U.K. Lawmakers Urge Government to Reject EU Hedge Fund Rules

By Ben Moshinsky

Feb. 10 (Bloomberg) -- U.K. lawmakers advised the government to challenge a proposed European Union law regulating hedge funds and private equity because it could make it harder for EU funds to compete.

The government “should not agree” to the rules unless they are “compatible with equivalent legislation with regulatory regimes in third countries and in particular in the United States,” the House of Lords European Union Committee said in a report today. Fund managers risk losing “competitiveness at a global level” according to the report.

“It will mean Cayman Island funds run by European managers will be more expensive than Cayman funds managed from the U.S., and that is dangerous,” Andrew Shrimpton, a former U.K. regulator who now advises hedge funds at Kinetic Partners LLP, said in a telephone interview. “The asset management industry is an Anglo-American industry.”

Hedge-fund managers have come under fire from politicians and regulators since the collapse of the U.S. subprime mortgage market triggered a global crisis. The European Commission proposed the Alternative Investment Fund Managers directive to tighten supervision of hedge funds last year. Finance ministers from the 27-member EU bloc are scheduled to vote on the rules later this year.

Equivalence Requirements

Investors from Europe won’t be able to access 40 percent of hedge funds and 35 percent of private equity firms under the proposals because of so-called equivalence requirements, Dan Waters, the Financial Services Authority’s asset-management sector leader, said in a speech in London last month.

The U.K. government “should continue to negotiate a solution that does not penalize the marketing of non-EU funds” because of the “negative repercussions on the U.K. and European financial markets,” the committee said in its report.

European lawmakers made hundreds of changes to the commission draft rules last week. Two members of the European Parliament proposed an amendment that would force hedge-fund and private-equity managers to return more than 20 percent of their bonuses to their funds if they don’t properly account for risk levels.

“The U.K. government should do everything it can to ensure that the final proposals that emerge in the AIFM Directive do not damage the EU and U.K. economies to which the City of London makes an important contribution,” Kenneth Woolmer, a member of the House of Lords Sub-Committee on Economic and Financial Affairs, said in an e-mailed statement.

To contact the reporters on this story: Ben Moshinsky in Brussels at bmoshinsky@bloomberg.net