FSA Launches Two Hedge Fund Discussion Papers

by Robin Pilgrim, LawAndTax-News.com, London

27 June 2005

The UK's Financial Services Authority (FSA) on Thursday published two discussion papers that focus on related but separate aspects of hedge funds and retail investment products.

The papers look, respectively, at the impact of hedge funds on the UK's wholesale markets - 'Hedge Funds: A Discussion of Risk and Regulatory Engagement' – and at the regulatory regime that applies to retail investment products - 'Wider Range of Retail Investment Products: Consumer Protection in a Rapidly Changing World'.

The FSA is seeking industry and investor feedback on the issues raised in the two papers and will be actively engaging with key market participants, including those who contributed to previous thematic reviews. It is also seeking views from the industry and interested parties on what products should be marketed to retail investors.

Hector Sants, FSA Wholesale Markets and Institutions Managing Director, explained that:

"We view hedge funds as a significant, useful and growing asset class through their role in providing market liquidity and diversification options for investors. However the activities of hedge funds do pose risks to the UK's financial markets and the work of the FSA, and it is right that we fully understand them."

"We intend to make certain changes in how we engage with the hedge fund industry in the UK and seek feedback on these changes and other potential changes which we have identified as meriting consideration."

"In relation to retail investment funds we want to open a wider debate on three important issues: first, how we can bring greater coherence to the current regime for retail investment products, given the changing environment we are operating in? Second, should we seek to encourage or to discourage wider access to hedge funds investment techniques by on-shore providers? Third, should we consider lifting the marketing restrictions on off-shore, unregulated CIS?"

He concluded by announcing that:

"Any debate on lifting the marketing restrictions needs to reflect that the FSA would not be regulating these products and so the risks to consumers are likely to be greater than for on-shore products. In opening this discussion we are mindful of the danger of regulatory arbitrage and have no desire to cause the hedge fund management industry to migrate to more lightly regulated offshore centres as a result of regulatory action."

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