European Union finance ministers on Tuesday abandoned efforts to reach a compromise deal over the EU’s controversial proposals to tighten regulation of hedge funds and private equity after a last-minute intervention by Gordon Brown, the British prime minister.
The proposed Alternative Investment Fund Manager directive, the first effort at drawing up EU-wide rules for the industry, has faced sharp criticism from both private equity and hedge funds.
The sticking points
● The stalemate centred on differences over the extent to which non EU-based fund managers and funds should be allowed to market on an EU-wide basis, provided the jurisdictions in which they were based met certain standards – the so-called “passport” issue.
● Coupled to this was the question of how those standards should be defined and how much discretion should be given to Brussels to impose conditions – which British officials claim raises issues of extraterritoriality.
The most controversial part of the directive focuses on its rules for non EU funds and managers, which critics say unfairly discriminate against US fund managers as well as those in offshore jurisdictions.
The draft’s tough rules for depositories - banks that hold funds assets - disclosure requirements for private equity held companies and limits on borrowing by hedge funds have also caused controversy.
Spain, which holds the rotating EU presidency, on Tuesday dropped the issue from the agenda of an EU finance ministers’ meeting in Brussels after 11th-hour negotiations failed to overcome hurdles to an agreement.
It emerged on Tuesday that Mr Brown called José Luis Rodríguez Zapatero, his Spanish counterpart, on Monday night, insisting Britain could not accept the compromise plans on the table.The UK and the Scandinavian countries have generally been more supportive of the alternative investment industry, while France has fought for a tighter crackdown, particularly on the depository banks.
British officials accuse France of pushing aggressively to curb the activities of hedge funds and private equity. But Nicolas Sarkozy, French president, told Mr Brown last week he would be flexible in searching for “a point of equilibrium”.
Downing Street officials said Paris had agreed to defer a vote – rather than forcing the issue and inflicting a defeat on Britain – a sign of the constructive working relationship between the British prime minster and Mr Sarkozy.
Mr Brown wants to refer the issue to G20 finance ministers at their meeting next month and Spanish diplomats on Tuesday said they hoped to agree a deal before the end of the presidency in June.
He could face heavy criticism in the City if he is seen to bow to excessive regulation: 80 per cent of Europe’s hedge fund industry is based in London.
The breakdown in talks comes after Tim Geithner, US Treasury secretary, warned the EU that he viewed the proposed rules for non-EU fund managers as protectionist.
FT In depth: The European Union’s draft rules on hedge funds and private equity have encountered opposition from Britain among others
Britain says it is not opposed to widening the regulatory net to cover hedge funds and private equity, but the UK Treasury said on Tuesday: “A number of countries had concern about the details and more discussions are necessary.”
A spokesman for the British Private Equity and Venture Capital Association said: “We’re very concerned about the directive in its current form. Hopefully this will give us more time to work things out.”
Andrew Baker, chief executive of the Alternative Investment Management Association, said: “It is better to get the directive right than to rush it through and risk botching it ... We hope that European policymakers will in the coming weeks and months reach a sensible consensus agreement .”
The industry was breathing “a huge sigh of relief that the current draft has not been accepted especially following the Geithner letter, which raises the risk of retaliatory action by the US”, said Andrew Shrimpton, a former UK regulator who works at Kinetic Partners, a consultancy.
Tuesday’s decision could affect the timetable for any eventual proposal becoming law. Hopes had been for a single text to be agreed between the member states and the parliament – and possibly even voted on – before the summer break.