Speaking before the Treasury select committee this week, John Tiner, chief executive of the FSA, stated that the European Union's e-commerce directive, which seeks to apply the internal market principle of freedom to provide services to e-commerce, allows hedge funds based in Germany to be accessed by retail investors in the UK through the internet.

Whilst Mr Tiner cautioned that such activity should be discouraged, he said that the regulator was somewhat hamstrung by the e-commerce directive, which has removed barriers to the provision of cross-border online services.

"German hedge funds can now be sold to UK retail investors and there are emerging anomalies like that which have to be very carefully handled if we are to move to a single EU market in retail financial services," he observed.

According to Mr Tiner, there is currently no evidence to suggest that UK-based retail investors have bought hedge fund products from German providers, although he advocated the launch of an awareness campaign as a preventative measure. However, beyond this, the FSA chief warned that there was little else that the regulator could do to police the problem.

"In terms of our formal powers I'm afraid they are rather limited, because they are overridden by the e-commerce directive," he stated.