• "Directive will hit UK and EU economies" peers argue
  • Greater differentiation between funds required
  • New rules should be in line with US

The Directive on Alternative Investment Funds (http://tinyurl.com/mkf36v), as currently drafted, will have a damaging effect on the UK and EU hedge fund industries and should not be supported by the UK government, a House of Lords Committee has said. In particular, it warned that EU regulations should be in line with international, and especially US, requirements if the industry is to remain competitive and the EU and UK economies not "seriously damaged."

In a report (http://tinyurl.com/yex86lr) published on 10th February the peers said that they recognised that the "aggregate activity of hedge funds could cause risk to financial stability," and that coordinated regulation and supervision of managers at EU level would be beneficial to the single market, and to the EU economy as a whole.

But they said as proposed, the Directive covers all non-UCITS funds, and that this "one size fits all" approach failed to acknowledge the differences in the way that alternative investment funds were structured and operated.

Other concerns highlighted by the peers include the Directive's introduction of a requirement for disclosure to supervisors by managers. These, it said, would enable supervisors to identify where managers pose excessive risk to Financial stability. But, it cautioned, the Directive should do more to differentiate between different kinds of funds, and the requirements should be "proportionate and carefully thought out" in order that supervisors were provided with "relevant data" which they had the tools to analyse.

In addition, the peers said that they believed that whereas the Directive proposed a single leverage cap on managers, this should be replaced with a "provision for national supervisors to have the power to impose leverage caps" based on information received from fund managers.

The peers' greatest concern is that the proposal in its current form is out of line with other regulatory frameworks. The report argued: "Most importantly...a European Union Directive to regulate fund managers should be in line with, and complement global arrangements. Coordination with the US...regime...is essential to avoid a situation in which the EU industry loses competitiveness at a global level as a result of regulatory arbitrage."

It added that EU investors should be able to continue to invest in non-EU funds, "a situation that the directive may prevent." Unless, it said, the directive is fully compatible with other approaches, it will "seriously damage the EU and UK economies," and urged the UK government to withhold agreement unless its concerns were addressed.

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