Stuart Fraser, Chairman of the Policy and Resources Committee at the City of London Corporation, is in Brussels today (Wednesday 2 September) with the Mayor of London to urge important changes to the European Commission’s Alternative Investment Fund Managers (AIFM) Directive, currently starting the legislative process in the European Parliament and Council.
The Commission’s Directive was published on 30 April 2009 and aims to provide a comprehensive regulatory structure for AIFM operating within the EU. AIFM, which include the managers of hedge funds and private equity funds, managed around €2 trillion in assets at the end of 2008.
In advance of a series of meetings with important EU figures, Stuart Fraser said:
‘It’s right that the EU helps to sort out issues around the financial crisis but any legislation needs to do the job it sets out to do. Others have said that the draft directive is unsatisfactory and we’re very unhappy with some key parts of it.
‘If it goes ahead unchanged it will be narrowly protectionist, fail to take account of other global players (including the US), and damage an important EU industry.
‘Of course we are supportive of the EU process – and have been lobbying for change for some time to a draft that has had no impact assessment, industry consultation or cost / benefit analysis. In contrast, the process for updating the UCITS Directive, which applied the better regulation principles, include a number of consultation and lasted three years.
‘There are many positive things, for example on single market passports for non-UCITS funds, and on the principle of focussing on fund managers for registrations and authorisation. We also welcome moves to improve transparency.
‘But among the problems are measures which actually worsen the management of risk, increase costs and reduce choice. There are also some measures in there which seem to be anti-global and are so EU-protectionist that they risk drawing counter-measures from other non-EU business centres. Moreover, as we start to emerge from the financial crisis we should be vigilant against putting unnecessary burdens on AIFMs, that do not pose systemic risks, or we risk blunting the economic recovery across the EU.
‘One key area is the matter of delegation of risk management functions by an AIFM, with the directive concentration too much on where business is done rather than how.
‘Another is the plan to limit custodianship to EU registered credit institutions – a measure that is not only protectionist and but may actually encourage investors to use less regulated products. For example, in many emerging markets, and some G8 ones, securities have to be held by a locally incorporated entity so by restricting the role of depository to EU credit institutions investors would be unable through an AIFM to access these markets. It seems wrong, too, for AIFM provisions to be stricter than retail rules.
‘The provisions about the leverage limits also seem unhelpful in that they set notional (fixed) limits rather than ones related to real risks – this sort of fixed limits would disproportionately affect the many smaller firms. Notional requirements also tend to be pro-cyclical, something we are all trying to avoid.
‘The meetings – which follow Tuesday’s City research seminar in Brussels – are a chance for leading EU figures to hear the views of the City and the Mayor of London. Interlocutors include: EU Internal Markets and Services Commissioner Charlie McCreevy, EPP coordinator on ECON Committee Jean-Paul Gauzes, UK permanent representative to the EU Kim Darroch (Stuart Fraser only), a number of London’s MEPs.
Mr Fraser added:
‘Of course we recognise that the directive reflects the collective will the EU member states to enhance transparency and reduce systemic risk within European financial markets – and we fully support this objective. We are also fully committed to working in detail with EU colleagues to getting this right.
However, in order to reaffirm our reputation for excellence, we need to be sure that any reforms do not unintentionally diminish the ability of countries in the EU to compete in this increasingly global industry or force firms that are globally integrated to relocate out of the EU."