Fund managers fear being shut out by reforms
Hedge funds and private equity firms breathed a collective sigh of relief last month when the European Union’s finance ministers delayed giving their approval to tighter regulation. But the relief is only temporary.
The proposed legislation, which covers a broad range of ‘alternative investment funds’, has been vehemently attacked by fund managers, who complain that it is protectionist, would harm returns for pension funds, make it harder for business to raise capital, and drive parts of the financial sector overseas.
The proposals have also raised the hackles of the US administration, which fears that fund managers based in the US could be shut out of the EU’s single market.
Tim Geithner, the US treasury secretary, wrote to Michel Barnier, the European commissioner for the internal market and services, on 1 March warning that the draft law “would discriminate against US firms and deny them the access to the EU market they currently have”.
Geithner pointed out: “You will see that our approach in the US maintains full access for EU fund managers and custodians [ie, banks that work with fund managers] to our market.” He reiterated this point in a letter to the finance ministers of the UK, Spain, Germany and France, on 5 April.
The Commission has denied any protectionist intent and argued that its proposal is in line with agreements reached at meetings of the G20.
Barnier, in a response to Geithner on 29 March, said he was “convinced that access to the European single market should be granted to managers and funds domiciled in third countries, including the US, provided that high-level standards of transparency and security are guaranteed”.
The UK government is also concerned about the draft law, fearing that it would reduce the City of London’s competitiveness.
Spain, which holds the rotating presidency of the Council of Ministers, had planned to send the proposal to the EU’s finance ministers on 16 March, but agreed to a delay after a personal intervention by Gordon Brown, the British prime minister. He asked for any decision to be postponed until after the UK general election on 6 May.
On the agenda
Despite these various concerns the proposal will be back on the ministers’ agenda soon. Elena Salgado, Spain’s finance minister, has said that she is determined to get an agreement on the law before the end of June. The proposal has strong backing from France and Germany, which have blamed ‘light touch’ financial regulation in the UK, where 80% of the EU hedge fund industry is based, for contributing to the financial crisis.
Salgado has said that she will use the extra time to seek “broader agreement” on the draft legislation. Opponents of the legislation fear, however, that discussions in the Council of Ministers are already too far advanced to make major changes. Nor do they like the direction that debate is taking in the European Parliament, which has co-legislative powers on the dossier.
The European Commission proposed the draft legislation in April 2009 to improve transparency and oversight of the alternative investment funds market, proposing that fund managers should have to register with regulators and report on how they intended to protect themselves against risk, and that irresponsible managers could be banned from operating on the single market.
The Commission also proposed placing minimum capital requirements on fund managers, and making depositary banks liable for failure to protect investors’ assets (an idea that has been fiercely opposed by the banking sector).
At the heart of the UK’s, US’s and fund managers’ concerns has been the Commission’s proposal that offshore funds should be banned from being marketed in the EU unless regulation in the “offshore centres” is equivalent to that in the EU. The Commission proposed that it should be tasked with drawing up “equivalence criteria” and deciding which non-EU countries come up to scratch.
This concept of equivalence survives in amended texts circulated by the Spanish presidency and in amendments under discussion in the Parliament.
Jean-Paul Gauzès, the lead MEP on the dossier, has found broad support among his colleagues for a proposal to apply equivalence criteria after a transitional period of several years, with a ‘grandfather clause’ exempting funds that were already active in Europe when the legislation entered into force.
Spain, meanwhile, is seeking agreement on a set of common standards that should be applied to offshore funds, to ensure they cannot undermine the new EU regulatory regime. Last week (31 March) Barnier called for “strict” equivalence criteria.
The Parliament’s economic and monetary affairs committee will vote on the legislation on 27 April, with a vote of the full Parliament to follow in July. Given the short timetable in the Parliament and the Council, opponents of the legislation will have to work fast to prevent their fears being realised.
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