The European commission published its widely anticipated package of financial reforms on Wednesday (29 April) that include measures for greater regulation of hedge funds and private equity funds, as well as proposals to limit executive pay.
Earlier drafts seen by European capitals have already proved controversial with the debate set to intensify in the coming months as the completed documents now head to the European Parliament and national ministries for scrutiny.
"In the debate on the matter, both inside and outside the college [of commissioners], this is the compromise that we have arrived at," said internal market commissioner, Charlie McCreevy, indicating he did not anticipate a smooth passage for the legislation.
Chief component of commission's financial package is a proposed Directive on Alternative Investment Fund Managers (AIFM) that will require managers of hedge funds and private equity funds to be authorised by home member state authorities.
Under the directive, managers will also have to disclose information on borrowing to regulators and notify authorities about the markets and assets they plan to invest in.
Hedge funds valued at less than €100 million and private equity firms valued at less than €500 million will be exempt from the new directive if it comes into force in its current form—something leading European socialists find particularly distasteful.
President of the Party of European Socialists, Poul Nyrup Rasmussen, said the directive "has more holes than a Swiss cheese" and would have political consequences for commission president Jose Manuel Barroso's hope of a second term.
"Barroso pretends to be the candidate for all parties but he has caved in to the demands of industry and their friends in the commission," said Mr Rasmussen.
However, the €100 million threshold for hedge funds already amounts to a significant climbdown from earlier drafts that set the bar at €250 million.
If maintained at this new level, approximately 30 percent of EU domiciled hedge funds would be covered, holding roughly 90 percent of the total assets in this area.
Alternative Investments Funds domiciled in the EU were valued at €2 trillion at the end of 2008, leading to fears that the failure of a large fund could destabilise the financial sector as a whole.
As a result, recent international communiques, including the one published by the G20 leaders after their meeting in London on 2 April, have called for "appropriate regulatory oversight" of the area.
The problem, said Mr McCreevy as he presented the proposals on Wednesday, is that defining "appropriate" is like defining "beauty," both subjective and highly difficult.
Also controversial in the new plans is the decision to regulate fund managers as opposed to the funds themselves.
Mr McCreevy defended the commission's decision in this area, saying attempts to regulate the day-to-day activities of such funds would be "impossible."
He also stressed that the funds provided much needed investment capital for European businesses at a time when bank lending was severely constricted.
Plans for executive pay
The financial package also includes a recommendation on executive pay and a second one on remuneration for risk-taking staff.
"As the crisis worsened, it became increasingly apparent that there was more than a hint of 'take the money and run' by some of those well-placed at the helm of our biggest companies," said Mr McCreevy.
The non-binding recommendations invite member states to ban severance pay for directors, known as "golden parachutes," in cases of poor performance, and promote the use of long and short performance criteria when deciding annual remuneration.
Likewise, the recommendation promotes delaying payment of staff bonuses as a means to ensure good long-term performance of financial institutions is rewarded rather than merely looking at the latest quarterly profit figures.
"Our message is very clear: directors' remuneration must be clearly linked to performance and not a reward for failure; and for the financial services industry, incentives should be aligned with long-term, firm-wide profitability," said Mr McCreevy.