George Osborne would not have wished his early days as Chancellor to be dominated by a rearguard action at the European Parliament. Yet as the Greek economic storm swirls, further clouds are on the continental horizon as the proposed Directive on Alternative Investment Fund Managers (AIFM) - which I wrote about here last September - goes to crucial votes by MEPs today.
To recap, the Directive is the first attempt in any jurisdiction to create direct regulation of the alternative fund industry, the aim being to clip the wings of hedge fund and private equity managers. The impetus derives from panic in response to the economic crisis alongside a partisan vision of hedge funds and private equity as a Wild West show of amoral speculators and asset-strippers.
But there has been no crisis of asset management. Unlike banks, hedge funds neither leveraged themselves to the hilt (they lacked the balance sheet clout to do so even if they had wanted to) nor ran down from adequate levels of liquidity. Indeed those which have failed have not threatened the entire financial system. Which is why this legislation is so controversial.
With 80% of hedge fund assets managed in Europe accounted for out of London, it is suspected that the Directive is little more than an attempt by German and French legislators to stamp their authority on the City of London and assert their dominance over the Anglo-Saxon capitalist model. Indeed hostility in Germany to the City of London and the Anglo-Saxon model of financial services has reached fever pitch as the costs of bailing out the Greek economy become apparent.
In fairness to both the outgoing government (Lord Myners) and our own contingent of MEPs (especially Syed Kamall and Vicky Ford) the UK’s corner has been fought tenaciously over recent months. Whilst business journalists seek to characterise the issue as the new administration ‘surrendering’ or ‘caving in’ to Europe, the reality is more complex.
We should recognise that open disclosure and transparency are key to restoring public confidence in the financial services sphere but the new UK government should also unashamedly support open competition. The provisions in the proposed Directive that restrict the rights of EU citizens investing in funds from outside the EU are protectionism of the worst, and most destructive, kind.
Unfortunately without large Franco-German institutional investors being willing to state publicly that this new Directive will greatly reduce their own ability to invest actively, there is little hope of watering it down. Whilst the UK stands to lose most, pension funds and their investors in mainland Europe will also suffer if this politically motivated measure goes through. It is left to the new Treasury team doggedly and passionately to fight this to the end - for at stake is not just the national interest but the European one as well.
