As the European Parliament gears up to issue new rules for private equity and hedge funds, a clash in regulatory attitudes is sharpening
A new report on hedge fund and private equity regulation, published by an influential MEP on Wednesday (25 November), highlights the diverging views held by European parliamentarians and the Swedish EU presidency on the matter.
The report by the French centre-right MEP Jean-Paul Gauzes says fund managers should be forced to agree on pre-determined levels of borrowing before making investments, a significantly tougher position than that currently adopted by the Swedes on behalf of member states.
In an explanatory memorandum attached to Mr Gauzes's report, the MEP says fund managers should "define [leverage] limits in advance for every fund they manage".
"To fix these limits, they must define the guiding principles," wrote the MEP charged with steering draft legislation on the topic through the parliament. "The managers are obliged to inform the national supervisors about the limits they chose."
However, Sweden's current compromise would let industry watchdogs alone decide whether or not to limit individual hedge fund borrowing, a move seen as less restrictive.
The UK – home to the lion's share of European investment funds – fears overly restrictive EU rules on borrowing will send investment funds overseas, causing job and revenue losses.
The European Private Equity and Venture Capital Association said Mr Gauzes' report contained some improvements but was still far from perfect.
"The report places obligations on even the very smallest venture-backed businesses, which could damage their ability to grow and innovate," said the group's chairman, Richard Wilson.
The financial crisis saw politicians call for greater regulation of Europe's alternative investment funds, with the European Commission coming forward with draft proposals in April.
The parliament, together with the EU member states, must now agree on the final shape of the directive on alternative investment fund managers (AIFM), with Mr Gauzes likely to play an important role.
The issue of leverage and the added risk it creates is seen as central to the debate over regulation, with the collapse of Long Term Capital Management, an American hedge fund, in 1998 requiring a very costly bail-out, led by the US Federal Reserve.
Amendment papers put forward by the Swedish presidency so far have generally sought to soften the commission's proposals and accommodate concerns held by the UK and other countries.
However, extensive lobbying from industry officials appears to have backfired in the area of fund manger pay, with a recent Swedish paper suggesting they face similar restrictions to those being discussed for Europe's bankers.
Still in its early stages, the parliament is not expected to vote on the legislation until the middle of next year, after which member state must give their final seal of approval.
Adding extra spice to the regulatory mix is the prospect of France's Michel Barnier taking over from Ireland's Charlie McCreevy as internal market commissioner. [Ed. note: On Nov. 27, this move was announced.]
While Mr McCreevy was generally seen as market friendly, France has been one of the loudest voices calling for stricter rules in the financial sector.
European Commission President Jose Manuel Barroso may yet decide to split financial services from the rest of the internal market portfolio, a move that would allay UK fears of a French regulatory squeeze on City of London, a vital component of the British economy.