Monday, May 18, 2009

politically driven effort to place obstacles in the way of an industry that is almost exclusively based in the US and the UK

TO BE NOTED: From the FT:

"
Europe’s classic exercise in closet protectionism

By Paul Marshall

Published: May 17 2009 19:19 | Last updated: May 17 2009 19:19

If opponents of the European Union are looking for evidence of political meddling and overreach, they could hardly find a better example than the new draft directive on alternative investment fund management. The proposal, aimed at imposing new regulation on hedge funds and private equity, is a politically driven effort to place obstacles in the way of an industry that is almost exclusively based in the US and the UK. It makes a mockery of any notion of subsidiarity – taking decisions at the lowest possible level – and is a classic exercise in closet protectionism.

I say this as a committed European and a member of the advisory council of Business for a New Europe (BNE), which strongly supports the UK’s active engagement in Europe. Indeed, BNE was set up to promote a reformed, enlarged and free-market EU.

The trouble with the draft directive is that it promotes no such thing. Instead, it proposes lifting authority for the initial authorisation, monitoring and supervision of alternative investment fund managers, as well as powers over the provision of services and marketing of funds, from the competent national authorities to the European Commission. The Commission may continue to delegate some of these powers to the countries, such as authorisation of managers. But the damage is done. The directive transfers ultimate powers to Brussels at the expense of national regulators.

It also has a strong protectionist element, since it would prevent fund managers in third countries – such as the US – from accessing the European market unless those countries adopted “equivalent” regulation. Try this as a sample of the language: “The key functions and activities which are likely to give rise to risks for European markets, investors or counterparties are required to be undertaken by EU-established entities, operating subject to harmonised rules.”

The content of the draft directive is a surprise to all those who have closely followed recent regulatory developments. Although hedge fund managers in the UK have always been regulated just like any other fund managers, the industry recognises that it needs to demonstrate to the outside world that it acts responsibly. That is why some of the leading funds, including Marshall Wace, joined together recently to promote tough voluntary standards – an approach endorsed by the recent gathering of leaders of the Group of 20 nations in London. The Commission’s draft legislation completely ignores the approach the G20 backed.

The Commission has also ignored in-depth analysis carried out by distinguished experts into the causes of the financial crisis and the measures needed to ensure it does not happen again. The De Larosière report carried out for the European Commission and the Turner report for the UK government both produced level-headed analyses of the failings of the global financial system. But neither could have led anyone to believe that the alternative investment industry was a dangerous source of risk, let alone the cause of the financial crisis.

Despite all this, the European Commission has steamed ahead without proper input from those most affected by its proposed measures – the investors and fund managers. It has also based its recommendations on an assessment of the risks posed by alternative investments that is at best debatable and at worst reveals a strong prejudice against this industry.

At a time when the overall reputation of the financial sector is so poor, it is hardly surprising that many people do not have a great deal of sympathy for the alternative investment industry. Most people do not really understand it or believe in its ability to create value for society as a whole, and I accept that it is up to us to explain ourselves better. But everyone can see what a misguided political project can lead to. This draft has been rushed through under extreme political pressure in a key electoral period, ahead of votes for the European parliament and in Germany. Is the EU really going to be built on such unashamedly protectionist initiatives, which marginalise the countries most affected?

Admittedly this is only the beginning of a long process. The final directive will have to be debated and approved. There will be the opportunity to modify it substantially and I hope the British government will take a lead in this. But the present draft is a very bad start. All it does is enhance the suspicions held by some in the UK that it is highly risky to engage with the continental Europeans on matters of crucial British interest.

The writer is chairman of Marshall Wace"

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