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22nd May 2022

UK forced to swallow bitter pill on hedge funds

  • London is home to 80 percent of the EU's hedge funds (Photo: harshilshah100)

EU finance ministers have agreed a common position on draft EU legislation on managers of hedge funds and other alternative investment firms, opening the door for negotiations with the European Parliament, the co-legislator.

The agreement on Tuesday (18 May) comes despite UK concerns that the Europe-wide law could negatively impact the British economy, with 80 percent of hedge funds currently located in London.

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Lightly regulated hedge funds handled roughly $1.2 trillion (€970 bn) worldwide in 2009, and have been blamed by some European politicians, including the leaders of France and Germany, for exacerbating the effects of the financial crisis, despite the lack of market data in this area.

Supporters of the EU bill say this danger would be reduced under the proposed requirements for greater transparency, which include forcing fund managers to register and comply with reporting requirements, coupled with curbs on risk-taking and pay awards.

Britain is concerned that the rules for non-EU domiciled funds could prove to be particularly onerous, with a majority of the country's firms currently located in the Cayman Islands for tax reasons.

The country's new finance minister, George Osborne, was forced to stomach the majority position of EU states on Tuesday however, despite support from the Czech Republic.

UK treasury officials have sought some solace in language in the meeting's conclusions saying discussions with the parliament will now get underway, "taking into account the concerns expressed by member states."

"Given where we are this means the UK concerns are still in play," said one official who wished to remain anonymous. "We have to go into the trialogue discussions now with the parliament and the European Commission."

Parliament's position

The finance ministers' decision comes less than a day after members of the European Parliament's economy committee voted on the same draft EU law on alternative investment funds, which was originally put forward by the commission last year.

The euro deputies called for new ways to deal with managers and funds located outside the EU, a proportionality system to regulate less risky funds more lightly, and rules on remuneration policies and short selling.

"This position will ensure better transparency and better investor protection while at the same time being on the side of the financial industry when it is working for the real economy," said centre-right MEP Jean-Paul Gauzes, the parliament's rapporteur on the subject.

While EU member states say third country funds should get individual approval in each member state in order to market their products there, parliament supports a system under which the external funds would voluntarily agree to the new directive's terms.

In addition they would have to comply with a number of extra standards such as measures to prevent money laundering, under Mr Gauzes' proposals.

EU internal market and financial services commissioner Michel Barnier gave an indication of the work to be done in reconciling the two sides after Tuesday's meeting. "On the third countries issue I am closer to the parliament's position," he said. "There are going to be substantial discussions."

Parliament has indicated it would like the full plenary of MEPs to vote on the draft legislation this July, although analysts say this is an ambitious deadline given the current divergences.

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