1. The Joint Committee has examined the Commission’s proposal (7873/79) for a Council Directive amending for the second time the First Directive for the implementation of Article 67 of the EEC Treaty (liberalisation of capital movements). The detailed examination of the proposal was carried out for the Joint Committee by its Sub-Committee on Statutory Instruments and Legal Affairs under the Chairmanship of Senator David Molony. The Joint Committee is indebted to Senator Molony and his Sub-Committee for their work. The aim of the proposal is to abolish exchange restrictions on the free movement of units in or securities issued by collective investment undertakings for transferable securities (CIUTS). These undertakings take two forms, namely, certain unit trusts in Ireland and the United Kingdom and open ended investment companies, or companies with variable capital, which operate on the Continent.
2. In 1976 the Commission submitted a draft Directive to the Council for the co-ordination of national laws and administrative provisions relating to CIUTS. The objective of the proposed co-ordination Directive is to secure uniform protection of investors and the approximation of conditions of competition between CIUTS, the ultimate purpose being to enable a CIUTS established in one Member State to promote its activities in the other Member States. This draft Directive which was the subject of the fifty-fourth report (Prl. 6168) of the former Joint Committee is still being examined by the Council’s subsidiary bodies. The proposed capital movements Directive is regarded by the Commission as essential for the effective implementation of the co-ordination Directive if and when it is adopted.
Liberalisation of Capital Movements within the EEC
3. Article 67 of the EEC Treaty provided for the abolition of restrictions on the movement of capital within the EEC during the transitional period “to the extent necessary to ensure the proper functioning of the common market.”. Article 69 envisages the issue of Council Directives for the implementation of Article 67. To date there have been two such Directives, in May, 1960 and December, 1962. These Directives divide capital movements into four categories or lists —A, B, C and D — the capital movements on each list having a different status regarding whether its liberalisation is mandatory or not. List A covers mainly direct investments and personal capital movements and liberalisation of these items is mandatory; List B covers individual acquisition and sale of quoted securities and is largely mandatory; List C covers issue of quoted securities, acquisition and sale of collective investment and non-quoted securities, medium and long-term loans etc,. and is largely optional. The Directives do not lay down any significant rules as regards List D items.
4. Under the Treaty of Accession Ireland was permitted to defer the liberalisation of different categories of capital movements for stated periods but these transition arrangements have expired. However, under Article 108 of the EEC Treaty Ireland has been permitted to maintain, subject to certain modifications, its restrictions on outward portfolio investment.
5. Following on entry into the EMS exchange rate arrangements the Irish controls, inter alia, on outward portfolio investment were amended so as to apply to transactions with the United Kingdom, with effect from 18th December, 1978, exchange controls broadly similar to those operating for transactions with other EEC countries. Formal notice of the action taken was given to the Commission and to other Member States under Article 109 of the Rome Treaty. The Joint Committee understands that the Commission is in the process of reviewing the Irish derogation from obligations to liberalise outward portfolio investment to other EEC Member States, but that it is expected that the existing restrictions on such investment will be allowed to remain. The nature of these restrictions is indicated in the following paragraph.
Irish Restrictions on Outward Portfolio Investment
6. In general, an increase in existing net holdings of foreign securities is not allowed. Existing holdings of such securities may be retained and subject to certain conditions switched for other similar securities. Such securities may also be sold outright to non-residents and the proceeds repatriated. Holders of existing foreign securities may also take up rights issues in respect of such securities. The proceeds of sale of U.K. securities may in general be reinvested anywhere in the world. There are also a number of exceptions to the general rule. In September, 1979 insurance companies and pension funds were allowed to bring their holdings of foreign securities (acquired in official exchange) up to 10% of their assets (in general terms, different methods of calculating assets apply) as at 31st December, 1978. These arrangements have now been updated by reference to end-1979 figures. A similar arrangement operates in the case of unit trusts. Insurance companies, pension funds and professional portfolio managers may borrow foreign currency to finance the purchase of foreign securities. Irish residents may buy securities issued by the European Communities and the European Investment Bank with official exchange. Irish residents may of course also buy Irish securities dealt in on the London Stock Exchange.
7. The proposed capital movements Directive would apply to those undertakings to which the proposed co-ordination Directive is to apply. These are unit trust and open ended investment companies which invest at least 95% of their assets in transferable securities and liquid assets. The Irish undertakings affected would be certain unit trusts which are registered under the Unit Trusts Act, 1972.
8. The Commission’s proposal is that units of those unit trusts and securities of the open ended investment companies to which the co-ordination Directive is to apply should be transferred from List C to List B of Annex 1 to the First Directive of 11th May, 1960 (as amended). Member States are obliged to grant general permission for the conclusion or performance of transactions and for transfers between residents of Member States in respect of capital movements set out in List B. In the case of List C on the other hand a Member State may maintain or reintroduce exhange restrictions which applied to them on the date of entry into force of the Directive (in the case of the United Kingdom, Ireland and Denmark, on the date of accession) if free movement of capital might form an obstacle to the achievement of the economic policy objectives it is pursuing. Denmark, France, Italy, Ireland and the Netherlands have all exercised this right.
9. Operations in most securities dealt with on a stock exchange by being included in List B were liberalised by the First Directive and the adoption of the Commission’s proposal would put units of unit trusts in the same category. However, the provisions of the First Directive can be overridden by Member States invoking safeguard clauses in the Treaty of Rome (e.g. Articles 73,108 and 109). Ireland, for example, is able to maintain the restrictions on outward portfolio investment referred to in paragraph 6 notwithstanding the provisions of the First Directive by virtue of such Clauses.
Consideration at Community Level
10. The propsed capital movements Directive will have to be considered by the Financial Questions Group of the Council. However, the Joint Committee understands that the majority of Member States, including Ireland, considers that it would be premature to pronounce upon the proposed Directive until work on the co-ordination Directive is further advanced. Moreover the Committee understands that it is not likely that the co-ordination Directive will be finalised for some years. At this stage it is not possible to say even when discussions on the capital movements Directive will commence.
Implications for Ireland
11. As far as outward investment is concerned the practical effect for Ireland of the adoption of the capital movements Directive depends on what exchange control restrictions, based on the overriding provisions of the EEC Treaty, are in operation at the time. The Joint Committee is advised that if the present restrictions are still in force it is possible that the EEC authority allowing their retention will be sufficiently general in terms to apply automatically to the capital movements covered by the proposed Directive. If not, the Committee understands that it is likely that EEC sanction would be sought to extend such restrictions to the capital movements in question, because of the disruptive market and movements effects likely to arise from the liberalisation of transactions in such a limited range of securities, that is unless, at that stage, circumstances obtained which did not warrant the retention of restrictions in this particular area.
12. As far as inward investment is concerned Ireland is not at present operating any restrictions and it is not anticipated that this situation will have changed when the proposed Directive is adopted if in fact this happens.
Views of the Joint Committee
13. One of the objectives of the proposed co-ordination Directive is to enable CIUTS to market their units in Member States other than their own without those Member States being able to make the undertakings or their units subject to any provision whatsoever other than marketing regulations. This objective could be frustrated, even if that Directive is adopted, by the restrictions on capital movements permitted at present by the First Directive of 11th May, 1960 (as amended). Accordingly, the Joint Committee agrees that if the co-ordination Directive, as proposed by the Commission, is adopted the First Directive should be amended in the manner proposed by the Commission. However, even if this is done, the practical effect as far as Ireland is concerned will depend on the exchange control restrictions in operation and the Committee recognises that the continuance of these restrictions must depend on wider economic and financial considerations.
14. The Joint Committee wishes to express its sincere thanks to the First General Unit Managers Limited, the Institute of Chartered Secretaries and Administrators and the Stock Exchange for the considerable assistance they gave the Committee when examining this proposal.
(Signed) ALEXIS FITZGERALD,
Chairman of the Joint Committee.
11th June, 1980.