company policy. If you are talkingabout protecting investors, there is no singleanswer. The world of the middleman varies greatly inSwitzerland. The business ranges an at-homeset-up managing 50 million francs in assets,to a small business with four to five employ-ees, to a larger company with managed assetscomparable in volume to that of a bank. Butwhat is a “middleman” really? The absence ofany real definition is precisely what makes itdifficult to trace and supervise this sector ofthe industry. Depending on the size of thecompany itself, the degree of protection theinvestor enjoys may vary. The existence of

Pierre Mirabaud

“For independent financial middlemen,

the client comes first”

7april 2004

INDUSTRY EVOLUTION

any affiliation to other reputable associations,endowed with a sound professional code ofethics, may also influence the quality of theirservices. But one mustn’t forget those professionalswho are subject to the LBA and the futureOBC-AC, the supervisory authority’s regula-tions concerning anti-money launderingmeasures.

ABSORBING OFFERS

Do middlemen have fewer conflicts of interestthan banks? P. M. In theory, yes, as they work in a singlearea, while banks are able to work in several,a freedom that exposes them to some con-flicts of interest. However, if one takes intoaccount the extremely rigid regulations towhich banks must adhere, regulationsintended to prevent such conflicts of interest,one finds that both middlemen and banks facethe same scenario, especially if internal regu-lation is effective.

What code of ethics should they live by?P. M. Ideally, it should be the same as abanker’s management ethic. The client shouldalways come first.

How can they prevent the loss of clients,particularly if they are to last on the market? P. M. It all depends on the size of the man-agement entity. Does it have a critical massrelative to its volume in managed assets andits costs? That’s the question. The subjugationof middlemen to the LBA and OBC-CA willconsiderably impact the costs and fees ofsome. The profitability and consequently theviability of smaller companies is, at the pres-ent time, uncertain.

In light of the increasing number of middle-men in the industry, what’s next for wealthmanagement in Switzerland? P. M. Some shake-up can be expected if onetakes into account this growing phenomenon. A decline in the number of middlemen doesn’tseem likely in the near future. Mergers and

takeovers are possible, without which smallerentities would be squeezed out of the market.

It is apparent, furthermore, that many middle-men are hopping on the bank bandwagon bybecoming subsidiaries. In general, wealthmanagement is still a global industry. Withgrowth, it is possible to expand one’s clientelein accordance with increasing demographictrends and the growing insolvency of socialsecurity systems that result from this, as thorough studies conducted by Merril Lynch,Cap Gemini, and Ernst & Young’s “WorldHealth Report”, for example. They confirmthat Switzerland remains a dominant marketleader thanks to its financial know-how. ■

Didier Planche

Enforcing good standard will bringan added attraction to the industry

How significant is APCIMS’s relationship with CIFA?Angela Knight: CIFA is an umbrella organi-zation which is bringing together the view ofindependent asset managers throughoutEurope. It should provide a good platform forexchange, as one of the most importantchanges facing the industry now is the movewithin the European Commission for finan-cial standards. In this context, it is crucial thatthe view of the practitioners be heard and thatthey understand each other. Being able to par-ticipate in the European debate is essentialand CIFA is providing such an opportunity.

Surely, CIFA is not alone in bringing togetherthe view of financial advisors at an Europeanlevel?A.K. Other types of groups exist. Those whooperate within the EU meet in Brussels. CIFAtakes a different, broader view. As APCIMS,we are contributing and participating in anumber of panels, for instance in the ExpertGroup on Securities Industry – related to theEuropean Commission – , of which I am amember.

How do you stand with respect to the EUFinancial Services Action Plan? In your

Angela Knight has been Chief Executive of APCIMS, the Associationof Private Client Investment Managers and Stockbrokers, since 1997Elected a Conservative MP in 1992, she became a front-bencher in1995 and was Treasury Minister in John Major’s cabinet.

Angela Knight

8 april 2004

INDUSTRY EVOLUTION

speech at APCIMS Annual Conference ofNovember 2003, you sounded somewhat criti-cal, regarding especially the 2005 deadline. A.K. The deadline has to be flexible, sincethe Action Plan which consists of many direc-tives equates to a large programme of change.There are certain areas of activity which areaffected by almost all of them. There needs tobe a pragmatic implementation against a sen-sible timetable. The desire to get greater har-monization means that if you want to bringtogether all of 15 States, everyone has got tomake adjustments. Now, costs are highestwhen the process is rushed. One should notforget the objectives however: opening up themarket, bringing down barriers and offering abetter deal to the investors.

Returning to the Financial Services ActionPlan, there does not seem to be much roomleft for bargaining, since most everythingappears to have been already decided…A.K. Much as already been written on the 32 plus proposals Action Plan, not one ofthem being yet implemented. Even though ithas passed trough the EU process, each direc-tive has several mandates within it. Much ofthat work has not started, as there is a differ-ence between principles and their implemen-tation. Thus, the 2005 deadline is also a mat-ter of interpretation.

You were speaking of 15 countries. Nowthey will be 25 as of May. Does that changeanything?A.K. As far as new proposals are concerned,it makes it more difficult, since we movefrom 15 to 25 market practices. But as long asthe will is here and legislation is created from

an evidence based approach, the financialservices industry can be improved.

Can you tell me more about APCIMS and itsrole within the UK?A.K. The 224 member firms on 500 sites werepresent occupy about 8000 persons. What is even more significant is the amountof assets under management, 240 billion £.Among those firms are a few private banksand many independent wealth managementfirms, not part of larger enterprises. To givesome more information, the number of clientsper firm ranges from 400 to 100’000, averag-ing 15’000.

The spectrum is then quite wide?A.K. These are firms whose customers areindividual investors. Indeed, APCIMS hastotal coverage of private firms for privateclients.

But this has not always been the case, espe-cially at the beginnings of APCIMS in 1992…A.K. APCIMS has been founded by a groupof stockbroking firms who wanted to have a representative body. It started with about 20 firms in 1992 to the size we have now.

What services do you provide for your members?A.K. We seek to beneficially influence theenvironment. To this end, we interact withgovernment agencies and we work for theinterest of our members in Brussels. We alsorun seminars, workshops and an annual con-ference. Every week, there is an event whichassists our members in understanding how thefuture will be.

How has been your experience with CIFA this far? A.K. Last year’s conference has gathered agood number of participants and it is notoften that a first event is this well attended.The agenda of this year’s conference coversall the areas which are of concern. Tax mat-ters, investment techniques are all commonsubjects with which we deal on a daily basis.

Is there still a place for independent advi-sors and wealth managers in an increas-ingly complex technical and regulatoryenvironment?A.K. The actual demand for good financialadvice will increase due to wealth increaseand also because governments are nolonger providing the source of pensionspeople expect. The question arises as towho will respond to this increasingdemand. There will be a consolidation,because of the finite size a firm will haveto attain in order to be competitive. Regu-lation increases overhead costs, but it alsohas an other side. Enforcing good stan-dards will bring an added attraction forwealth management. ■

Mohammad Farrokh

What is even more significant is the amount

of assets under management, 240 billion £

9april 2004

INDUSTRY EVOLUTION

EU legislation for cross-boarderservices in the insurance sector

EUlegislationin the insur-ance sectorprovides forthe effectiveexercise by

Community-based insurance companies ofthe fundamental freedoms guaranteed by theEC Treaty, namely the freedom of establish-ment, freedom to provide services and freemovement of capital. Specifically, EU legisla-tion harmonizes the existing national supervi-sory regulations to the extent necessary toallow insurance undertakings established inone Member state (“home Member state”) toset up a subsidiary/branch – under freedom ofestablishment – or provide cross-border serv-ices in another Member state (“host Memberstate”) – under freedom to provide services.

Accordingly, any undertaking having its headoffice in one of the Member states, andauthorized in that State, is allowed to offer its

insurance products for sale under the initialauthorization of its State of origin (“homeMember state”), through either subsidiaries/branches or under the freedom to provideservices throughout European territory.

In the first case, the undertaking may berequired to comply with national tax andcompany legislation of the State in which the subsidiary/branch is located and to pay afee to the supervisory authority of that State.By contrast, in the case of free provision of services, the undertaking is not obliged tohave recourse to host structures.

1. THE SECOND COORDINATING DIRECTIVES ON NON-LIFE AND LIFE INSURANCE

1.1. Non-life insuranceOn June 22, 1988, the Council adopted Direc-tive 88/357/EEC (the second Directive onnon-life insurance) under which the authori-

zation system has evolved from an originallyterritorially limited national procedure to onewith Community-wide validity. The Directivedistinguishes between “large risks” (concernedwith large undertakings) and “small risks”(concerned with private individuals). In thefirst case, an insurance company may provideits services in another Member State – i.e. theState where the risk is situated – withoutauthorization from that State and under thesupervision of the home Member State. In thecase of small risks, the host Member statemay require authorization by its own supervi-sory authority and the application of its ownlegislation, including tax law.

1.2. Life assuranceDirective 90/619/EEC (the second Directiveon life assurance) achieved the effective exer-cise of freedom to provide services. TheDirective distinguishes between cases wherepolicyholders act on their own initiative inseeking assurance in another Member state

© Communauté européenne, 2004

10 avril 2004

INDUSTRY EVOLUTION

and those where insurers approach policy-holders. In the former cases, insurance com-panies are subject to the control of the Mem-ber state where their head office is located(“home Member state”) without the need offurther authorization from the Member statewhere the service is being provided (“hostMember state”). Conversely, in the latter casehost Member states may apply their ownnational rules.

2. THE THIRD COORDINATING DIRECTIVES ON NON-LIFE AND LIFE INSURANCE

The third coordinating Directives have gonemuch further: they expressly forbid any prioror systematic substantive control of insurancepolicies and policy documents. Such controlis only possible in those cases specificallyprovided for in Community Directives, suchas compulsory third-party motor insurance.Moreover, under the “single authorizationsystem”, an insurance undertaking may carryon anywhere in the European Union thoseactivities for which it was authorized in itshome Member state. Such activities may becarried on either under the freedom to provideservices or, alternatively, under the right ofestablishment. In the latter cases, should thecompany set up a branch/subsidiary in thehost Member State, it will have to complywith the applicable legislation of that State.

2.1. Non-life insuranceOn June 18, 1992, the Council adopted Direc-tive 92/49/EEC (the third Directive on non-life insurance), which introduced the singleauthorization system. Accordingly, it providesfor a system of cooperation between thesupervisory authorities of the Member states,whereby the activities carried out under thefreedom to provide services, come under thesupervision exercised by the supervisoryauthority of the country where the insurancecompany has its registered office (“homeMember state”).

In other words, the competence of the super-visory authority of the home Member state isextended to the activities of their nationalundertakings carried out in another Member

state (“host Member state”) under the free-dom to provide services throughout the EU.Symmetrically, they lose the supervision ofCommunity free services providers operatingin their territory.

Not only prior communication of documentsis abolished, including contractual conditionsand scales of premiums, but companies with-out an establishment in the countries in whichthey wish to operate also are not obliged tohave a systematic recourse to host structures.

Thus, the third Directive extends the approachadopted for large risks in the second non-lifeDirective.

2.2. Life assuranceIn the case of life assurance, Directive92/96/EEC (the third Directive on life assur-ance) mirrors the provisions of the third non-life insurance Directive, by introducing a sin-gle authorization system throughout theUnion, by the State in which the company hasits registered head office (“home Memberstate”).

In other words, the authorization granted bythe home Member State is valid for the wholeterritory of the European Union and permitsthe insurance company to carry on businessby means of either the establishment of sub-sidiaries/branches, or the provision of cross-border services.

On October 15, 1997, the European Commis-sion adopted a draft interpretative Communi-cation on “freedom to provide services andthe general good in the insurance sector”.This Communication launched a wide consul-tation exercise concerning the problems asso-ciated to (1) the freedom to provide servicesand, (2) the general good, in the light of thethird coordinating Directives on life and non-life insurance.

The draft Communication recalls, among oth-ers, that the Third Directives have expresslyforbidden any prior or systematic substantivecontrol of insurance policies and policy docu-ments. It further indicates that the mainte-nance of such a system by certain Member

states may not be justified on grounds of thegeneral good “since the conditions set by theCourt of Justice have not been met, in as muchas this is an area which is already the subjectof harmonization at Community level”. ■

1. Council Directive 88/357/EEC of June 22, 1988 on the

coordination of laws, regulations and administrative provi-

sions relating to direct insurance other than life assurance

and laying down provisions to facilitate the effective exer-

cise of freedom to provide services and amending Directive

73/239/EEC (OJ L 172 of July 4, 1988, p. 1-14).

2. Council Directive 90/619/EEC of November 8, 1990,


sions relating to direct life assurance and laying down pro-

visions to facilitate the effective exercise of freedom to pro-

vide services and amending Directive 79/217/EEC (OJ L

330 of November 29, 1990, p. 50-61).

3. Articles 6.3, 29 and 39 of Directive 92/49/EEC; Articles

5.3, 29 and 39 of Directive 92/96/EEC.

4. It should be stressed that both life and non-life insur-

ance directives do not cover motor vehicle third party lia-

bility insurance, which are governed by a separate set of

directives.

5. Council Directive 92/49/EEC of June 18, 1992 on the


sions relating to direct insurance other than life assurance

and amending Directives 73/239/EEC and 88/357/EEC

(OJ L 228 of August 11, 1992, p. 1-234).

6. Council Directive 92/96/EEC of November 10, 1992, on

the coordination of laws, regulations and administrative

provisions relating to direct life assurance and amending

Directive 79/267/EEC and 90/619/EEC (OJ L 360 of

December 9, 1992, p. 1-27).

7. OJ C 365 of December 3, 1997, p. 7-27.

take to the field. The criminal world movesfast: a response is found on the same day,offshore companies can be replaced byother more impenetrable organisations.

At the beginning of the 21st century, the mainbattlefield of world chaos is these chinks inspace and time. Tracking terrorist and crimi-nal funds therefore means operating in twodimensions: space and time.

a)The battle in uncontrolled space– Zones outside of the law, or “grey zones”,

spaces between the territories effectivelypoliced by real nation states.

– Spaces that fall through the gap betweenministries, or between the specific “territo-ries” of departments (drugs, human traf-ficking, terrorism, smuggling, etc.).

b)The battle against time– Dangerous and aggressive entities, equipped

with hi-tech resources, today have a huge

11avril 2004

LEGAL & REGULATORY CONSIDERATIONS

The laborious hunt for terrorist moneyWhere exactly are we with the state repressionof terrorist and criminal money?

In the field, criminologists find that it haslittle effect. It seems that states, their laws,their police and magistrates evolve in onedimension, whilst the terrorists and Mafiosi,their networks, the traffic in arms, drugs,explosives and money, evolve in another. The two rarely meet during the confiscations,arrests and seizures that do little real harm to these villains.

• Islamic terrorists accept such seizures andcaptures with fatalism: we are in the hands of God; we continue to make conversionsin prison, where Allah will decide where toguide us.

• Organised crime takes it in its stride. Los-ing 10% of its cocaine? So what – it’s lessthan corporate tax. Arrests? They regener-ate the criminal élites – just as an intelli-gent hunt stimulates game without eradicat-ing it: see Darwin (survival of the fittest).Finally, the intentions of governments aretrumpeted well before their troops slowly

advantage in the field of time over slow andponderous states, paralysed by administra-tive and legal inertia. How? Why?

A terrorist or criminal organisation today nor-mally operates from a zone outside of control(mountains, large cities, etc.). There it accu-mulates cash, which it has to recycle in thelegitimate economy to enable it to circulateby electronic means. It employs financialexperts for this purpose. Operating with thehelp of swarms of lawyers and financial advi-sors, these “pros” are constantly seeking legalloopholes throughout the world, studyinglegislative changes with a single objective:to create front companies to hide the real originof funds. For each major transaction, an off-shore company is created and then eliminatedimmediately. Everything happens fast. Firstly,there is a powerful incentive not to make amistake. The money launderer answers withhis life for sums handled for the network orthe Mafia. There is only one penalty: death.Much more effective than a medal or an end-of-year bonus...

These “pros” know that governments and inter-national organisations forget and soon loseinterest. Too close to the virtual world of themedia, politicians believe that all problemsthat they raise are ipso facto resolved. Justlook at the worldwide ecological and socialforums: “in five years, greenhouse gases willhave been reduced by 50%”, “in five yearsthe number of poor will be halved”. And fiveyears later? Nothing has really changed... But in the field, far from the effects of thedeclaration, what can be done to combat thisfast-moving and changing criminal activity of money laundering? Before any form ofrepression, a realistic diagnosis of the diseaseis required in order to understand the hugedifficulties of the operation. Below we exam-ine the two main conceptual obstacles thathamper the tracing of terrorist money.

1)Is the entity referred to as “Al-Qaeda”really an organisation?No. A child could work out that “Al-Qaeda”is not an organisation, in the sense that,remaining in the field of terrorism, the IRAis an organisation. In brief, “Al-Qaeda” isnot a sort of IRA that is fanatically Islamicinstead of being Catholic.

Since the month of August 1998 and thetwo attacks in Nairobi and Dar es-Salaam,“Al-Qaeda” has suffered the worst wave ofrepression in history. 5,000 individuals pre-sented as “members” have been captured in58 countries around the world; they comefrom at least as many countries, if not more.

12 april 2004


In addition, hundreds of other detentionshave occurred in secret in the Arab world.

All of this happened, you will note,before the war in Iraq in spring 2003 andthe attacks that followed in Riyadh (SaudiArabia) and Casablanca (Morocco).

Let us now take a look at two large organi-sations that need to operate around theglobe: one is a multinational and the otheran intelligence service – General Motorsand the CIA. What would remain of thesetwo giants if, worldwide, 5,000 to 6,000 oftheir staff were thrown into prison, theiroffices closed, their archives ransacked,their working equipment, bank accountsand funds confiscated? Nothing. Manifestly“Al-Qaeda” is of a very different nature,because even after five years of unprece-dented repression, cells that draw inspira-tion from it are still striking unhampered,and in 2004 who knows?

2)The war on terrorism in the UnitedStates: bureaucracy and confusionSometimes a newspaper investigationachieves something out of the ordinary. By revealing the reality, the press uncoversand educates, thus fulfilling its mission. Such an investigation appeared in theChicago Tribune on 10 February 2003. It concerned a period in the life of a youngwomen who left her job at a merchant bankafter “9/11” through patriotism to take up apost (at a lower salary) at the money laun-dering unit of the State Department’s coun-terterrorism unit. The report was entitled:Following the money – A hard-chargingbanker left Goldman-Sachs to join the StateDepartment’s Counterterrorism finance anddesignation unit, tracking the financial trailand battling a bureaucracy.

Four major facts emerge from an attentivereading of this investigation:

1)The battle plan of the Bush administration:We want to detect, disrupt and dismantleterrorists networks before they reach theUS shores; the mission of the bankingcounterterrorist is simple: hampering ter-rorist financing abroad. So much for theideal, but what about the reality?

2)This young woman and her administra-tion seem to be deprived of all autonomy,of all original thought in the face of themedia:“The nature of this job is that you’re at themercy of events... At the State Department

(...) senior staff members gather everymorning in the office of the new counterter-rorism chief. It’s a lot about the crisis dujour... Often, whatever terrorism relatednews is in the headlines... It’s almost likeCNN runs your day”

3)The federal counterterrorist operation ishorrendously complex:“A hectic, often frustrating routine... Thisamorphous thing called the war on terror-ism... Frustrations of trying to coordinateamong the many agencies involved inantiterrorist efforts...

In Washington, antiterrorism programssprawl across countless federal agencies,from the CIA to the FBI, from the NationalSecurity Agency to the Pentagon, fromCustoms to Coast Guards”.

4) The basic task is drawing up terroristwatch lists, the names of individuals andgroups:“the US maintains lists of groups and indi-viduals designated as terrorists...”. The American antiterrorist effort thereforebelieves that the groups and individualsthat it tracks are stable and, in the Westernfashion, have a fixed and permanent iden-tity. This was true during the Cold War, buttoday, at least in Europe, it is totally false.

[And even absurd in the Near East. For exam-ple, a resident in Arabia has ten local cardsand permits, a permanent visa, etc. None ofthem properly describes his real civil status.Let us call him Jean, Pierre, Maurice,Dupont. A local document is in the name ofMr Jen Duron, another of Mr Bire Maurice,the third, Mr Dugont Mauric, and so on (withno exaggeration). There is no computer tracein any office, consulate or airport of a MrDupont, who could also, without impediment,have a local chequebook and a bank card, inthe name of Mr Bire Maurice. The sameapplies to his colleagues. What we are look-ing at is the watch list concerning them and“tracking” their finances... and they havefixed European family names. Just try it with

“Ali bin Mohammed al-Bagdadi” (Ali, son ofMohammed, born in Baghdad)...]

Conclusion: “It is relatively easy to depositand move money many places with few ques-tions asked, or paper trails left. Internationalfinance experts predict that is unlikely tochange anytime soon.”

This comes as no surprise when we see howthis young woman (overworked and under-paid) plays the difficult hand that she hasbeen dealt. In such cases, what would happeneven to great chess masters if they had to playwithout being able to focus, between inces-sant flurries of e-mails and telephone calls,on a chess board with shifting positions andephemeral pieces – and without knowingwhen the game was finished, or even if itswould end one day? ■

Xavier Raufer * – March 2004

* Professor Xavier Raufer, Director of Studies,

Department of Research into Contemporary Criminal

Threats, Université Panthéon-Assas Paris II

For further information:

www.drmcc.org: the site of the Contemporary Criminal

Threats Research Department of the Université Paris II

www.xavier-raufer.com: the personal site of the author,

with bibliography, texts, etc.

The worldwidefreeze of

“Al-Qaeda” fundsSince the first attacks in August 2001,59.2 million dollars held by “Al-Qaeda”,or by close entities or companies, or byindividuals deemed to be “members”,has been frozen, or confiscated, in onehundred and twenty nine countriesthroughout the world. 70% in Europe,Eurasia and North America, 21% in theNear East (Saudi Arabia, the Emirates,etc.), and 8% in Southern Asia. ■

Source: report, July 2003, by a group ofUnited Nations experts charged with moni-toring the application of UN resolutions tocombat terrorism

The American antiterrorist effort therefore

believes that the groups and individuals that it

tracks are stable and, in the Western fashion,

have a fixed and permanent identity. This was

true during the Cold War, but today, at least in

Europe, it is totally false

Marc DassesseProfessor at the Free University of Brussels(ULB)Member of the Belgian Institute of Tax Advisors (IEC-IDAC)[email protected] article was previously published in Butterworths Journal of International Bankingand Financial Law, January 2004.

I. INTRODUCTIONThe Council Directive 2003/48/EC of 3 June2003 “on taxation of savings income in theform of interest payments” was published inthe Official Journal of the European Union on26 June 20031.

Even though Member States are committedto adopt and publish before 1 January 2004“the laws, regulations and administrativeprovisions necessary to comply with [the]Directive”2, it is yet far from certain that theywill have to “apply these provisions from 1 January 2005”3.

It will only be the case if the Member Statesdecide “by unanimity, at least six monthsbefore 1 January 2005”4 whether:– (i) the Swiss Confederation, the Principality

of Liechtenstein, the Republic of SanMarino, the Principality of Monaco and the

Principality of Andorra “apply from thatsame date measures equivalent to those con-tained in this Directive, in accordance withagreements [still to be] entered into by themwith the European Community, followingunanimous decisions of the Council”;

– and whether (ii) “all agreements or otherarrangements are in place, which providethat all the relevant dependent or associatedterritories (the Channel Islands, the Isle ofMan and the dependent or associated terri-tories in the Caribbean) apply from thesame date [1 January 2005] automaticexchange of information in the same man-ner as is provided for [in the Directive forall Member States, except Luxembourg,Belgium and Austria], (or, during the tran-sitional period … apply a withholding taxon the same terms as are [applicable duringthat period to Luxembourg, Belgium andAustria])”5.

Notwithstanding these uncertainties, theadoption of the Directive, and the fact thatMember States are committed to adopt andpublish national laws and regulations trans-posing it by 1 January 2004, is an importantmilestone the effects of which are alreadyreverberating in the EU throughout the mar-ket for retail financial services.Yet, as will be explained below, the Directiveis fraught with contradictions in terms of itsjustifications and stated objectives, and thequestion can be asked whether it is not inbreach of the freedom of movement of capitaland payments provided for by Articles 50 to60 of the Treaty establishing the EuropeanCommunity (hereafter the Treaty).

II. THE COMMUNITY REGIME ON CAPITAL MOVEMENTS AND PAYMENT PRIOR TO 1 JANUARY 19946

The Treaty of Rome, which came into effecton 1 January 1958, recognised four basicfreedoms:

• Free movement of persons,

• Free provision of services,

• Free movement of goods,

• Freedom of establishment.

Those freedoms were, as a rule, unconditionalas from the end of the so called transitionalperiod. This meant that an individual or a cor-poration could avail itself directly before anational court of the benefit of these freedomsif faced with a national law or regulationwhich restricted the full exercise of the same.To facilitate the full exercise of these free-doms, the Council adopted over the years var-ious directives. However it is important tobear in mind that in the Community legalorder a directive may never supersede a pro-vision of the Treaty. In other words, theunconditional nature of these four freedomsmeant that individuals (which term includeslegal persons) could avail themselves of thebenefit of the same even in the absence ofadoption of any directive meant to facilitatetheir exercise.

The position was however totally differentwith respect to the freedom of movement ofcapital and payments. Pursuant to article 67(i) of the Treaty of Rome, the Member Stateswere under the obligation to lift restrictions tothe free flow of capital but only “to the extentnecessary to ensure the proper functioning ofthe Common Market”.

13april 2004


Does the EU Directive “on taxationof savings” violate the freedom ofmovement of capital?

1. OJ L157/382. See Directive, Article 17.13. See Directive, Article 17.24. See Directive, Article 17.35. See Article 17.2 (i) and (ii)6. For a comprehensive review, see, among others, J.P. Raes,

“The European Community Regime on the Free Movement ofCapital”. A Turkish version of that paper has been published inJanuary 2002 by the Economic Development Foundation(Istanbul) under the following title: “EU legislation on the freemovement of capital and Turkey's harmonisation”, in the series“The process of Turkey's accession to the EU” (Book no.9).

by Marc Dassesse

made to local residents. Obviously, a mixtureof the three is possible.

As soon as a private individual is authorisedto entrust his savings to a credit institutionestablished outside his Member State of resi-dence, this whole system becomes totallyineffective.

For reasons which go beyond the scope of thepresent article, the proposed directive on tax-ation of savings to which reference is made inthe “Whereas” of the 1988 Capital Directivewas eventually withdrawn. Thus, MemberStates ended up in an uncomfortable situa-tion: of the one part, their residents couldopen bank accounts abroad freely. On theother part, their national tax authorities hadno instrument, in terms of Community law,allowing them to get (easy) access to the

financial dealings of their local taxpayersabroad, especially when they had chosen toopen a bank account in a Member State hav-ing strict banking secrecy rules.

III. THE PRESENT COMMUNITY REGIME ON CAPITAL MOVEMENTS AND PAYMENTS

The adoption of the so-called MaastrichtTreaty, amending the Treaty of Rome, pro-vided Member States with the opportunity tobacktrack on the amount of freedom they hadgranted to their citizens under the 1988 Capi-tal Directive.

True, under the Maastricht Treaty, the free-dom of movement of capital and paymentshas become a full fledged freedom, on a parwith the other freedoms10.

The key provision to that effect is Article 56EC which reads as follows:

“Within the framework of the provisions setout in this Chapter all restrictions on themovement of capital between Member Statesand between Member States and third coun-tries shall be prohibited.2. Within the framework of the provisionsset out in this Chapter, all restrictions on pay-ments between Member States and betweenMember States and third countries shall beprohibited”.

However, as always, the devil is in the detail:the words “within the framework of the provi-sions set out in this Chapter” at the beginningof both paragraphs of Article 56 means thatthe freedom thus affirmed is subject to theother provisions of the same Chapter, namelyArticles 57 to 60 EC, which allow MemberStates to restrict that freedom in severalrespects.

For the purposes of the present article,particular attention must be paid to Article 58EC which reads as follows:1. The provisions of Article 56 shall be with-

out prejudice to the right of Member States:(a) to apply the relevant provisions of theirtax law which distinguish between taxpay-ers who are not in the same situation withregard to their place of residence or withregard to the place where their capital isinvested;(b) to take all requisite measures to preventinfringements of national law and regula-tions, in particular in the field of taxationand the prudential supervision of financialinstitutions, or to lay down procedures forthe declaration of capital movements forpurposes of administrative or statisticalinformation, or to take measures which arejustified on grounds of public policy orpublic security.

2. The provisions of this Chapter shall bewithout prejudice to the applicability ofrestrictions on the right of establishmentwhich are compatible with this Treaty.

3. The measures and procedures referred to in paragraphs 1 and 2 shall not constitute a means of arbitrary discrimination or adisguised restriction on the free movementof capital and payments as defined in Article 56.”

In other words, Member States may, amongothers, differentiate in their tax laws betweentaxpayers who are resident and who are non-resident, as well as in respect of the placewhere the capital of their taxpayers isinvested.

It was for the Council to determine the extentto which the lifting of such restrictions wasnecessary. The Council did so by adopting,over the years, a number of directives whichprogressively did away with a large numberof restrictions.

Thus, contrary to the other freedoms, the free-dom of movement of capital and paymentsunder the Treaty of Rome was not uncondi-tional: it could only be relied upon by individ-uals to the extent that a national law or regu-lation restricting a particular movement ofcapital or payment could be held to be con-trary to one of the directives adopted by theCouncil.

Additionally, the Treaty of Rome provided inArticle 61 (ii) that the liberalisation of bankand insurance services should progress con-currently with the progressive liberalisationof capital movements.

As a result of this link, credit institutionscould only be entitled, in terms of Communitylaw, to provide banking services at the retaillevel, including receipt of deposits, on a cross-border basis if liberalisation of private savingsthroughout the Community had also becomeeffective as a matter of Community law7.

This was the key achievement of the 19888

Capital Directive 88/361/EEC of 24 June1988 . Adoption of this directive by the Coun-cil required unanimity. Such unanimity couldonly be achieved because at the time, as evi-denced by the “Whereas” of the directive, theCommission was (already!) in the process ofpreparing a directive on the taxation of sav-ings. At the time, this proposed directive ontaxation of savings appeared likely to beadopted unanimously by the Council.

In a regime9 in which a private individual isprohibited from having a bank account out-side the Member State in which he is resi-dent, he has no alternative but to entrust hissavings to local credit institutions. In turn,the tax authorities of the Member State ofresidence of that individual can, by appropri-ate legislation, enlist the assistance of thedomestic credit institutions to ensure thatlocal savers comply with their fiscal obliga-tions. This can be achieved by giving the taxauthorities more or less unlimited access tothe records of the local credit institutions, orby imposing on local credit institutions aduty to report automatically to the tax author-ities the payment of interest which they havemade to local residents, or by imposing onthe local credit institutions the obligation towithhold tax on any payment of interest

14 april 2004


7. For a comprehensive review, see, among others, M. Dassesse,S. Isaacs and J. Penn, EC Banking Law, Second Edition, 1994,Lloyds of London Press at page 235 sq.

8. OJ L178/5 dated 8 July 1988.9. Such as was in force in France and Italy prior to the adoption of

the 1988 Capital Directive.10. It can, in some respects, even be called a super freedom: namely,

contrary to what is the case of the other freedoms, the freedom of movement of capital and payments is applicable, as a rule,not only as between Member States but also as between MemberStates and third countries.

As soon as a private individual is authorised to

entrust his savings to a credit institution estab-

lished outside his Member State of residence,

this whole system becomes totally ineffective

This discretion is however subject to animportant proviso: The possibilities of differ-entiation provided for by Articles 58 (1) and(2) EC may not constitute the means of arbi-trary discrimination or a disguised restrictionof the free movement of capital and paymentsas defined in Article 56 EC.

Thus, the measures taken pursuant to Article58 (1) (a) or (b) must be proportionate to theobjectives pursued, and these objectives mustthemselves be compatible with the provisionsof the Treaty.

Article 58 (1) (a) must be read in conjunctionwith the explanatory Declaration which wasincluded in the Maastricht Treaty, and whichreads as follows:

“The Conference affirms that the right ofMember States to apply the relevant provi-sions of their tax law as referred to in Article58 (1) (a) of this Treaty will apply only to therelevant provisions which exist at the end of1993. However, this Declaration shall applyonly to capital movements between MemberStates and to payments effected betweenMember States.”The main effect of this Declaration was thusto introduce a standstill on intra-EU differen-tiation: Member States are allowed to main-tain only the discriminately fiscal measuresthat existed as of 31 December 1993. In other words, the Declaration considerablylimits the potential use of the freedom of dif-ferentiation provided for by 58 (1) (a). How-ever one has to bear in mind that, in terms ofthe Community legal order, the Declarationdoes not carry the same strength as an expressTreaty provision.

The last sentence of the Declaration meansthat the standstill clause does not apply inrespect of capital movements and paymentsbetween Member States and third countries.

In other words, Member States were permit-ted to continue competing with each other byintroducing evermore favourable tax meas-ures for taxpayers resident in third countries,in order to attract their savings or investmentsto their territory, whereas they lost their free-dom to continue to do so with respect to tax-payers resident in other Member States.

Thus, contrary to what may be presumed by asuperficial reading of the first sentence of theDeclaration, the discriminatory fiscal meas-ures referred to therein are not fiscal meas-ures to the detriment of taxpayers resident inother Member States , but instead tax meas-ures which grant more favourable treatment

to taxpayers resident in other Member Statesthan to local taxpayers.

A parallel may be made in this respect withthe present day situation regarding tax-freeshopping at EU airports: It is only available totravellers bound for non-EU destinations.IV. The Communication of the Commissionon certain legal aspects concerning intra-EUInvestment.

On 1 January 1994 Articles 73 (b) to 73 (h) ofthe EC Treaty governing capital movementsand payments came into effect. Since the rati-fication of the Amsterdam Treaty, the num-bering of these Articles has been changed toArticles 56 to 60 EC reviewed above. As aforesaid, in contrast to what was pro-vided by the pre-Maastricht Treaty regime,the provisions of Articles 56 to 60 EC are“directly applicable”.

In order to clarify the extent to which nationallaws and regulations restricting directly orindirectly the cross-border flows of capitaland payments could be viewed as incompati-ble with the new Community regime embod-ied by Articles 56 to 60 EC, the EuropeanCommission adopted “Communication oncertain legal aspects concerning intra-EUinvestment” . The objective of the Communi-cation was to indicate to national authoritiesand economic operators how the Commissionconstrues these Articles, on the basis essen-tially of the case law of the European Courtof Justice (ECJ).

By its very nature, however, the Communica-tion has no binding authority, except for theCommission itself. It is the ECJ which, in theCommunity’s legal order, has the final say interms of the proper construction of Articles56 to 60 EC.

In addition, attention must be paid to the factthat in as far as the Communication basesitself on the case law of the ECJ, it is essen-tially basing itself on case law which predatesthe coming into force of Articles 56 to 60 EC.

In other words, the ECJ case law to whichreference is made in the Communicationessentially relates to the pre-Maastricht capi-tal movements regime, which regime was notqualified by the “fiscal carve-out” introducedby Article 58 EC with effect from 1 January1994.

“In such circumstances, ECJ case law relatingto the previous capital movementsregime….seems somewhat irrelevant in thelight of the step backwards in terms of fiscal

discrimination in the present [post-Maas-tricht] regime.”12

IV. THE GENERAL SCHEME OF THE TAXATION OF SAVINGS DIRECTIVE (HEREAFTER, THE DIRECTIVE)

Suffice it to recall, for the purposes of thisarticle, that the Directive as adopted essen-tially provides as follows:

Whenever a payment of interest is made by apaying agent established in a Member State toa private individual resident in another Mem-ber State, acting for his own account and in aprivate capacity, the paying agent (which, inmost cases, will mean the bank with whichthe beneficiary has an account) must:

• In the case of all Member States saveBelgium, Luxembourg and Austria, com-municate to its tax authorities, who will inturn pass on that information to the taxauthorities of the Member State of resi-dence of the beneficiary, specific informa-tion, as laid down by the Directive, regard-ing such payment;

• In the case of Belgium, Luxembourg andAustria, withhold tax at rate initially set at15%13 on the payment made to the benefi-ciary, unless the beneficiary (at the optionof the Member State where the payingagent is established), authorises the payingagent to release all relevant information tohis tax authorities, or produces a tax certifi-cate issued by his tax authorities.

NB: continued on www.cifafound.ch,where the entire article is available on a PDF file.

15april 2004


11. OJ C 220/06 dated 19 July 1997.12. J.P. Raes, The European Community Regime on the Free

Movement of Capital, at page 16.13. To be increased after 3 years to 20% for the subsequent 3 years,

and to 35% thereafter.

16 april 2004


A European Examination Framework for Financial Advisers: The EFPA ModelIn the past year the European Financial Planning Association (EFPA)has set out to create a new examination structure for the financialservices industry in Europe. The starting point, presented in this article,addresses the key strand of financial advice.

The EFPA curriculum isdesigned to raise standardsacross the financial servicessector in Europe and toimprove consumer protectionby ensuring that those involved

in financial consultancy have a sound under-standing of key principles as well as the skillsto implement recommended actions.

In co-ordinating the various structures, thefollowing key issues were identified:

• The current examination matrices of vari-ous examinations structures are confusingand inflexible.

• There are inconsistencies and differences instandards between qualifications for thesame activity.

• The examination structure and numerousassociated designations are confusing.

• There is a cost to firms when staff movesbetween activities if they must be (re)-examined on the same content.

• There are gaps and inconsistencies inexamination provisions.

• Some syllabuses cover content areas ingreater depth than others.

• There is a requirement to ensure that practi-tioners remain up to date via regular assess-ment of competence.

ADDRESSING PRACTITIONERSPractitioners previously assessed as compe-

tent, will, at a given transitional date, have anopportunity to be grandfathered within thenew structure. Moreover, transitional arrange-ments should enable those taking examina-tions and working towards attaining compe-tence to transfer into appropriate programs orotherwise make new arrangements.

EFPA is also keen to address existing andplanned mechanisms for ensuring thatpractitioners maintain their competence. It is likely that such a competence updating/reclassification system would involve regu-lar assessment and training, particularly to ensure regulatory, legislative and productknowledge.

The Financial Planning practitioner is placedat the pinnacle of the structure. The distinctionbetween advising and planning is blurredbecause financial planning is an integral partof the whole advice process but the two practi-tioners can nevertheless be distinguished bythe complexity of their clients’ financial struc-ture and net worth and by the level of trainingeach professional has undertaken.

The syllabus must be regularly reviewed andwhere appropriate, amended. We in Europeare currently experiencing a period of mas-sive change within the financial sector, partic-

ularly in the retail area (financial services)and as the nature of the market transformsand companies react to new and changinglegislation and regulation, new and innovativeproducts will be brought to the market. The EFPA examination framework will needto reflect and adapt to these changes whileaccredited examining bodies will also need toupdate their syllabuses and assessmentmethodologies accordingly.

The curriculum content is comprehensive andappropriate in relation to both the learningoutcomes and the indicative content. Constantassessments must be undertaken to ensurethat it remains so.

The goals are to benchmark the examinationsstandards against national/European standardsand work to ensure that this curriculum isaccepted as an international benchmark.

Transitional arrangements must be designedto recognise existing achievement and partialachievement in a manner that does not dis-criminate against existing practitioners or par-tially qualified candidates. Institutions aregenerally eager to know what arrangementswill be in place for those partially qualifiedthrough current examinations and what recog-nition there will be for the prior ‘old’ exami-nations under the new arrangements. Also,what level of authorisation, for example, willbe granted in the new structure for examina-tions and certifications / diplomas held cur-rently? There appears to be little appetite forrequiring existing practitioners to undergowholesale or partial re-qualification on thebasis of new examinations; nor is such actionjustifiable.

The goals are to benchmark the examinations

standards against national/European standards

and work to ensure that this curriculum is

accepted as an international benchmark

17april 2004


One could argue that there should be noexemptions policy at all because 1) consis-tency of approach and fairness are very diffi-cult to achieve and 2) other qualificationsmay not have undergone the same qualityassessments / accrediting procedures as thoseapproved under the new examination frame-work. There would, in any case be very lim-ited exemptions available based on very spe-cific parameters of achievement and anyexemptions should reflect different forms ofprior achievement, including any regionaldimension, e.g. overseas qualifications.Another approach could be to combine a noexemption policy with recognition of priorachievements through an educationally linkedcredit-based system. The introduction of anew examination framework affords theopportunity to simplify the basis on whichexemptions are currently offered from exist-ing examinations.

The following general principles couldunderpin any exemptions policy in order toimprove consistency and reliability:

• Incorporation of a means of recognisingprior achievements based on credits;

• Use of national and international qualifica-tion frameworks to inform considerationsof claims of qualifications equivalency; and

• Identification of criteria for setting prece-dents and resolving conflicts.

Institutions are very supportive of periodicassessments for maintaining competence butare not; on the whole, enthusiastic that thisshould be a formal requirement. Many institu-

The new generation © Communauté européenne, 2004

18 april 2004


tions indicate that they already have regulartesting as part of their training and compe-tence schemes and that, subject to inspectionand evaluation; they would prefer to continuethis modus operandi. Areas that are generallycovered are product knowledge, complianceand money laundering.

Institutions should be able to implement atraining and competence programme depend-ing on their specific business and risk-profile,taking into account the experience of individ-ual staff within their staff rolls. Such assess-ments must be the responsibility of institutionsto ensure that an individual’s competence isassessed in a manner and frequency appropri-ate to that individual. The wide-ranging viewsof how frequently assessments should takeplace and the format they should adopt giveweight to the view that these matters are bestleft to institutions.

The following may be seen as a summaryof possible benefits to institutions.

• Transferability of qualifications. There maybe a reduction in training/examining costsfor jobs that cover more than one mainactivity or for those persons shifting into adifferent but related field.

• The new examinations framework should

allow for the easy and straightforwardtransfer of staff, avoiding unnecessary re-qualification and associated study time;

• International standards and cross recogni-tion will assist cross-jurisdictional transfer-ability.

• A reduction in the costs incurred by firms(e.g. sorting out errors and managing com-plaints)

The new framework for the EFPA / EFA Curriculum:

• Set standards for the development of a sin-gle, modular exam system, ensuring consis-tency as well as flexibility;

• Simplify the alphabet soup of qualifica-tions, making it clearer for everyone – con-sumers, employers and new entrants to theindustry – to see what a person is qualifiedto do also across boarders.

• The framework and proposed modulesshall generally be seen to be helpful andlogical as a starting point for the newexamination structure

• Streamline the current plethora of examsand develop internationally recognisedstandards so that employees are able tomove between jobs more easily

• Establish performance measures for theadministration and delivery of EFPA-accredited exams.

• Require employees to demonstrate thatthey are keeping up-to-date with develop-ments in the marketplace.

• The structure reflects more accurately thecomplexity of the relationship betweenselling, advising and planning, in so far asthese are separate activities.

There is the inclusion of ethics in the curricu-lum (Or ethics and Code of Conduct / profes-sional responsibility). The complete array ofsocially responsible, ethical and sustainableinvestments is reflected more fully in themodules.

Fundamentally – what is a European Finan-cial Adviser’? There are a variety of assess-ment methods, including national availableand nationally accredited qualifications, thatmay be suitable in assessing these skills and it is up to institutions to choose the methodthey deem most appropriate for this purpose.The assessment of advice skills is likely to becarried out in the workplace. However, the knowledge, understanding andapplication underpinning these skills can bepicked up and assessed synoptically throughEFPA / EFA’s module for examinations.

The European Financial Planning Association(EFPA) is Europe’s largest standard settingand certification organisation for financialplanner and financial advisers. Currently situ-ated in twelve countries, EFPA expects tohave national Affiliates in fifteen countries bythe end of 2004. ■

Susan Middelboe is a Board Member,and Michael Fawcett Chief Executive Officer of the European Financial Planning Association (EFPA), Rotterdam.

The wide-ranging views of how frequently

assessments should take place and the format

they should adopt give weight to the view that

these matters are best left to institutions

19april 2004


French business cultureGilles-Guy de SALINS

(Vice-President, Association Nationale des ConseilsDiplômés en Gestion de Patrimoine / National Asso-

ciation for Graduates in Wealth Management –A.N.C.D.G.P.) contribution to TRUSTING –

The Independent Financial Advisor, prior to the nd

CIFA Forum If

I tell you that the French do not conduct business likeother people in the world,I believe that you will trustme. I should know, for I amFrench. However, besides

the joke, there is a reality. So let us discoverhow the trade is organized on the other side of the lake:

As in other countries we have notaries,accountants, barristers, lawyers, solicitors,bankers, portfolio managers, and the like. Our pension industry is both State regulated(mainly) and in the hands of insurance com-panies, to make it short.

We have IFA’s: In this respect there are threelevels of IFA’s expertise. Firstly the “guide”who is in fact a financial products sales person,who, in France, is covered by the recentlyvoted law of 01/08/2003. Secondly, the“adviser” who is also regulated under thesame law as Consultant in Financial Invest-ments (CIF). Thirdly the “planner” who is,to some extend, comparable to a GP (generalpractitioner) outside the medical scene, cover-ing all aspects of an individual’s wealth man-agement (in French CGP for Conseil en Ges-tion de Patrimoine). He has legal adviceauthority through two French Ministry of Jus-tice Departmental Orders dated 19/12/2000and 01/12/2003.

• The 1972 law has been upgraded as ofAugust 1st 2003 to regulate the sale offinancial products and advice related tothis: IFA/Sales. However, under the decreeto be, to operate, one needs a professionalcard from each and every supplier one reg-isters with. Its validity is of two years only,which questions the future of clients if notrenewed at expiry. The motto “best advice,best offer” is also difficult to achieve due tofloor volume imposed by suppliers to allowfor a registration production code. We arestill lobbying for a global card, and clearrights upon the “property” of the client base.

• The same law, under a new «advisor only»heading, the CIF, organises the financialadvisory level. Indeed the law dictates thatthe IFA/CIF sells a truly independentadvice to the final client. Once effected,he then changes his hat as a Dr. Jekyll &

Mr Hyde (although there is nothing to hide)and goes back to a sales talk. He is thensupposed to sell the perfect product in alltransparency. First step: fees, second: com-missions. In the law, it is compulsory forthe IFA/CIF’s to provide compliance, capi-tal adequacy, reporting and training. Sincebankers, through lobbying, exempted them-selves from this double talk and charge,guess where should go the customer for atleast simplicity?

• Nevertheless, the four French professionalassociations, amongst which ANCDGP,will be in charge of monitoring the respectof professionalism and deontology of theirmembers who will chose the IFA/CIF trade,under rules to be written by the newly cre-ated Authority of Financial Markets (AMF).

• Third step, the planning. Not only financialplanning. Therefore the Planner, in theFrench inception of the term (IFA/CGP) orGPP for Global Patrimonial Practitioner,is mostly graduated from some 40 Univer-sities and “top” Schools that deliver mainlya Master’s Degree. (One year after 4 yearsof law or economic studies, or a BA in lawand economics plus 2 years in wealth man-agement). It is therefore a post-graduate

discipline. Therefore, today, the inceptionof the CIF is a real threat to the survival ofthe planner. What is at stake is the qualifi-cation of the architect of the planningprocess in as much as the CIF text, as writ-ten today, establishes the CIF as the ulti-

mate intermediary, before and above theplanner. This is nonsense. ANCDGP con-tinues to try to introduce a bill so that thisprofession is recognised under a dedicatedlaw. At least, pursuing talks with theFrench Ministry of Justice, we would liketo see the use of the CGP name restrictedand protected.

To help us out in this fight for recognition, theEuropean integration in this field is logical:from the pure sales (guide) level to the finan-cial services (adviser) step, then to up to theultimate all inclusive family office (planner)this is the only common road tomorrow. Thewealth manager, planner, Conseil en Gestionde Patrimoine or CGP in French, must berecognised as a profession and not an activity.

CGP training is open to all in two parallelways: an initial university cursus from gradua-tion, or a professional curriculum through thesame channels on adapted timetables. Experi-ence accounts for some credits, and in the end,the same level of diplomas are achieved. However, despite this, there are still someFrench independent people, at all three levels,who still show today no qualification at all.After a short period of grandfathering imposedby a coming decree, this will be eradicated.

…French people do not conduct business like

other people in the world…

20 april 2004


Geneva’s diverse mixture of state and private schools, universities andother institutions of higher learning provides world-class standards ofeducation, within a rare international framework.

ANCDGP articles of association aim to repre-sent all French training organisations thatdeliver a postgraduate diploma. As mentionedthis is mainly the 5-year’s Master Degree, thenorm recognised at pan European level. Inci-dentally, the head of the French legal system,the Conseil d’Etat (State Counsellor) con-firmed ANCDGP’s legitimacy as official rep-resentative of the graduates on 03/06/2002.

Port of call of all official training, ANCDGP’sgoals are to monitor a common minimal/maximum base for each of the three levels ofFrench IFA’s. By right of incorporation, it hasaccess to all programs taught in France. Sinceno one can be sure of a career as IFA only, ithas already established ties with ACGP, theAssociation of Graduates from the BankingInstitute (CESB), and speaks in the name of

each graduate, independent or employee.On another front, let us recall that everyunderlying trade behind advisory servicesheading is governed by a dedicated law: realestate, insurance (both life and risk), portfoliomanagement, CIF, sales … Indeed, all ancil-lary business, in turn full-fledged professionsthemselves, are truly regulated, “chartered”,trained for and accredited. To advise to thefull, the global planner requires these cards.If he does not possess them, or if the saidprofessions are not registered inside the plan-ning company, the planner needs to set upties with external practises: fiscal and legalservices, estate planning, independent ormulti-tied insurance brokerage, real estateservices (sales and management), portfoliomanagement, CIF and sale of financial products etc. All these aspects, and more,

are touched and/or developed in the trainingprocess of an IFA/CGP, according to themain targets of the universities’ programdevelopers. However, since they have a common base of economics or law, the endgraduates have a comparable level.

Therefore it would be quite counter produc-tive, both on a European viewpoint and on alegal perspective, that current French legisla-tion moves the top range activity (planning atGPP level) below CIF capacity. Lawyers andnotaries in particular would have some prob-lems in becoming full-fledged commercialIFA’s. Finally one does not understand underthe current legislation why IFA’s would need accreditation while bankers would not,but still train at the same universities for thesame degrees! ■

The International Center FAME

Our nation is one of the fewcountries to emphasize prac-tical vocational training.Over 90% of young people,having completed their edu-cation system in Switzerland

leave with a diploma or professional certifi-cate. Like reinforcing this assertion the city of Calvin spends more than a quarter of itsbudget on education (compared with 14.2%in the United States and 11.3% in Japan). In the 20th century alone, personalities asfamous as Jean Piaget, Ansermet and Jaques-Dalcroze immediately spring to mind, theyhave left a deep impression on European andworld culture.

The University of Geneva has a long traditionof welcoming foreign students. The institu-tion is linked with four leading institutesteaching international, ecumenical, develop-ment and European studies. One of them,the Graduate Institute of International Studies,

is a teaching and research institution dedi-cated to the study of international relations atgraduate level. Its staff and 650 studentscome from all parts of the world. Students goon to careers in the diplomatic service andnational administrations, or join internationalcompanies. The institution seeks, in associa-tion with the Graduate Institute of Interna-tional Studies, to promote the exchange ofideas and information, training and researchin the fields of international money, bankingand finance.

Finally, a unique partnership between theacademic and financial worlds, the Interna-tional Center for Financial Asset Manage-ment and Engineering (FAME) supports cutting-edge education through a doctoralprogram in Finance in association withleading academics worldwide. The Univer-sity of Geneva has signed 125 bilateralagreements with European Universities forexchange programs.

THE INTERNATIONAL CENTER FAME

The International Center for Financial AssetManagement and Engineering (FAME) is aprivate foundation created in September 1996by an initial group of 21 leading partners ofthe finance and technology communitytogether with three academic Institutions ofGeneva.

Endowed with CHF 21 million, the Institu-tion is involved in advanced and appliedresearch, executive education, and doctoraltraining with the goal of becoming a privi-leged interface between practitioners andacademics in the field of asset managementand financial engineering. Its ambition is toconvert the Lake Geneva region into theintellectual capital of the world of asset man-agement and financial engineering. The Cen-ter sponsors activities organized along fourmajor axes : Executive Education, Doctoral

21april 2004


Program, Research, and Interfacing Activi-ties. Its Executive Education courses providea wide palette of opportunities for the financeprofessional.

FAME has become one of the major Europeanproviders of advanced executive education infinance. As of this year FAME and the SwissBanking School have joined forces in Execu-tive Education. The Swiss Banking Schoolprovides cutting edge education for execu-tives of financial institutions to improve man-agement capabilities and professional expert-ise, it is now co-operates with internationallyrenowned academics and professionals inorder to stay at the forefront of global devel-opments in banking and finance. The Certifi-cate in Financial Asset Management andEngineering is a 5 weeks immersion program,planned to provide intensive training in thestate-of-the-art techniques and practices ofasset management, as well as financial engi-neering. Launched in 1997, the Doctoral Program in Finance is a joint offer of the University of Geneva, the University of Lau-sanne, and the Graduate Institute of Interna-tional Studies in Geneva, tied later by theUniversity of Neuchâtel.

VISION FOR THE FUTURE: 3 DISTINCT FEATURES

The FAME doctoral program has 3 distinctfeatures a full offering of Ph.D. level coursesin finance doctoral research carried out in

collaboration with first-rate partners in thefinancial industry and in the intellectualenvironment provided by highly renownedacademic institutions and full financing ofall degree candidates. A wide variety of toplevel research events help students and fac-ulty stay at the research frontier stimulatingnew thinking. The executive education pro-gram, including the hands-on CertificateFAME and the Geneva Executive Courses inFinance, keeps providing importantspillovers into the academic part of FAME.And last but not least, the large number ofdistinguished academic visitors that come toGeneva and Lausanne every year, teachingcourses in the doctoral and executive pro-grams, making joint research with local fac-ulty, or to give seminars, constantly opensup new perspectives.

The program is structured along three phases.The Preliminary Phase consists of one of theMaster/DEA programs in economics orfinance organized by the member institutionsin Geneva and Lausanne. The First Phase fea-tures specific PhD level courses coveringadvanced financial theory and the techniquesfor research in finance. The Second Phase isdevoted to the writing of a doctoral thesis.Students take selected courses according totheir interests and are involved in interna-tional academic activities. ■

By Didier Perrin

The FAME doctoral program in finance has the

ambition to become the number one doctoral

program in Europe

A wide variety of top level research events help

students and faculty stay at the research fron-

tier stimulating new thinking

22 april 2004

INVESTING – HOW TO NAVIGATE

Independent Asset Managers & Hedge FundsThe importance of a qualitative approach torisk management and due diligence.

We have the impression that the IndependentAsset Manager industry is in full expansion:what reading do you make from this evolution?B.Z. The industry is presently growing bynumber of Independent Asset Managers:there are two kinds of new entrants, on onehand experienced and entrepreneurial bankerswith their own portfolios of clients taking onthe challenge of establishing their own com-pany respectively joining established compa-nies in the market. The aim of these entrepre-neurs are mainly to focus on their clientrelations, providing a tailor made service and“escaping” the administrative, bureaucraticwork and politics of bigger institutions.

On the other hand, there are several compa-nies from the surrounding countries establish-ing themselves in Switzerland in order to ben-efit from our excellent infrastructure andavailability of well-educated, professional andmultilingual staff.

The market is expected to consolidate in thecoming years because of:

• many Independent Asset Managers areclose to retirement,

• the lack of critical mass as to assets undermanagement,

• the administrative and legal framework isgetting more complicated.

Compared on an international scale, yourbank is a rather small player in the finance /wealth management industry: what are yourcompetitive advantages?B.Z. Yes, we are a rather small institution andalthough we have been growing at ratherimportant yearly rates (the last 10 years from60 to 280 employees) due to the ongoingmergers in the industry we hardly can catchup and compared with other players in themarket we actually are becoming smaller.Our competitive advantage is the result ofmany factors such as our “human size”, conti-nuity (i.e. decisions taken on a long term viewbasis, speak to the same interlocutor overtime etc) and transparency, client drivenapproach, tailor made solutions and shortdecision process.

What are the products that your group offersto Independent Asset Managers?B.Z. Our bank was one of the first bankinginstitutions to perceive that performance couldbe improved by judicious use of alternativeinvestments, and was one of the pioneers inthe early 1970s of this new approach to themanagement of clients’ assets in Switzerland.

We manage fund of funds and use a selectionof external funds of various types. Our in-house products include offshore fundsreserved for our clientele and funds registeredin Switzerland.

You mentioned that your “human size”enables you to offer tailor made services:what about alternative products?B.Z. Depending on the needs expressed byIndependent Asset Managers with whom wedevelop relationships, we can create “tailormade” investments funds subject to adequatevolumes.

Biagio Zoccolillo

…“ Manager selection is more an art than a

science” is something you hear with regards

to hedge fund investing...

Biagio Zoccolillo, SVP and Head of the IndependentAsset Managers department at Mirabaud & Cie,Geneva

Johan Olson, VP and Head of marketing, alternative investments at Mirabaud & Cie, Geneva

23april 2004


We also offer a service called managedaccounts, where we offer tailor made hedgefund portfolios according to each clients spe-cific investment objectives composed by sin-gle hedge funds “line by line”.

What are the advantages of alternative products if they are integrated in the assetmanagement of a conventional portfolio?B.Z. Hedge funds enable us to reduce theoverall volatility of our traditional portfolios.Typically we participate meaningfully in pos-itive equity and bond markets and preservecapital in bear markets.

What are the qualitative aspects of due diligence and risk management?J.O. Manager selection is more an art than ascience” is something you hear with regardsto hedge fund investing. The truth is that duediligence and risk management when investingin hedge funds is both an art and a science.What you need to decide is how much effortto put on the quantitative side (science) andhow much effort to put on the qualitative side(art) of the equation.

Our bank has been active in the area of hedgefund investing for some 30 years and obvi-ously noted the evolution of the industry overthe years. Our experience is that the qualita-tive due diligence and risk management isparamount and should represent the majorityof the due diligence you conduct on an indi-vidual hedge fund when you first invest aswell as on an ongoing basis. We have how-ever noticed that the reliance on quantitativeanalysis, due diligence and risk monitoringhas increased over the last 10 years with thearrival of institutional investors starting toallocate assets to hedge funds.

What is important when carrying out thequalitative due diligence and risk manage-ment of hedge fund mangers?J.O. In the last few years with the arrival of

institutional investors in the hedge fundspace, we have noticed the increased relianceof quantitative research, due diligence andrisk monitoring by some of the newer compa-nies providing investment management serv-ices and advice to these institutions.

Value at Risk (VaR), correlation analysis andother metrics are used to monitor perform-ance of hedge funds. We agree that this areaof due diligence is important however weargue that quantitative work should representroughly 1/3 of the equation and the rest spendon qualitative research. One problem is obvi-ously that qualitative research demand morehuman resources and has to be carried out bysomeone with long experience of hedger fundinvesting.

VaR is an interesting monitoring tool but lets face it. We have experienced at least one10 standard deviation event in at least onemarket every year for the past decade. Wealso know that correlation are seldom stableover time and goes out the window in“stressed” periods going from negative/ zerocorrelation to a perfect +1, something we tendto forget in between crises.

Before looking at the different areas wherequalitative due diligence is important weneed to define risk. Simply put risk is thechance of an unwanted outcome. One way tolearn about risks is to look at previous prob-lems that occurred and try not to repeat them. The last decade is full of examples like valu-ation issues of the Granite fund, Impact ofhaircuts on LTCM or fraud allegations at theManhattan Fund. Risk management from aqualitative standpoint is not about eliminat-ing risk, you cannot make money withouttaking risk and your risk rules should notextinguish return. It’s more about ensuringthat you both understand what risks you aretaking and that the balance between risk andreward is in proportion.

Johan Olson

Risk management from a qualitative stand-

point is not about eliminating risk, you can-

not make money without taking risk and

your risk rules should not extinguish return.

It’s more about ensuring that you both

understand what risks you are taking and

that the balance between risk and reward

is in proportion

24 april 2004


Finally none of us will be able to predict thenext “ surprise” but we need to assume thatthere will be new ones.

In which areas of alternative investments isqualitative due diligence most important andwhat would be the important questions youwould like to have answered?J.O. Strategy: The manager should be able tocoherently describe their investment philoso-phy and investment process and also be ableto describe their past performance. Past per-formance is numbers but you need to probeand understand how these numbers wereachieved. Was it using the same strategy, wasit a team approach and with what resources asto analysis, administration and other supportwas the track-record achieved.

You need to look at their methodology interms of portfolio turnover, risk/return, viabil-ity of approach and money managements.Basically you are looking for someone with aunique discipline to a specific strategy andwho are able to strictly adhere to their style.

STRUCTURE

The organization has to exhibit an adequateinfrastructure. We have seen many brilliantfund managers starting their own hedgefunds alone with a Bloomberg only to failbecause the lack of a sufficient organizationto help with all aspects of running a hedgefunds besides managing the money. You arelooking for a professional team with strategicmakeup and size. Legal and accountingframework, Prime brokerage relationship,trade execution capabilities are other factorsyou need to examine and at the same timemake sure that there is no conflict of interestin any of these areas.

PRINCIPALS

Do we like them? The stability and consis-tency of the fund managers need to beassessed. Industry background, personal andbusiness ethics, employment history, person-ality traits and track record are other factorsof importance. Here experience and industrycontacts is important since you need to checkwith other industry participants to get infor-mation on the principals. You also would liketo ask for references and use these referencesin your due diligence. After having con-ducted hundreds of manager interviews youget a sort of gut feeling for who is good andwho is not and after leaving the managermeeting you know if you will give the man-ager money or not.

COMMITMENT

Why is the hedge fund manager doing whathe is doing? You would like to see that themanager has put a significant portion of hisnet worth in the fund he manages. You alsowould like to have a balance between what hewill earn on management and performancefees versus the return on his own investment.There is always a risk that a fund grows to bigand becomes an annuity product for the man-agement team. The result being that they arenot as “ hungry” as they use to be or becomesmore cautious in their investment strategy toprotect their huge asset base rather than pro-duce the returns you expect them to.

Operational review. Included analysis ofprospectus, pricing methodology (mark tomarket), independence of administrator,reviewing financial statements (audited ifpossible), segregation of duties between frontand back office, relationship with counter par-ties, compliance, use of leverage in accor-dance with guidelines etc. In the operationalreview you also would like to include thefund terms and look at things like lockup,redemption policy, soft dollar arrangements,and compensation. How is the fund teamremunerated between salary, bonus andincentives?

These are some of the factors that are impor-tant in the due diligence process in order toget some qualitative insights on individualhedge fund managers and their funds. Oneproblem is that it is difficult to quantify quali-tative insights. One idea is to attribute anattractiveness rating or score to the differentareas on which you conduct the due dili-gence.

Is this initial due diligence sufficient to protect your investment from any negativesurprises?. J.O. Obviously not and to cite Leslie Rahl“Risk management is a journey, not a destina-tion. It is not a one time exercise to imple-ment best practices tools, but rather a life-time’s odyssey”. The most important part ofthe qualitative due diligence and risk manage-ment is the ongoing monitoring and analysisof the hedge fund manger. The informationyou receive from the manager on a monthlybasis is just that, information from the man-ager. You need to get very close to your dif-ferent hedge fund managers and establish anongoing dialogue with each of them. travelextensively and meet eye to eye as frequent asis possible with the manager, make regularchecks with the funds administrator andprime broker to assure yourself that the sail-

ing is smooth. The fund manager will some-times travel and come to you but the on-sitevisits is more important since you will be ableto see for yourself and talk to more peopleinvolved in different areas of the fund. Quali-tative due diligence and risk management istime consuming and demands a lot ofresources from the team involved in hedgefund allocation.

We have seen many new industry participantsestablish themselves over the last few yearswhere the emphasis has been on quantitativeanalysis. Gathering information data andcrunching number is relatively easy with lowbarriers to entry. Qualitative capabilities how-ever demands substantial human resources, istime consuming and requires industry profes-sionals with extensive experience of hedgefund investing, carrying out the due diligence.To have long term success in the hedge fundsbusiness its important to incorporate andestablish a platform for qualitative due dili-gence and acknowledge its importance in theoverall due diligence and risk management inthe day to day running of the business. ■

25april 2004


It’s Spring again!Managed assets are back on track. Placementfund acceptance is on the rise among privateand institutional investors alike. Things are look-ing good despite tough competition.

In2003, the wealth of fundsgrew just about every-where. This growth isfuelled by an increase inplacement fund value aswell an in influx of liq-

uidities. In Switzerland, net income climbedto 13 billion francs, the amount invested infunds reaching a total of 429 billion (a 9%increase relative to 2002). This figure repre-sents only 87% of the record-breaking highsexperienced in August of 2000. But, neverthe-less, it still adds up to an overall satisfactoryperformance (11% higher) when compared tothe February 2003’s all time lows. At 4 bil-lion, net returns remain modest, but, as theSwiss Funds Association (SFA) notes, theyare in actual fact slightly higher since certainfunds have not yet been included in the cur-rent statistics.

CONSTRUCTION: THE BIG WINNER

Outside of monetary funds which havedeclined in wealth from 98 billion francs tosettle at 92 billion, their market share reduced

to 22% (a 3% decline), all other fundsremained more or less stable in comparison tothe year before. Therefore, as in 2002, themarket share of debenture funds was 26%.Fund shares regained a portion of their formerterritory in 2002, but the increase in theirwealth (over 8 billion francs) is due more totheir performance than to the influx of newliquidities which only amounted to 2 billionfrancs. With a market share of 26%, they arestill below the 32% they reached in 2001.Benefiting from the meagre returns from thebonded loan market, construction enjoyed asurge of some 3 billion francs to the extentthat some had to temporarily freeze new sub-scriptions. At the end of 2003, they reached atotal wealth of 19 billion which accounts for4% of the total market volume of funds, amarket share that has virtually doubled in justa few years.

A SWISS LEADER IN EUROPE

At the end of 2003, 3,852 funds were listedfor public distribution in Switzerland, anincrease by 186 units. The dominance of foreign funds, particularly those of Luxem-burg remained clear as day (3,261 funds),but things seem to be changing. As the SFAremarked, “the increase in the number offunds is lower than in previous years. This might be due in part to index saturation,but as a first logical outcome: all majorEuropean and American funds are listed onthe Swiss market, spanning an array of funds.

Thus 703 foreign funds have been recentlyadmitted, of which 517 have been pulled

from the market”. As the SFA concluded,“this suggests that different providers haverevised their fund options and eliminateddoubling.”

The increase in Swiss legal funds is strongerthan previous years: 91 units. The “new”Swiss legal funds are also as present as thoseof new foreign legal funds (95). This changemay basically be explained by the creation of“other fund” products which, today, make upthe majority of Swiss legal fund offers with a total of 340 units. Of this number, 51 unitsfall into “Other funds with particular risks”.This is comprised almost entirely of HedgeFunds modelled after the fund’s fundapproach. In this arena, Switzerland hasmanaged to take the position of front runner,at least within the European market.”

On the whole, fund markets are heading inthe right direction, with steady growth in theirportfolios. Funds in portfolios of securities is21% on average and tops off at 35% for foreign private clients as opposed to 28% for Swiss private clients. This also marks anincrease among institutional clients (16% forlocal clients and 11% for foreign clients). The SFA therefore estimates that the growingpotential remains significant.

EUROPE MUST RATIONALIZE ITS APPROACH

Following the Swiss example, Europe hasenjoyed a similar progression: the wealth of funds in Europe increased by 9 % up toSeptember 2003, representing 3.581 billioneuros. But as the SFA notes, despite theimplementation in February 2002 of the newEuropean directive on funds, “business hashardly crossed national borders withinEurope.” It accounts for 400 to 500 billioneuros or approximately 12% of Europe’s totalwealth in funds.

Currently, the 28,300 funds distributed inEurope represent some 900 providers whichhave their own wealth management depart-ments and a large number of products. “If,” writes the SFA, “these products do notreceive massive amounts in the years to come,pressure to regroup them and rationalize linesof production will build up. Economic andpolitical constraints seem to make inevitable a more driven push from a concentrated fundindustry to a something more fragmented.The new European directive on funds doesnot anticipate cross-border mergers of funds.Similarly, the possibility of casting cost-creating providers beyond national bordersremains restricted. That’s the hard reality.”

The new European directive on funds does

not anticipate cross-border mergers of funds.

Similarly, the possibility of casting cost-cre-

ating providers beyond national borders

remains restricted. That’s the hard reality

By Véronique Bühlmann

26 april 2004


SUCCESSFUL DISTRIBUTION

In this fund network which is essentiallydoing well in terms of development of collec-tive vehicles as a privileged instrument ofwealth management showing strong trendsand particularly an improved flexibility inmanagement. But the trend towards trans-parency is undoubtedly the most significantdevelopment and will have the most profoundinfluence over product offering. In this regard,the turn of events surrounding ThreadneedleInvestments is quite interesting. In lateNovember, 2003, a year after the registrationof its first funds for distribution in Switzerland,Threadneedle Investments announced thesigning of an agreement with Fundlab, theinteractive fund division of Credit Suisse.Christian Pellis, regional sales director toEurope, and explained that, “For a few yearsnow, the third-level distribution networkshave been playing an increasingly importantrole in Threadneedle’s strategy. Clients andthere advisors demand a wide range of prod-ucts and these distribution agreements pro-vide an excellent means of accessing adiverse array of products. Our objective is toestablish a strong relationship with all ourdistributors, and to offer them first-class serv-ice and sales support.” Recently, a study con-ducted by the FERI Trust placed Threadneedleamong the top 10 in Europe for investmentfund distribution.

This example seems to indicate that even ifbusiness is not yet booming across borders,it is active in addressing the rationalisationneeds of promoters and the demand for bettermanagement results. Indeed, the steadyimprovement in information technologysectors and the provision of high-performancefund selection media, which is evident in theplacing of a new analysis and fund marketingsoftware on Standard & Poor’s “FundInsight”, can only increase the selectivenature of demand.

THE FUND’S FUND’S FUND…

The transparency and improved selectionprocess are opening doors to the creation of awider assortment of fund funds. In order tominimize risk, these were formerly usedmainly in hedge funds, but they are becomingmore and more popular in traditional manage-ment as is the case of World Gold ExpertiseFund OF Lombard Odier Darier Hentsch &Cie, lauched in September 2003. With thismulti-managerial product, the promoter pres-

ents itself less as an expert on a given fund,and more as one capable of selecting the bestmanagers in that sector and blending their different investment styles in a manner thatwill ensure reliable returns on investments. LODH pushed the multi-management reflexrelatively far as it also placed one of the besthedge funds on the market, an F3. In thiscase, organization follows the guidelines ofalternative management which, in order toperform well, must often limit its scope to theexploration of specific niches. Consequently,if the F3 reaches a certain volume it musthave a body of managers adequately diversein background to not influence their perform-ance and to not alienate itself from nicheproducts. Furthermore, if demand requiresrather short reimbursement and purchasedeadlines, through its flexibility, the F3 structure is able to address this need.

While a certain number of products make upthe best of breed category, for example man-agement firms having recently received anaward – further resembling standard market-ing products made exclusively by fundsobtained after qualitative assessment –have enjoyed a certain degree of successamong the most risk-free sectors of clientele.According to estimates by the Schrodergroup, it would seem that fund’s fund marketshould grow from 30% to 40% until 2007,which suggests assets in the order of 700 billion euros. These encouraging figures arenot surprising in light of the fact that S&PInvestment Services is about to propose itsown selections of fund’s funds to investors.

ALLOCATION OF SECOND GENERATION ASSETS

But the multi-managerial structure is not nec-essarily synonymous with external manage-ment firms. The inconveniences resultingfrom market difficulty in passed yearsencouraged the demand for products capableof generating absolute value, meaning clearreturns such as Libor, plus an additional per-centage. To achieve this, within an assetgroup, the manager allows itself a certaindegree of freedom to play with subcategories.The first of this type to enter the Swiss mar-ket was Core-Plus debenture funds of Clari-den bank. Invested at at least 60% in invest-ment grade bonds, the funds can draw fromother sectors of the bond market, particularlyhigh yield bonds, asset backed securities,emerging debt, convertible bonds, or usehedge funds. Each division will evidently be

managed by specialists of that sector, bothwithin and without the bank. Strong in thebond industry, the bank launched the TotalReturn Fund which targets positive returns in12 months, regardless of market conditions.The fund can invest up to 60% of shares but itmay also invest as much as 40% in alternativeinvestments (hedgefunds or construction with20% on each) or go as high as 100% in fixed

27april 2004


rate options. These products that offerabsolute returns – such as inflation plus 5%as on the British market – may be consideredto be asset allocation funds and will be privyto a larger scope of investment opportunities.Indeed, traditional asset allocation funds aregenerally limited to shares, bonds, and moneymarkets, and have had a marginally flexiblegeographical allocation. In these new prod-

ucts, the range of markets (such as construc-tion, commodities, and foreign currency) andmanagement styles (value, growth, hedgefunds) is significantly broader with moredynamic asset allocation options.

In this highly innovative framework, thequestion of fees attached to funds seems tobecome a secondary concern when one notes

that a number of new hedge funds arerenouncing the attachment of price to performance. The increased access to indexresources such as the Exchange TradedFunds is anything but foreign to these newdevelopments. ■

By Véronique Bühlmann

28 april 2004


Sarbanes-Oxley Act: if youcan’t beat them, join them

Asthe Enron story isbeing reenactedonce again with theParmalat scandal,it is high time tohighlight the conse-

quences of such affairs on the supervision ofmultinational companies. These are by nomeans minor, and only the smallest firms willbe spared, inasmuch as they operate at locallevel and keep off financial markets. For allthe others, the Enron affair has launched aprocess which is far reaching, even though itis still somewhat too early to fully account forthe ripple effect this will have on Europeanfirms. The direction however to which thechanges point is unmistakable, and that is awidening of the scope of efforts being madeto reinforce international supervision of audits.“High quality accounting principles and theavailability of high quality audits of publiccompanies is critical to the proper functioningof securities markets and the protection ofinvestors”, reads a press release issued onFebruary 5 by IOSCO (International Organi-zation of Securities Commission). The previ-ous day, the standard setter and cooperationforum, had just inaugurated its new MadridHeadquarters. In this context, the Parmalat

affair is actually turning out to be a good thingfor the US Securities and Exchanges Com-mission (SEC), to make the case for increasedsupervision more acceptable on this side ofthe Atlantic. Indeed, the SEC has seized theopportunity to strengthen its position in theframework of IOSCO, which has announcedthe setting up of a task force to be led jointlyby SEC and the Italian Consob to “reviewimplementation of existing standards, includ-ing current mechanisms for internationalcooperation”. This emphasis on internationalcooperation may be seen as a welcome depar-ture from the unilateral approach which theUS administration has adopted following theEnron scandal.

In the aftermath of the Enron affair, the USCongress has passed the Sarbanes-Oxley Act(SOX) which is widely regarded as the mostsignificant audit and corporate governancereform in recent history. What makes theSOX a landmark legislation is also that it ismeant to be applicable outside the UnitedStates. It took some time following theenactement of the SOX by US Congress inJuly 2002 for the international financial com-munity to fully comprehend the implicationsof the Act. Arguably, enforcement of suchregulations beyond the borders of the USmay be regarded as an improper extension ofUS law to non-US companies. The ripplingeffect of the law is still being felt on bothsides of the Atlantic, while certain compli-ance dates are pending on the agenda. Thus,non-US issuers that are listed in the UnitedStates will have until July 31, 2005, to com-ply with the new listing rules written in theSOX. The very fact that final rules applyequally to US and non-US issuers mark asignificant departure from existing practicein that US agencies had not previouslysought to impose corporate governance stan-dards to European companies. Actually, theSEC, which is responsible for the implemen-tation of the Act, may exempt non-US com-panies from certain of its provisions, and ithas moved to do so to some extent. In 2003,the SEC has created a new governmentagency to oversee the implementation of theSOX, known as PCAOB (Private Companies

Accounting Oversight Board) which has nowlargely taken over dealings with non-UScompanies and government agencies. Nevermind the sovereignty of other States, no lessthan full compliance with American supervi-sory authorities will be required from thoseEuropean firms falling within the scope ofthe Sarbanes-Oxley Act. However, the SEChas shown some responsiveness to potentialconflicts of jurisdiction arising from anundiscriminate enforcement of Act. Thus,non-US issuers are encouraged to bring toSEC’s attention rules which stand in poten-tial conflict with their home jurisdiction. The SEC has namely made known that it wasready to permit non-management employeesto sit on the audit committee of a foreign pri-vate issuer if they do so pursuant to homecountry legal requirements. The allusion toGerman companies, whose personnel must as a rule be represented on such committees,is obvious even if it has not been made in anexplicit way. This willingness to compromiseon minor issues may also be regarded as atoken response to at least one German com-pany which had hinted at a possible delisting

By Mohammad Farrokh

29april 2004


of its shares. This option, however, is rathertheoretical given dissuasive proceduresapplicable to such cases under existing US markets regulations which make a delisting hardly practical.

There is no detracting from the fact howeverthat European accountants and auditors failingto abide by the rules laid down in Washingtonwill be liable to severe penalties under theAct. Now, it is critical that all investors andcompanies based in Europe familiarize themselves thoroughly with the SOX. In effect,the scope of the Act is not limited exclusivelyto those non-US companies whose securitiesare traded publicly in the United States. In certain circumstances, many if not allEuropean firms are liable to be subject to whatis termed as “general principles of extra-territorial jurisdiction”. These principles,which are applicable in particular to antitrustsituation, should lead to renewed attention todocument preservation practices. Failure todo so may result in severe criminal penalties,

including a prison term up to 20 years. Othercompanies, namely in the insurance sector,have spontaneously chosen to abide by SOXrules, in view of possible litigation with US-based clients.

Even though nearly everybody in the Euro-pean corporate world is potentially concernedwith the SOX, auditors are still those mostlyat risk. Among them uneasiness at theprospect of being directly liable to US law iswidespread albeit muted. It is not yet knownwhether envoys acting on behalf of thePCAOB will actually make sure that US regu-lations applicable to European companies arerespected. But the drive for compliance willbe stronger inasmuch as Europe has clearlysignalled its intention to follow the lead of theUS and enact equivalent legislation. Inciden-tally, the generalization of SOX like proce-dures should result in considerable increaseas far as auditing costs are concerned,by about 30% based on experiences alreadybeen made by American companies.

This equality under US corporate governanceprinciples should not obfuscate the gap stillexisting between the two sides of the Atlantic.Such differences are obvious in the field of accounting standards which are still wideapart, although there are signs pointingtowards some sort of prospective conver-gence. In this perspective, InternationalAccounting Standards (IAS) have beenreworded in 2003 to be designated as Interna-tional Financial Reporting Standards (IFRS),which is more than a mere cosmetic move.The idea is allegedly to pave the way for asubsequent merging with the US GAAP. Thismay not prove easy, allowing for the differ-ences in approach between the two account-ing systems, the latter being very much a setof mandatory regulations, while IFRS – whichwill be generally applicable to Europeancompanies as of 2005 – are rather viewed asguidelines, however elaborate. ■

By Mohammad Farrokh

BANQUE & FINANCE Le magazine de la place financière suisse

Launched in 1988

BANQUE & FINANCELe magazine de la place financière de Paris

From May 3, 2004, in all French newsstands

30 april 2004

SPECIAL REPORT

ANASF(Associazione nazionalepromotori finanziari)

ANASF is the main professional associationwhich represents the Italian financial advi-sors with 12,000 members. The Associationwas founded in 1977, by financial players(called financial advisors), with the aim toobtain the acknowledgement of the profes-sion through the creation of a National Reg-ister. A first, partial recognition, came in1985, through the emanation of the Consob(Italian Security Regulator) Regulation onthe solicitation of the public saving, outsidethe offices of the banks. From then, theengagement of ANASF always hasaddressed to the awareness of the Institu-tions and the savers on the importance of apublic Register.

In October 1988, the Congress of the Associa-tion instituted the “Register of Self-disciplineof the financial advisers”, that represented the

first step towards the officialization of a codeof behaviour (Code of Ethics) for the profes-sionals enrolled.

1) AIMS AND ORGANIZATION OF THE ASSOCIATION

1.1 Aims:A) to protect the moral, professional and

financial interests of promotori finanziariby promoting the image of the professionin the eyes of the investors, institutionsand the public opinion in general;

B) to provide members with advice relatingto problems and disputes which concerntheir professional activity;

C) to promote training and refresher courses

Elio Conti Nibali, President of ANASF

ANASF (is the main professional association which represents the Italian financial advisors with 12,000 mem-bers. The Association was founded in 1977, by financial players (called financial advisors), with the aim toobtain the acknowledgement of the profession through the creation of a National Register. A first, partialrecognition came in 1985, through the emanation of the Consob (Italian Security Regulator) Regulation on thesolicitation of the public saving, outside the offices of the banks. From then, the engagement of ANASF alwayshas addressed to the awareness of the Institutions and the savers on the importance of a public Register.

31april 2004

SPECIAL REPORT

for members and the creation of specificdegree courses in preparation for the profession;

D) to promote forms of coordination andcooperation with the organizations thatrepresent other financial market sectorworkers on a national, European andinternational level;

E) to promote a single European Public Reg-ister of sector workers with a commoncode of conduct, which allows membersto work on the basis of reciprocal recog-nition.

1.2 Organization of the associationThe organizational bodies of the ANASF aredefined in the articles of association (art. 7).

The supreme body is the National Confer-ence, which represents all the members of theassociation and consists of elected delegates.

The National Council consists of 25 mem-bers and is elected by the National Confer-ence from among the delegates.

The National Council nominates the Chair-man of the Association, two Deputy Chair-men, the Treasurer and the other fivemembers of the Executive Committee.

The members of the executive committeeare in charge of specific areas. At presentthese areas are: Decentralization, Evolu-tion of the Profession, Foreign Affairs,Training, Organization, Development ofthe Association and Fiscal Aspects.

Regionally, the ANASF is divided intoCommittees consisting of between 5 and15 committee members according to thetotal number of members in the region.

Another organizational body of the associ-

ation is the Board of Arbitrators, which is incharge of checking compliance with the self-regulatory code of conduct for promotorifinanziari and deals with sanctionary proce-dures in the event of breaches of the code.

2) WHAT A PROMOTOREFINANZIARIO IS

A promotore finanziario is the only savingsindustry sector worker authorized to meetinvestors outside banks, stock brokerage com-panies or investment management companies,and offers financial instruments and invest-ment services. To practice the profession, thepromoter must be registered in the nationalpublic register of promotori finanziari kept byConsob.

The promoter is a professional able to offerinvestment advice aimed at helping customerschoose the financial products and services

32 april 2004

SPECIAL REPORT

The Milan Stock Market

which meet their requirements: after analysingthe customer’s investment needs, the promoterproposes suitable solutions from among thoseoffered by the firm they work for, takes ordersfor the investments, delivers the documentsinvolved, and receives the money to invest.After this, the promoter periodically reanaly-ses the customer’s financial situation and sug-gests suitable changes according to markettrends or the changing needs of the customersthemselves.

The single national public register of promo-tori finanziari was set up for the first time bylaw No. 1 of 2 January 1999.

In order to remain in the register, promotorifinanziari are required to pay an annual sum to Consob known as “supervisory dues”.Deletion from the register may be ordered by

Consob on the request of the promotorefinanziario him/herself, if one of the requisitesfor registration is lost, if the supervisory duesare not paid, or due to striking off.

The professional qualification exam ispresently held by Consob three times a year.It consists of a series of questions which haveto be answered in a fixed time (30 minutes)and an oral interview, which only the candi-dates who pass the written test have to face.

3) ADVANTAGES AND SERVICES FOR THE MEMBERS

The ANASF covers all the aspects whichrevolve around our business: safeguarding thefigure of promotore; the need to promote theadvisory aspect; the association’s considera-

Aldo Varenna, Head of International Relations

A promotore finanziario is the only savings

industry sector worker authorized to meet

investors outside banks, stock brokerage

companies or investment management com-

panies, and offers financial instruments and

investment services

33april 2004

SPECIAL REPORT

A GROUP OF PROFESSIONALS

… WHICH CULTIVATES QUALITY WITH PATIENCE AND WHICH REINFORCES ITS

PRINCIPLES WITH CARE …

Groupement Suisse des Conseils en Gestion Indépendants

3, rue du Vieux-CollègeP.O. Box 32551211 Geneva 3

Tel. +41 22 317 11 11Fax +41 22 317 11 [email protected]

tions during positive and negative marketphases; presence in the debate concerningfinancial service costs; and safeguardinginvestors as valuable assets to defend.

The association offers its members severalservices and opportunities. In particular, itprovides advice on the subject of social secu-rity through a well-known expert manager ofINPS (the Italian Public Social SecurityBody), who gives opinions and offers adviceon the subject of pensions. Another of theservices offered is fiscal advice and, lastly,legal advice.

Moreover ANASF members may also obtainseveral discounts thanks to agreements theAssociation has stipulated (such as those withtravel agents and for advanced trading pro-grams). Lastly, in the part of the www.anasf.it

site reserved to members, there are severaltools useful for the daily work of promotorifinanziari.

Through its means of communication (website, PF and PF News, monthly inserts inMilano Finanza, press releases, articles in themain Italian sector newspapers, and participa-tion in programmes and interviews on sectorradio and television), the association mainlypursues two aims: to defend the image of pro-motori finanziari, and to spread the profes-sional role that promotori finanziari play andtheir attention to the safeguarding investors.

4) ANASF IN EUROPE

The Association’s re-launched foreign com-mitment goes in the direction of an increas-ingly more effective and concrete lobbying

action, through renewed commitment in theFecif (European Federation of FinancialAdvisers and Financial Intermediaries),consolidated relations with other Europeanprofessional associations and participation ininternationally important events whichensure benefits for members in the medium-long term. ■

The ANASF also believes it is essential toproceed along the road towards pan-European certification. In fact the Associa-tion had already realized this in 2002,when it set up EFPA Italia, which has sincethen certified several promotori finanziariwith the title of Financial Adviser andFinancial Planner.

34 april 2004

SPECIAL REPORT

DFP – first mover in settingstandards for financialplanning in Europe

SUMMARY The “Deutsche Gesellschaft für Finanzpla-nung e.V. (DFP)” was founded in 1995 toestablish a professional profile and developquality standards for financial planning inGermany. By developing the ProfessionalProfile for Financial Planners, the Code ofEthics, the Principles of Financial Planningand the 5 Phases of Financial Planning thefirst recognised market standards could beestablished. The DFP is member of theFédération Européenne des Conseils et Inter-médiaires Financiers (FECIF)

I. HISTORYFinancial advisers and people brokeringinvestments or insurances – even if they givegood advise – have one of the lowest reputa-tions of all professions with respect to quali-fication and moral standards in Germany.Only recently even banking institutes havelost their former higher reputation due tonegative media news. They were accused toeither insufficient capability or the unwilling-ness to give customised advice.

In 1995, the desire of a small group of quali-fied financial planners to change this unsatis-factory situation, led to the foundation of theDeutsche Gesellschaft für Finanzplanung e.V.(DFP). It was clear from the outset, that onlyan interdisciplinary approach could provesuccessful. This was consequently mirrored in the founding members which come fromthe banking sector, independent financialadvisers/planners and respective companies,tax and legal advisers, and researchers fromthe academic world. In the following workingcommittees two-third of the financial planningmarket in Germany at that time were present.

It did not take long until the next step was tobe taken. As Europe is more and more inte-grating, a co-operation on European level isthe natural next step. Therefore in 1997 thefirst agreement of co-operation was signed

with the Chambre National des ConseilsExpert Financiers (CNCEF) Paris. In the following year 1998 DFP was – together withthe European Academy for Financial Plan-ning (EAFP) – one of the main engines forthe development and the foundation of theEuropean Financial Planning Association(EFPA) in December 2000.

When institutions with exclusively close tiesto the banking sector became dominant, themembers of the DFP moved forward to foundthe European Federation for Financial Profes-sionals (EFFP) as an independent certificationinstitute for qualified financial advisers andplanners irrespective their origin, be it bank-ing, insurance, independence or anywhere else– working in close co-operation with CIFAand FECIF.

II. STANDARDS FOR FINANCIAL PLANNING

The DFP has developed within 18 monthsafter its foundation the following standardsfor qualified financial advise and planning:

Professional Profile of Financial Planners The financial planner is obliged by the pro-fessional profile to carry out financial plan-ning conscientiously and to the welfare of his or her client. It defines minimum require-ments for educational and professional train-ing and the professional experience. It definesthe way to behave as financial planner withrespect to professional subjects and describesthe main areas of activity for financial plan-ners. Additionally it calls for a continuousvocational training.

Code of Ethics for Financial Planning They give the ethic rules for the profession,as we have

• Integrity and Confidentiality• Objectivity and Neutrality• Competence and Professionalism

Rainer Juretzek, President

In 1995, the desire of a small group of qual-

ified financial planners to change this unsat-

isfactory situation, led to the foundation of

the Deutsche Gesellschaft für Finanzplanung

e.V. (DFP).

35april 2004

SPECIAL REPORT

Principles of Financial Planning (GOF)‚In 7 principles it is defined how a state-of-the-art financial planning has to be carried out:

Completeness– the client’s data have to be complete

Holistic– the client’s parameters are to be linkedwith exogenous economic, socio-economic,and tax parameters

Individuality– a financial plan must mirror the client’sindividual situation

Correctness– a financial plan must be calculated cor-rectly and the assumptions must be plausible

Understandability– a financial plan has to be understandablefor the client

Duty for Documentation–a financial plan must be in writing inorder to make a check of the calculationsand results possible

Compliance with Code of Ethics

5-phases of financial planning5-phases of financial planning describe thewhole process of financial planning:

Placing of order defines which questions have to beanswered before an order of the clientfinally is placed incl. payment schemes

Data collectingdefines which data are necessary for thedevelopment of a financial plan and respec-tively which have to be collected

Analysis and planningdefines how a financial planning has to becarried out (contents, processes, assump-tions), arguments for recommendations

Documentationincludes information about which data haveto be stored in writing.

Up-datingincludes the necessity to keep the financialplan up to date and to use it as a tool forcontinuous customer relationship

All these principles are accepted standards inthe financial planning industry in Germany.

III. FURTHER ACTIVITIES OF DFPMedia-informationDFP offers information for media especiallyif expert knowledge is needed.

Customer Information Customers have the opportunity to ask DFPfor financial advisers and financial planners.The DFP provides a national network ofexperts in all areas of financial planning.These information can of course be used bymembers and customers as well. FurthermoreDFP develops informational material thathelps customers to distinguish qualified fromnot qualified advisers and planners.

Promotion of Research DFP supports research activities in the area offinancial planning by announcing a competi-tion. The focus is on promoting doctoral the-ses and examination works, that give newinsights into financial planning. The fact thatthere is no comparable research competitionfor financial planning, highlights one of itsmain problems. Financial Planning is not ascientific discipline but grew up in the indus-try. Therefore we lack a scientific basis to fallback on. To build up this founding willbecome one of the tasks of DFP in the closefuture.

Professional AssociationAs professional association the DFP repre-sents the financial planners in Germanyagainst private and governmental institutions.In 1998 DFP was furthermore involved in thedesign of the Chartered Expert for PrivateInvestments and Financial Planning by theChambers of Commerce. It is represented inthe hearings of the German Financial Regula-tion Authority (BaFin) and at the Chamber ofCommerce with respect to questions of voca-tional training for financial service industry.Currently DFP makes its contribution to legal developments, i.e. the transfer of EU-directives in national law, in order to guaran-tee an adequate regulatory framework forfinancial planners and advisers in Germany. ■

Ferdinandstraße 19D-61348 Bad Homburg v.d.H.Tel: +49(0)6172-69 00 69Fax: +49(0)6172-69 00 00

e-mail: [email protected]: www.finanzplanung.de

The Chamber of Industry and Commerce

and the Stock Market of Frankfurt/Main

Who are the members of the AFG?The Association française de la gestion finan-cière (AFG) is the professional organisationfor the third-party asset management industry.It draws together all companies involved inthe management of portfolios and FrenchOPCVMs (i.e. collective investments in trans-ferable securities, the French term for UCITSor mutual funds) and therefore covers bothinvestment funds and individual portfoliomanagement. The clients of AFG membersinclude both private (retail) and institutionalinvestors. The French management market isvery advanced. It leads Europe in the field ofinvestment funds (over 1,000 billion Euros)and ranks among the world’s leaders in gen-eral asset management (1,600 billion Euros).Major management companies, often mem-bers of banking or insurance groups, arejoined by vast numbers of entrepreneurialcompanies and, of course, foreign groups’subsidiaries. Among them are Swiss man-

agers, very present throughout history, whohave grown in number and importance overthe last few months. They are welcomed withopen arms!

Can financial advisers become members ofthe AFG?No. Our association only includes companiesapproved by the Financial Markets Authority(AMF) to act in individual portfolio manage-ment, an activity that is the monopoly, along-side banks, of course, of companies specialis-ing in the management of portfolios orOPCVMs. Management companies are sub-ject to very strict regulations: prior approval,recourse to a custodian/depository, meansobligations, stringent controls… It is the pricethey have to pay for their fiduciary responsi-bility!

Consultancy activities are federated withinother associations, which whom we meet reg-

36 april 2004

SPECIAL REPORT

The French Asset ManagementAssociation (AFG) at a glance

An interview of Pierre Bollon,

Director General

The clients of AFG members include both

private (retail) and institutional investors

ularly for work meetings and maintain excel-lent relations. This clear distinction betweenmanagement/consultancy is, I think, less strictthan in other countries, notably Switzerland.But the rules governing consultancy and,more globally, marketing, are they not con-stantly changing?

Yes, and largely on our own initiative. Weshould distinguish between these two points.With regard to marketing, the main issue is tobetter clarify responsibilities. Let us take aconcrete example. If a well managed equityfund is sold to an investor in need of a short-term investment, the manager should not bein a position where his liability may beincurred, that is to say if this latter is not ineffective control of the marketing network atissue. The danger, one that is present through-out Europe and across the Atlantic, is that thedisappointed client, and therefore the courts,is going to automatically go for the ‘deeppocket’ in cases of misselling. This situationis ultimately detrimental to the investor sinceit limits commercial dynamism and thereforecompetition.

Another just as essential and intricately inter-woven factor is the issue of the independentfinancial adviser. This activity, although it iswitnessing a growth, is all-too underdevel-oped in France, where the banking and insur-ance networks account for nearly 95% of thedistribution of OPCVM funds. For this rea-son, together with the advisers’ associations,we have pushed for the creation of the statusof ‘financial investment adviser’, as estab-

lished by the Financial Security Act of August2003. We believe that this profession willdevelop in leaps and bounds over the next fewyears, mainly because savers’ confidence inthe profession will have grown as a result ofthese regulations and because the latter willnecessitate membership of an associationrecognised by the AMF, continuing educa-tion, civil liability cover, etc… These efforts must now become widespreadat European level.

Can you give us a few concrete priorities forthe future?The first is clearly to continue to deserve the confidence that our clients place in us,be they retail or institutional investors. To achieve this, the management industrymust go on bringing them added value. Thislatter is based essentially on its professional-ism and relies on its transparency andintegrity.

To conclude, I would like to emphasise twopoints:• The first concerns innovation. This consti-

tutes the heart of the financial management

industry. We must not allow the trend forregulations that is steadily taking holdthroughout the world to eclipse the perma-nent contribution made by university (‘aca-demic’) and applied research, a field inwhich France is, in fact, very well placed.We should clearly encourage not only new,or so-called ‘alternative’, managementtechniques, but also refinements in terms ofasset allocation, for example. We shouldencourage the founding of entrepreneurialcompanies (beware the risks involved in theintroduction of excessive minimum capitalrequirements…) and the constitution ofpowerful European groups.

• The second point, need we say more, is theneed to apply pressure to costs and push forthe swift introduction of the European man-agement market. For some countries thiswill mean abandoning their specialist fields,be it tax affairs or the protection of thedomestic market, and therefore making cer-tain sacrifices. However, this is the onlyway that European management companieswill be able to rely on the scene of worldaffairs. The greatest Swiss, French, German,Italian, Spanish managers must be able tocontinue to develop in future alongside themany small companies in existence…

As you will note, all these topics fit neatly in with those that will be broached at the 2nd international CIFA forum! ■

37april 2004

SPECIAL REPORT

The danger, one that is present throughout

Europe and across the Atlantic, is that the

disappointed client, and therefore the courts,

is going to automatically go for the ‘deep

pocket’ in cases of misselling

39april 2004

SPECIAL REPORT

Advantages for Independent InvestmentManagement of using a Universal Bankwith a multi-local presence

Driven by the bull-marketyears and the growing suc-cess of their personalisedservice, Independent Finan-cial Advisors (IFA’s) havemultiplied alongside bank

restructuring. They now occupy an importantplace in the Swiss wealth-management indus-try with around 12% of the market. Neverthe-less, Independent Investment Managementhas not been spared by the fundamentalchanges taking place in the financial world.On the contrary, new control requirementsand the increasingly technical nature ofinvestment management impose ever higherexpenses on these often small entities. Theindustry has assessed the extent of the invest-ments required and the highly heterogeneousindependent investment management universeis changing rapidly through disposals, merg-ers and specialisation of IFA’s in more struc-tured companies.

IFA’s are carrying out this consolidation effi-ciently and with their usual reactivity andpragmatism, strengthening the services pro-vided to their increasingly demanding andwell-informed clients.

Crédit Agricole Indosuez (Suisse) SA hasspecialised in wealth management inSwitzerland for over 50 years. Its objective is to provide its IFA’s clients and their owncustomers with the strength and range ofcapabilities of one of the world’s leadingbanks, over and above the basic custodian-bank services. Present in Geneva, Lausanne,Zurich, Lugano and Basle, its specialisedstaff are reactive and have developed strongrelations with their IFA’s, delivering a top-grade service on transparent and competitiveterms. This service is supported by efficientsystems and experienced account managerscapable of putting together tailor-made solu-tions to suit clients’ needs together with the support of a full-range of experts in fieldssuch as Real estate, Financial engineering,Investment funds, Estate planning services,Commercial banking, Foreign exchange,Advisory & structured products, Fund services, Global custody, etc.

In addition to your own expertise and valu-able relationship, your banking partner isthere to bring you the specialist’s answer thatwill be, at one point or another, critical toyour client’s success. ■

Jean-Pierre LAGANE

Head of Independent Financial Advisors

at Crédit Agricole Indosuez (Suisse) SA

“French Riviera:charming, tastefullydecorated villa with stunning seaviews from its hugeterrace…”.

One day or another you may be captivated bysuch an ad, the start of a dream you will wantto share with friends and relatives. Everyonewill have their own opinion and give the bestadvice. But the dream may become a night-mare, from trying to choose the right propertythrough to the final stage of going through

the legal documentation and all the covenants.Property investment involves rearrangingyour assets and may be concluded success-fully only with support from the appropriatespecialists such as your account manager oryour private banker.

Bear in mind that buying your main propertyis one thing, but investing in a second homeor a property to let - especially abroad – isquite another. The market, legal framework,financing and costs - and even the language –may be completely different! Except in very

Property investment: beyond the “coup de cœur” and friends’ advice

special circumstances, such a decision needscareful forward planning.

Just forget your best friends' advice, beforeyou fall out with them. For a standard, oreven quite a large investment, there may beno point in setting up complicated legal struc-tures, which only generate annual costs oftenwithout really avoiding financial and taxcharges. No one is in a better position thanyour lawyer and/or your private advisor toconsider all the ramifications of such aninvestment on you, your family, your other

40 april 2004

SPECIAL REPORT

plans… and your asset allocation. Last butnot least, they can advise on the tax implica-tions, from the date of exchange of contractsthrough to final disposal of the property, andensure the correct tax returns are completedand that all aspects of the law are observed.On the basis of a rational assessment, theownership structure needs to be defined inadvance (direct ownership or through anappropriate legal structure such as an SCI – anon-trading property investment company –in France) and the financing finalised with theappropriate arbitrage between cash and mort-gage loan, bearing in mind the financialcharges and the spread of your other assets.

The next step will be to define the investmentcriteria (where, what and why) to identify asprecisely as possible the preferred property(location, budget, objectives, etc.) and focusthe estate agent and/or chartered surveyor’ssearch. Once a property has been identified,proper due diligence must be carried out to

ensure you are aware of any potential problems, before coming back to your bankerand lawyer to finalise the transaction.

It is worth bearing in mind that the cost ofinitial studies and structural surveys is nearlyalways lower than the cost of rectifyingproblems subsequently… and can save muchfuture heartache.

A property investment is generally made on a long-term basis with an objective ofasset diversification and to protect capital to be eventually transferred to your heirs.These factors will be taken into considera-tion in the initial survey with your financialmanager and your private banker. You mayspot your “coup de cœur” tomorrow whenreading your newspaper or during your nextholiday. Be ready for it and in a position tonegotiate a good deal while preserving yourinterests and optimising the management ofyour assets. ■

Dominique ROBIN

Financial Engineering / Real Estate Dpt


Recent years have witnessed anexponential growth of invest-ment structured products.Once reserved to institutionalinvestors, they have nowbecome readily accessible to

private individuals, wealthy or simply afflu-ent. This evolution has given rise to a para-dox: in many countries, retail investors arebeing proposed, through distribution net-works of large banks, structured productswith a high degree of complexity, sometimesdisconnected from any economic scenario oreven from any rationale investment strategy.

We believe that going back to basics can helpuse structured products for what they aregood at: giving access to a selected pay-offprofile in a deterministic manner, i.e. withoutthe interference of error-prone humans.Before proposing a structure, we always askthe following questions. How different fromthe market’s anticipation is the view of the

investor? Is he/she looking for areturn or for a capital gain? What is the level of risk aversion?Or, in other words, how necessaryis a capital protection? In view ofthe investment horizon, how muchimportant is the market timing?

The art of the product designer is to find the one pay-off and timeprofile that will answer best allthese expectations. Our experiencetells us that “simplicity is of theessence”. First of all, simple struc-tures are very often the best per-forming, even if they could appearinitially less attractive (for God’ssake, lets try and stop hiding struc-turing difficulties being “casino”style convolutions!). Then, mostwill agree, rarely a multi-layerintricate formula will translate awell formulated strategy (bells and

Structured Products: A DeterministicTool for Asset Management

Frédéric LAMOTTE

Head of Advisory & Structured Products at

Crédit Agricole Indosuez (Suisse) SA

41april 2004

SPECIAL REPORT

One may ask if IndependentFinancial Advisors (IFA’s)and Private Bankers shouldchange their approach todealing with high net worthindividuals (HNWI’s)?

At Crédit Agricole Indosuez (Suisse) SA(“CAIS”) we believe we should, and havealready pioneered such a change.

We think that very wealthy customers must beserved by a dedicated and experienced teamof professionals that combine a dual expertisein private wealth management and corporate& investment banking. Such an approach iswe believe the key to future success.

This new trade must add value and requires aglobal financial expertise which can beobtained from the combined efforts of a uni-versal bank and IFA’s. Such “dual expertisecross fertilization” to be carried out within theSwiss Private Bank would fit well with thebehaviour and investment needs of the HNWIclass of pro-active clients who participateactively in the management of their wealth.

Very wealthy clients seek a broad range ofadvisory services and alternative asset classesthat will properly address the needs of theiroverall wealth. Some may also wish to sourceinto various forms of fresh equity capital tobe raised through private placements, and forthis reason we feel that this class of HNWI’smust have access to not only co-investmentopportunities in exclusive deals, but also tosophisticated advisory services as well as newcapital sources.

This concept will cover a broad scope ofdeals such as – private equity, including capi-tal development transactions, asset structuredfinance, LBO and LMBO, real estate invest-ment proposals – and of banking services,such as M&A advice, asset disposals, privateplacements, acquisition finance, tax andestate planning.

Obviously, such a change in strategy requirescareful diligence as to the suitability of boththe business proposals and the customer pro-files. Both IFA’s, and private & investmentbankers need to better understand the invest-ment strategy and the overall financial needsof their very wealthy clients.

Such a client-focused strategy targets the verywealthy customers, family offices and multi-family offices and entrepreneurs, who aredirectly involved in managing their financialaffairs. IFA’s who are often close to HNWI’s,family offices and entrepreneurial business-men, will create value if they can successfullyimplement such a dual expertise when mar-keting their largest customers.

This strategic change in the terms of privatebanking for very wealthy clients creates apotentially new area of co-operation betweenIFA’s and the bank with the objective forIFA’s to acquire additional private assets andto create greater added value for this HNWIclass of private customers. This new directionfor conducting private banking business byIFA’s with their very wealthy customers isalready underway. ■

whistles tend to reduce option costs but at thesame time limit the return that can be “rea-sonably” expected). Finally, but not the least,we are very adamant that simplicity is key insecondary market transparency and liquidity.

Structured products are there to stay becausethey provide an efficient answer to specificanticipations in a risk-controlled framework.And like an architect designing a home, weshould always keep in mind a founding prin-

ciple of modern finance: the “size of a dream”is always commensurate with its probabilityto become reality. ■

A new direction for Private Bankingactivities with very wealthy clients?

Jean-François FOUQUET

Head of Financial Engineering Dpt


• About 150,000 are members of nationalprofessional associations (38 at today’scount).

The professional activities of advice andmediation are today penalised by extremelyconstraining regulations, the soaring cost ofcompliance procedures, the development ofnew technologies, and the demands of a gen-erally distressed and ill- informed clientele.

CUSTOMERSThe end customers of the average IFA aremiddle class business- and professional peoplewho do not manage their own money but arebelow the levels required for private bankingservices. Typically they would be investingbetween € 50,000 and € 250,000 as a lumpsum to commence a personal pension or a lifepolicy. Often they will have to reinvest theproceeds of a tax-driven investment that hasmatured. They are often professionals and companydirectors who wish to make additional sav-ings provisions in a tax efficient manner,

often wishing to place funds with an interna-tional rather than local organisation.

We estimate that there are 30,000,000 suchinvestors in Europe. A large proportion ofthem mistrusts the ability of their governmentto provide them with a decent retirement.

MARKET SUPPLIERSOver the last 25 years, an increasing numberof financial institutions have come to acceptthe growing importance of cross-border salesactivity in Europe.

For some, whether life companies, fundgroups or banking operations, this realisationhas led to activities in just one or two targetcountries (Clerical Medical, Scottish Mutual).

FREEDOM OF MOVEMENT OF CAPITAL

42 april 2004

SPECIAL REPORT

The European public will becomemore used to the idea of inde-pendent advice and the accessi-bility of new products and thistrend will be complemented by the political movement to a

Single European Market in Financial Services.

IFAs retained between 30% and 56% of theinvestment market in the major Europeanmember states.

In 2004, IFAs will collect worldwide morethan US$ 300 billion worth of fees on the“mass affluent” individual customer segmentwith liquid assets between € 100,000 and € 1 million.

The European intermediary communityincludes approximately• 250,000 private individuals exercising this

profession as a main occupation (represent-ing approximately 40,000 legal entities),

The role and importanceof European IFA Recent research supports the view that the role and importance ofEuropean Independent Financial Advisers (IFA) firms in the distributionprocess will expand quite dramatically over the coming years.

Country

Germany

Great Britain

Italy

Spain

Switzerland

France

Luxembourg

Greece

Baltic states

Netherlands

Belgium

Number (Private individuals)

100,000

40,000

35,000

20,000

6,000

3,000

3,000

3,000

3,000

3,000

3,000

Country

Great Britain

Belgium/Netherlands

Germany

Scandinavian Countries

Italy

Spain

% ofSavings Funds

56%

51%

36%

35%

34%

30%By Vincent J. Derudder

during the year 2001, to concentrate on inde-pendent distribution and has closed its Frenchoperation.

EUROPEAN COMPLIANCE ISSUESThe formulation of European legislation forfinancial services, whilst being done for theprotection of consumer’s interests must beapplicable without pointless restraints forpractitioners.

It remains a hard task for the European Com-mission in view of, amongst other things, thepaltry enthusiasm of national civil servants,based on their narrow view of society, foranything that might represent the slightestchange in their little practices or privileges.

The “time bomb”, which in the very shortterm is constituted by the pensions problem,reinforces the political need to attack theensuing problems sooner than later, even ifthe politicians are showing a certain reluc-tance for European harmonisation of legisla-tion, that would take a more liberal direction,and be more genuinely concerned with con-sumer interests, than certain national adminis-trations might wish.

The failure of the state pension systems willopen unprecedented prospects for Europeanfinancial advisers and intermediaries calledupon to assist the anxious consumer in theright choice of options and alternatives for thesound management of his or her inheritance.

However, the lack of training and organisa-tion of certain financial advisers and interme-diaries can create problems and the industrymust tackle the provision of quality trainingcourses and ensure assistance for adviser andintermediary integration, in close co-opera-tion with its national member associations.

European Union legislation is broadly designedto create a “level playing field” throughout

the financial service arena. In reality, how-ever, many “local” hurdles continue to existand this often frustrates the operating activi-ties of foreign product suppliers – despite thefact that national (basic) product requirementsare consistent throughout the continent.

Compliance issues and operating (marketing)restrictions across continental Europe varyfrom country to country.

Despite these gaps and niche opportunitiescertainly surface on a regular basis through-out Europe. Local “knowledge” and adviceare essential in the monitoring of local legis-lation, the identification of opportunities andany subsequent introduction of products topromoters and distributors.

The EU proposal for a comprehensive legisla-tion not only deals with insurance intermedi-aries but also with the more general issue ofinformation to be given to the client whenselling insurance contracts. This issue is criti-cal, as the EU wants, (and the action planrequires it), to elaborate a “consumer-focused” legislation. However, potential poli-cyholders should be equally informed, regard-less of the nature of the provider that theydeal with.

Regarding the life sector, the current proposalsimply specifies the information to be givenregarding surrender and paid-up values.

Finally, the proposal tries to define whatinformation as to his status should be givenby the intermediary and what should be dis-closed by the insurance undertaking.

EUROPEAN PENSION ANDINVESTMENT MARKETThe European pensions and personal invest-ment market is undergoing a period of rapidchange. The financial pressures of an ageingpopulation combined with governments’

FREEDOM OF MOVEMENT OF CAPITAL

43april 2004

SPECIAL REPORT

For others, the experiment has been morediversified. In recent years, some institutionshave gone so far as to establish separate sub-sidiary companies that have been specificallyset up to promote and trade Financial Ser-vices related products on an internationalbasis (Hansard, Flemings, Prudential).

Others have made strategic investments inoperations that appear to offer a developingdistribution base (Aberdeen Asset Manage-ment, Lombard, Kleinwort Benson, ScottishLife International).

IFA ORGANISATIONSComparatively few IFA firms operate interna-tionally. A handful of Anglo-Saxon IFAgroupings are working to develop new agentoutlets in more than one European country(such as DBS in Germany) but these tend tobe focused on expatriate clientele. Inter-Alliance, an UK-based network listed on theAIM market of London has recently acquiredan operation based in Cyprus.

IFA firms have been the targets of large inter-national groups such as Deutsche Bank, andDexia (“Rekord” in Germany and “FinancièreExelmans” in France are amongst the acquisi-tions of this group) acquiring IFA firms forcash at a multiple estimated to be closed to 8times EBT.

However, the European Commission haslaunched consultations to seek the views ofindustry and other interested parties on thefuture regulation of financial conglomerates(i.e. single financial entities that offer a rangeof financial services such as banking, insur-ance and securities). In the opinion of theCommission, the objective of one wholesalefinancial market and open and secure retailmarkets cannot be achieved without state-of-the-art prudential rules and supervision. Thephenomenon of financial conglomerates hasgrown fast and although specific prudentialissues are being discussed separately in thebanking and insurance sectors, the continuingtrend towards closer corporate links betweenfinancial institutions across sectors and acrossborders gives rise to new concerns thatrequire new legislation.

As a matter of consequence, Deutsche Bankhas already announced that it will sell in avery near future all its non-core business par-ticipations in insurance and distribution(“Allianz”, etc.).

In an unrelated issue, Prudential, the largestUK life insurance company, is going toreduce its sales force in the UK by 2,000 jobs

BelgiumDenmarkFinlandFranceGermanyItalyNetherlandsNorwayPortugalSpainSwedenSwitzerlandUK

10,25,35,1

58,082,057,415,64,49,9

39,38,97,1

59,0

241453993

30389

490341021

110282991

11%84%35%

7%14%

7%127%233%

9%4%

66%117%77%

227

8242

31811

164017

Country Population in millions

Value of pension assets (€m)

Pension assets as a % of GDP

Pension assets per capita (€000’s)

needs to cut spiralling welfare budgets are thechief driving forces fuelling the trend towardsgreater private pension provision.

The current value of private Pension Funds inEurope is thought to be € 2.82 trillion(Source: Mercer/FT), the bulk of which isconcentrated in the two largest markets – theUK and Netherlands. Over the next decadethese funds are anticipated to grow dramati-cally as governments reduce their dependenceupon state “pay-as-you-go” schemes, whichrely on the social security contributions of theemployed to pay the pensions of the retired.

The economic impact of private PensionFunds cannot be overstated. In several Euro-pean countries, including Ireland and Nether-lands, the value of domestic Pension Fundsexceeds stock market capitalisation. More-over, in the Netherlands and Switzerlandthese assets represent over 100% of grossdomestic product.Global demand for pensions will spark growthfor investment managers and financial advisers,

according to the conference of the NationalAssociation of Pension Funds in the US.

Private pensions should provide a globalbonanza for investors, managers and financialadvisers in the next century but economic anddemographic trends could undermine theirfunding.

A figure of € 237 bn has been put on the sizeof the third-party mutual fund market inFrance, Germany, Italy and Switzerlandalone. In a poll of 800 senior investmentexecutives, sector analysis found that Francehas the largest fund market in these fourcountries but is the smallest user of externallymanaged funds. Growth in demand for third-party funds is likely to be highest in France andItaly, although previously the highest demandhas been in Germany. Assets in external fundsare predicted to grow by 20% in these twomarkets.

The latest Annual World Wealth Report pro-duced by Merrill Lynch shows the global

asset management industry for privateinvestors – the famed HNWI – is in goodshape and facing a rosy future in terms ofgrowing capital inflows. The total wealth ofthe world HNWI is € 17.4 trillion, up from € 7.2 trillion ten years ago. Even with theasset-value collapse in most markets, the mar-ket serving rich people grew by 5%. By theturn of the century, it is estimated to reach € 23 trillion, with annual growth at 10%.

Europeans are not only healthier than everbefore but are also living longer, according toa report from Eurostat, the statistical office ofthe European Commission.A better standard of living is increasing lifeexpectancy across Europe.

The biggest increase in pensioners is expectedin the Netherlands, with the number of over-sixties increasing by 64% compared with28% in Portugal.

THE EUROPEAN MONETARY UNIONPost Euro-phoria, the consensus among gov-ernment experts bankers is that there will be amassive shift out of US-dollar-denominatedsecurities. JP Morgan expects that within fiveyears private investors in non-European coun-tries will have switched €750 bn to €1 trillionout of dollar securities into Euro-based finan-cial instruments.

DEVELOPMENTS IN PENSION FUNDSThe European pensions market is undergoinga period of rapid change. The financial pres-sures of an ageing population combined withgovernments’ need to cut spiralling welfarebudgets are the chiefs of the chief drivingforces fuelling the trend towards greater pri-vate pension provision.

There is no coherent pension “market” assuch in Europe. The three Pillar system ofpension provision is widely used, but eachcountry has a different balance between stateand private provision. This means that thethreat of the demographic time bomb – theimpact of any depopulation on state welfaresystems – varies considerably from country tocountry.

The greatest problems arise in countries suchas France and Italy which have very generousstate pension systems and underdevelopedprivate pension markets.

Germany also has a serious pension problemwith the state scheme being in deficit. In sev-eral central and Eastern European countries,

44 april 2004

SPECIAL REPORT

Number of “workers” to 65 + years old(Source: US Dept. of Commerce)

02000 2025 2050

1

2

3

4

5

6

7

8

9

WorldUSJapanEurope

the switch from under funded state schemesto private funding plans has been swift anddramatic. (Financial Times: The Future forEuropean Pensions)

There are some signs of demand from multi-nationals for a Pan-European pension scheme.However, despite the single market’s achieve-ments in terms of the free movement of per-sons, goods, services and capital throughoutthe Union, pension schemes have continuedto operate mainly on a domestic basis.

There are moves to bring forward the possi-bility of fully portable European pensions.The first development has been the Directiveon supplementary pensions for posted work-ers, has technically come into effect on 25 July 2001.

The market is keenly aware of the salespotential of pan-European pensions. Luxem-bourg announced that it is establishing twonew vehicles, which will be virtually tax-freeand have a totally flexible structure.

AUSTRIAAustria’s pension system is thought to be oneof the world’s leaders in terms of pensionexpenditure, not because of its demographicstructure but because of the generosity of thesystem. Contributors can obtain 80% of theaverage of their 15 best years of income as apension.

Therefore, pension expenditures absorb 15%of GDP and contribution rates are among thehighest in Europe.

The IFA market is growing in importance(1,800 individuals).

BELGIUMBelgian Pension Funds are expected to bene-fit from an overhaul of the country’s pensionlaws. These changes are likely to result in the relaxation of the legal obligations andbring state pension provision in line with EUlegislation.

There are currently approximately 3,000intermediaries operating in Belgium. Flemishand French speaking Broker representativegroupings exist although much cross-borderactivity by IFAs is still largely limited.

FRANCEThe French state pension scheme faces majorchallenges in a country with an increasingretired population. It is a highly charged polit-ical issue that may not be solved for sometime and this is leading many individuals to

make their own independent pension arrange-ments.

There are presently only a few IFAs that areproperly operating in France. The IFA com-munity is growing slowly with around 1,500active in the market. Many of these appearwilling to embrace “foreign” products.

GERMANYWhilst Germany may be a world leader inmany areas, its over-stretched pension systemis badly in need of repair. It has become clearthat high unemployment and unfavourabledemographics make change to the existingpay-as-you-go system necessary.

IFAs in Germany are still broadly unregu-lated. Estimates of the numbers of IFAs varyfrom as few as 10,000 to as many as900,000… Around 20,000 are dedicated tothe business on a full time basis and theseoffer real distribution potential.

ITALYPublic pension expenditure in Italy grew fromabout 5% of GDP to over 15% in the early1990’s, outpacing all other categories of pri-mary government expenditure and makingItaly one of the biggest spenders on pensionsin Europe. This has led to a move away fromthe state system towards private pensions.

Intermediaries (around 40,000 are active) arebecoming more relevant in the distributionprocess. “Independence” is a recent develop-ment that is proving to have attractions as agrowing number of foreign product supplier’slook to enter the market. The growth and roleof IFA in Italy is being encouraged by politi-cally strong representative groupings.

NETHERLANDSThe national savings and pension’s law of1953 shifted part of the burden of pensionsaway from the state system onto voluntaryprivately financed schemes. Over 90% of theworkforce now belongs to a private supple-mentary scheme and it is usual for retiringemployees to enjoy a pension of 70% oftheir final salary. Dutch investors are felt tobe conservative with equities representingonly 29% of funds invested as against 77%in the UK.

The Netherlands boasts a well-structured and large IFA sector. Requirements for for-eign products (excluding institutional fundmanagement) are limited, however, giventhe quality and diversity of local productsuppliers.

SPAINSpain is increasingly moving away from thestate pension system.A politically strong association serves the IFA market of (approximately) 5,000. Thereare currently good opportunities for foreignsuppliers.

SWITZERLANDA strong fund management culture existsthroughout the Swiss intermediary marketand three associations promote the interest oftheir (total) membership of around 1,000firms.

UKWith its well-developed pension system andhigh level of regulation the UK market isprobably the most developed in Europe.

Generally, IFA firms tend to be good atselling but would benefit from assistance inthe areas of marketing administration andbusiness management.

Selecting and understanding unfamiliarinternational products to offer to theirclientele and building up a “value added”relationship with specific productproviders are two of the major issues IFAfirms are facing together with creating aresidual value for a business built up overthe years, very often from scratch.Based on a small stable number of clientstoday, it is fairly clear that most IFA firmscould increase their portfolio of clients rea-sonably easily through a better marketingapproach and with the help of some sup-portive technical assistance (administra-tive, legal and financial). ■

By Vincent J. Derudder

45april 2004

SPECIAL REPORT

47april 2004

SPECIAL REPORT

Without question,Asian economicactivity should con-tinue to surpass thatof the rest of theworld during 2004,

particularly that of the developed world.Growth in most of Asia has surged over thelast one year and we forecast that this rateof activity can be maintained in the comingtwelve months. On the other hand, the polit-ical calendar will become very active overthe course of 2004 as three Presidentialelections are scheduled to be held (Taiwanin March, Philippines in May and Indonesiain July) along with four Parliamentary/National Assembly general elections (Malaysia, South Korea, India, Indonesiaand Thailand). Investment opportunities,as well as new risks, abound.

China will remain the engine of growth forthe rest of Asia as it has increasingly replacedthe position previously held by the U.S.,due to the country’s incredible appetite forcapital goods, equipment, machinery and rawmaterials/basic commodities. China has alsoemerged as the world’s most significantconsumer of commodities in order to fuel the country’s rapid economic expansion. We anticipate that external pressure willremain on China regarding its currency policy.A weak Renminbi ensures that China cancontinue to attract huge amounts of foreigndirect investment, which will help to createmore new jobs, as social stability remains thetop priority for the leadership in Beijing.China will continue to make decisions basedon domestic considerations and will not pan-der to obvious US election induced rhetoric.

The long awaited, much anticipated recoveryof the South Korean economy also loomslarge during 2004. This development, along

with the political element, will dictate ourinvestment decisions towards the country in2004. The unprecedented impeachment ofPresident Roh Moo Hyun certainly does nothelp matters ahead of the National Assemblyelections scheduled for 15 April. The impeach-ment move could disrupt government deci-sion making as the country struggles to reviveits fragile economy and deal with the nuclearambitions of North Korea.

Thailand will need to call a general electionby January 2005, however, we anticipate the

election to be brought forward to possiblyDecember to capitalize on the overwhelmingapproval ratings for tycoon Prime MinisterShinawatra. However, Bangkok is vulnerable

as the Muslim insurgency in the South is areal threat.

India’s ten-year old reform program is nowpaying dividends in the form of a muchhigher level of economic activity fuelled bythe country’s well-educated labor force, thegovernment’s huge commitment to infrastruc-tural development linking this vast countryand a better rural economy. India will elect anew government over a three-week periodcommencing 20 April. The current BJP coali-tion government led by Vajpayee and themain opposition Congress Party both supportand share the same ideology on the economyand the reform agenda, which can only bodewell for further gains and overall develop-ment for India. India remains our most signif-icant strategy bet.

We observe three main risks to the perform-ance of the Asian regional stock marketsover the course of the next year – 1) domestic and external political events; 2) a collapse of the US$;

Asian Markets for 2004

The Crédit Agricole Asset Management team in Hong Kong

India’s ten-year old reform program is now

paying dividends in the form of a much

higher level of economic activity

China will remain the engine of growth for

the rest of Asia…

3) excessive equity capital raising exercisesby Asian corporations.

1)2004 is shaping up to be a pivotal year forpolitical developments throughout theAsian region. Not since year 2000 has therebeen scheduled such a vast array of Presi-dential, Parliamentary and General Assem-bly elections across the region involvingalmost every country. This year representsone of the most active political calendars inthe history of Asian political development.A total of eight plebiscites are scheduledand one leadership transition anticipatedduring the year. Undoubtedly, events lead-ing up to these elections and the formationof new governments and leaders followingthe elections will have significant implica-tions with respect to the direction of thereforms agenda, policy planning, the sus-tained viability of individual economiesand currency movements. Indeed, electionoutcomes will ultimately dictate importantconsequences for the performances offinancial markets.

2004’s inaugural plebiscite was held on 20 March in Taiwan. President Chen Shui-bian attempted to double the stakes by alsointroducing a potentially divisive defensereferendum outlining the country’s inten-tions towards China to coincide with thegeneral election. Consequently, we con-tinue to advocate an underweight invest-ment stance for portfolios towards the Tai-wan market during the first quarter of 2004.The uncertain outcome of the Taiwan elec-tion, coupled with the assassination attempton President Chen while campaigning,resulted in the Taiwanese market tumbling.A recount of the votes is the only hope leftfor the KMT, but either result is not prom-ising as a DPP confirmed victory will leavethe market depressed, and a KMT victorywill likely result in uprisings in the South.Either way, the political risk premium inTaiwan has risen.

We expect a big victory for Malaysia’s new Prime-Minister Badawi, in the March General Election, which will solidify hisleadership mandate in the country.

Local politics notwithstanding, the U.S.Presidential election cycle in 2004 couldmanifest itself in the form of greater U.S.protectionism rhetoric and threats, particu-larly from the Democratic Presidentialnominee, John Kerry. This would be anobvious attempt to appeal to a domesticaudience increasingly concerned by mount-ing job losses in both the manufacturingand now services sector. Fear of U.S. pro-tectionism is a real threat as politics entersthe equation. However, the recent decisionby the Bush Administration to withdrawpunitive tariffs on imported steel in order toavert a looming international trade war wascertainly a positive development to tonedown the risk. China and India unfortu-nately remain the focus of attention of U.S.policymakers. Asian markets are very waryof this type of activity.

2)A collapse of the US$ would create signif-icant problems. But we can expect thatAsian regional currencies will continue torise against the Greenback. The other bigquestion is whether or not Asian CentralBanks will continue to be the major buyerof U.S. Treasury debt in 2004, as was thecase during 2003. This unique arrangementgreatly helped to underwrite the surge inU.S. economic activity that was largely theresult of aggressive fiscal spending by theBush Administration. A dollar crash wouldspell the end of Asia’s rapid growth.

3)The other prominent risk factor regardingthe sustainability of the recent strong per-formances of the Asian regional stock mar-kets remains the possibility of excessive,large-scale capital raising exercises byAsian corporations. Asian corporationsare notorious for taking advantage of theopportunity presented by sharply risingequity markets to raise fresh capital.

This has particularly been the case over thecourse of 2003, when US$ 52 billion wasraised, and could serve to put a brake onstock market performances in the Asianregion during 2004 if indeed the dilutioneffect from these capital-raising exercises isprohibitive. We forecast US$ 75-80 billionto be raised during 2004, ranking as thesecond highest annual total in Asian finan-cial history. This would give rise to a con-solidation phase in these markets due to thecapital raising initiatives.

Although the U.S. remains a vital customerfor Asia, the emergence of a sustained levelof domestic demand combined with bettereconomic policies by governments with anemphasis on reforms introduces the possi-bility of more broad-based growth for theregion. As such, we would argue and recom-mend that any excessive market weaknessrepresent an opportunity for investors toeither increase or initiate new positions inthe Asian region.

Although clearly challenging, we remainconfident regarding Asia’s medium termprospects for a return to a sustainable levelof economic growth and believe that ourstrategy remains well placed to benefitfrom this recovery. ■

By Ray JOVANOVICH

Asian corporations are notorious for taking

advantage of the opportunity presented by

sharply rising equity markets to raise fresh

capital.

48 april 2004

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