BREAKINGVIEWS-EU’s favour to Brown gives hedge funds a reprieve

March 17, 2010

— The author is a Reuters Breakingviews columnist. The opinions expressed are his own —

By Pierre Briançon

PARIS, March 17 (Reuters Breakingviews) – The unwritten rules of the gentlemen’s club called the European Union have won hedge funds and private equity a reprieve. Sitting leaders naturally sympathise with a colleague facing a tough election battle. This explains why France and Germany, who are leading the charge to impose strong new regulations on the alternative investment industry, have agreed to kick the matter into touch until after the UK election, expected in May.

But the regulation-heavy camp will then still be faced with the same problem. Should it renew the fight for draconian rules, or should it seek a quick compromise with the UK, home to most hedge funds operating in Europe?

Theoretically the matter could be settled by a majority vote within the European Council, according to the Lisbon Treaty’s new rules. But neither France nor Germany want to risk humiliating Gordon Brown in a vote he would almost certainly have lost. Furthermore, both Paris and Berlin think a negotiated agreement on the controversial directive is still possible.

There is little chance that things will have moved forward much by June on the main bone of contention — the right of fund managers based outside the EU to market their wares within Europe. The UK advocates a “passport” system that would allow any fund approved in one of the member countries to tap EU investors. France and Germany insist that offshore funds are first submitted to the same disclosure and transparency rules imposed on EU-based funds.

If Brown loses the election to the Conservatives, other European states might be tempted to go ahead with a vote. The Conservatives are widely considered less EU-friendly than Brown’s Labour party, so there would be less reason to play nice. But the possibility is moot. The directive will ultimately have to be approved by the European Parliament — which would be problematic if the text remained contentious.

This leaves the clampdown camp with a dilemma. Continued deadlock would mean that the current situation lingers on — and that hedgies can continue to operate as before, without much scrutiny. So the pressure to compromise is on those who want to change the rules of the game to make them tougher.


— Discussion of the controversial alternative investment fund management directive was pulled from the agenda of a European Union finance ministers meeting on March 16 after the UK asked Spain, the current holder of the EU’s presidency, to delay discussions on the matter.

(Editing by Chris Hughes and Aliza Rosenbaum)


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