The European Parliament and Council have both agreed this week to push ahead with stricter regulations for hedge funds, private equity funds and other alternative investment methods.
The Alternative Investment Fund Manager (AIFM) Directive aims to increase transparency regulations, and push for higher standards for third country funds seeking access to EU markets.
It also seeks to regulate more proportionally, with riskier funds, such as hedge funds, being more heavily scrutinised than others.
On 17 May the Parliament’s Economic Committee voted to endorse the draft Directive. The following day, EU finance ministers agreed their own versions of AIFM.
Both versions emphasise different ways of dealing with this particular branch of the finance industry, and  both are bound to come to a compromise co-decision; indeed both Institutions are set to discuss the matter ahead of a first reading of the draft, scheduled for the July plenary session.
Already, the AIFM Directive is causing some alarm, notably in the UK, where some are predicting it will be the end of the City of London. Think Tank Open Europe have gone on a lobbying offensive, arguing vociferously that these new financial regulations will kill off the ‘Golden Mile’ and cause massive losses in tax revenue for the country, as well as damaging investment for overseas aid projects.
Open Europe estimates that about €5.3 billion in tax revenues will be lost to the country as hedge fund managers get scared and head out to conduct their business elsewhere, especially Sinagpore. According to the think tank, the Directive as it currently stands, could cost the UK economy between €6.8 and €9.6 billion a year from 2020.
This analysis is backed up by UK Conservative MEP Syed Kamall, who has dubbed the Directive “highly protectionist”. In January of this year, he wrote to Michel Barnier asking the Commissioner to clarify his position on private equity and hedge funds, and put it to him that the City of London would benefit negatively as a result of the AIFM proposals.
Bernier’s response was conciliatory. It suggested that the Commissioner’s first priority is to “promote European competitiveness” and a “level playing field” for EU hedge funds. He also made clear that “intelligent and effective regulation” of hedge funds was essential.
At the time, Kamall seemed reasonably satisfied. Now, he says that the Parliament could damage the industry (specifically, UK industry) with its position, which has been supported by the EPP, Socialists and Greens. Despite this, he says “opposition” is growing to the Directive.
Maybe so; while the timing was co-incidental, both the Parliament and Council endorsed two very different vision of how the Directive should play out. The UK might not like what the Parliament has to say, but (and although they would favour no regulation in the area) the new Conservative-Liberal Democrat government stance is that, at least there should be a European standard. This would ensure that it would not be beneficial for hedge fund managers to depart London for, say, Dublin.
The Council has more or less proposed this, suggesting that hedge fund operation should be granted through a certificate system. Those outside the EU wishing to operate in Europe would have to apply for a certificate of their own.
As the Council foresees it, this would be governed at member state level – potentially meaning a variety of standards. This will not satisfy the UK, currently the most vocal opposition to the Directive.
The UK’s new Chancellor of the Exchequer, George Osborne, came away from his first Council meeting having suffered what could have been a humiliating defeat. Instead, he knows he has lived to fight again. A certificate system is, at least, open for discussion. Wherever the “opposition” to AIFM might be, it hasn’t been suppressed. Let the next round begin.