FSA Conference Highlights EC Hedge Fund Directive Issues

by Robin Pilgrim, LawandTax-News, London

24 September 2009

At their Asset Management Sector conference, the FSA's Sally Dewar, managing director of Wholesale Markets at the Financial Services Authority (FSA), spoke on the side of the regulators, calling for adjustments of the proposed EC Regulation of the Hedge Fund Industry to make it workable, while the industry called for a different approach.

Dewar stated that "most of us can see value to the European and global capital markets, and the wider economy, in sensible and proportionate harmonization of regulatory standards in the areas under discussion." She added that there remain four key areas that need to be addressed to make the Directive more effective for the funds it covers:

• Correct identification of the weaknesses in the present regulatory arrangements and addressing them in a proportionate way.
• Differentiation between types of alternative investment fund management.
• Adoption of a risk-based approach – the scope and thresholds of the Directive need to strike the correct balance between imposing additional costs and enabling regulators to identify and mitigate systemic risks.
• The need to take a global approach that recognizes the global nature of the sector and does not impose unjustifiable geographical restrictions on firms' business models that would significantly restrict investor choice.

However, other contributors to the conference expressed broader concerns. David Vaughn from the SEC felt that US fund managers would be excluded from the European market and that it is always difficult to reconcile differences between two separate systems of regulation. Mats Odell, representing the Swedish EU presidency, wanted to avoid building up barriers to global trade while acknowledging the need for effective regulation. David Wright, representing the EC internal market unit, echoed this desire to strike the right balance between being too protectionist on the one hand, and too passive and weak on the other. Interestingly, Wright said the EC would "support sensible and balanced improvements" to the proposal and acknowledged that the regulatory regime was drawn up under pressure. After a period of consultation through to mid-2010, the Directive could be in force by the middle of 2012.

Todd Groome, Chairman of AIMA, the association that speaks on behalf of the alternative investment industry, argued that the EC Directive had little or nothing to do with financial stability and that, rather than compose a new regulatory framework, it would make more sense to implement and enforce the existing rules more effectively. He questioned the capacity of the authorities to understand and monitor risk worldwide of even the 320 fund managers that invest more than USD1bn each, and said it is time to bring more people with practical market skills and experience into the regulatory system now that there has been a shakeout. Dick Saunders, Chief Executive of the Investment Management Association, thought the EC Directive just "did not work" at the technical level and called for a lot more discussion between the technical specialists to get a sensible outcome.

The Financial Times suggests that there have been missed opportunities for the London AIM industry to join in the consultation process in a more constructive way and quoted Karel Lanoo's paper for the European Capital Markets Institute, which said: "The industry has thus probably woken up to something it should have been aware of for years. The approaching storm was visible on the horizon; the industry just didn’t see it coming and somehow still believes it can be avoided. … By reacting so ferociously to the proposal, which largely follows the EU mainstream and accepted wisdom on the crisis, the industry is behaving as though it has something to hide."

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