As part of its ongoing inquiry into corporate governance and remuneration in the financial services sector, the Treasury Select Committee has taken evidence from Dick Saunders, Chief Executive, Investment Management Association, Otto Thoresen, Director General, Association of British Insurers, and David Paterson, Head of Corporate Governance, National Association of Pension Funds.

David questioned Dick Saunders on what effect the failure of a large asset manager would have on the rest of the economy and on corporate governance in asset management. He also asked questions of Otto Thoresen whether his members should be classed as systemically important financial institutions.

Q133 Mr Ruffley: A question for Mr Saunders. You have said that asset managers do not give rise to any systemic concerns. Are you inviting us to believe that the failure of a significant buy-side institution would have no effect on the UK economy?

Dick Saunders: Yes, I think that is correct. The important thing to remember about buy-side institutions is that, as institutions, they are quite small. They are nothing like the size of a bank and the reason for that is, while they may be managing hundreds of billions in the way of assets, those assets are held entirely separately from the asset manager. Were the asset manager to fail, those assets would be unaffected by that. So the only people that suffer when an asset manager fails are the employees and shareholders of that firm. It does not ripple out into the broader economy.

Q134 Mr Ruffley: A separate question: do you think there are any concerns that your industry needs to address regarding the corporate governance of and remuneration of asset managers, or is everything in the garden lovely?

Dick Saunders: On corporate governance, I am not aware of any specific issues. The corporate governance within an asset management firm is organised in the way that it is, whether it is listed or unlisted.

In terms of remuneration, the asset managers are subject to the same requirements in the Capital Requirements Directive as other financial institutions, although they are applied in a more proportionate manner. Generally speaking, when one looks at the way individual asset managers are incentivised, there is a fairly substantial performance-related element in there, which is related to the performance of the funds that they are managing. That is in order to try to align their interests with those of their clients. Those performance arrangements and incentive arrangements tend to be over up to three years, sometimes up to five years, and may be subject to clawback as well.

Q135 Mr Ruffley: Mr Thoresen, the ABI says to this Committee that we need to be clearer about the categories of institution that we are referring to when discussing the meaning of "systemically important". Can you tell us what the ABI defines as systemically important?

Otto Thoresen: I think there is extensive work already in the public domain around the categorisation of banks in that category. The discussion about how you extend beyond into other sectors-

Mr Ruffley: Yes. Going beyond banks-outwith banks or financial firms-can you give us a kind of working definition?

Otto Thoresen: Where I start from is, to a certain extent, the same territory that Dick was covering. The liabilities that exist within the organisations have assets that are in the organisations that can match those liabilities. If you take insurance companies, on the whole, insurance companies deal with long-term liabilities and hold assets long term to match those liabilities. So the existence of that kind of balance within your organisation protects the external economy from the effect of failure within the fund. But there have been, historically, insurance businesses globally-AIG is a very obvious example-who have extended their activities into territory where the principle that has underpinned how insurance businesses operate is not present, and those businesses then become SIFIs, clearly.

Q136 Mr Ruffley: Your submission says that the International Association of Insurance Supervisors has yet to determine whether or not an insurance company merits this categorisation of "systemically important financial firm". Wouldn't you think it prudent, given the uncertainty at the moment, to say, "Let's treat big insurers as systemically important financial firms for the purposes of inquiries of the kind we are engaged in today"? Why are you trying to exclude them? That seems to be the thrust of ABI's position.

Otto Thoresen: I think what we are trying to do is effectively to segment the financial services industry into a number of different categories and try to approach those categories from first principles and identify where the risks are. Much of the discussion we are having at the moment has been about good governance and good practice in funds. I think, though, if you move to a point where the regulatory response is about protecting the wider economy from the effect of failure, it is important that that only be applied where it is relevant and justified. In our view, the vast majority of insurance businesses globally would not be in that category.

Q137 Mr Ruffley: The key words in your last sentence are "the vast majority of". What about the minority? Who might they be? Could you give us a description?

Otto Thoresen: The discussion that has been going on globally with the International Association is around where funds are operating in related sectors. I used the example of AIG earlier. I think that is a public domain example of an organisation that offered services and products that were outside the normal definition of insurance but were, as a result of that, exposing them and the economy to far greater consequences of failure. The discussion at the moment is about the extent to which that should be reflected in the way the overall organisation is classified, from the point of view of whether it is a SIFI or not.