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EU leaders back clampdown on hedge funds and private equity firms
The hedge fund and private equity industry will this week launch a last-ditch effort to head off EU moves to impose draconian regulation in the wake of the continuing financial crisis.
The European industry is arguing for improved self-regulation or, at most, "light touch," globally-agreed rules. It will take its fight to public hearings held by the European commission on Thursday and Friday.
But Jean-Claude Trichet, president of the European Central Bank, warned the industry to expect greater supervision and leading MEPs insisted that self-regulation had failed.
Trichet told a Paris conference: "The crisis is a loud and clear call for extending regulation and oversight to all systematically important institutions, notably hedge funds and credit rating agencies."
He coupled his remarks with a severe warning that frozen credit markets and widespread corporate debt repayments would threaten the very raison d'être of Europe's banking system.
Hedge fund and private equity executives seized on his comments to press home their message to this week's hearings that the core of the crisis lies in the heavily-regulated and over-leveraged banking sector — and that they are part of the solution, not the problem.
They argue that one-size-fits-all regulation imposed in Europe without including the much-bigger industry in the US, is doomed to fail. Their US hedge fund peers are not regulated at all while, many offshore funds sidestep regulation.
Antonio Borges, chairman of the London-based Hedge Fund Standards Board (HFSB), told the Committee of European Securities Regulators' conference in the French capital that the funds continued to invest in the economy as traditional businesses pulled out. "It's very important to keep the model alive," he said.
This heightened debate came after EU leaders, meeting in Berlin, urged sweeping new regulation of financial markets, including hedge funds, seeking a common approach with the Obama administration and other countries at the G20 summit in London on 2 April.
This week's hearings come amid growing evidence that any EU legislation will distinguish between hedge funds and private equity, with the latter subjected to a lighter regime.
José Manuel Barroso, EC president, has sidelined Charlie McCreevy, internal market commissioner and reluctant regulator, at the behest of France and Germany which favour a tough regime — in contrast to the UK. Poul Nyrop Rasmussen, European Socilist Party (PSE) president, said McCreevy was no longer in charge.
In a letter to leading socialist MEPs, including Rasmussen, who have long demanded tough regulation, Barroso said "substantive" initiatives to regulate hedge funds would be presented before the European elections in June.
But his letter, seen by the Guardian, makes plain that the EC is simply reviewing national legislation and industry codes of conduct for private equity.
"This will identify the gaps in the current arrangements that need to be addressed in appropriate regulatory initiatives." He promises solutions that "are sound, coherent and future-proof."
But Rasmussen, writing in Private Equity News, said the industry had not even signed up to a new list of standards that were, anyway, hardly rigorous.
"The code of conduct cannot solve excessive fees, excessive debt and conflicts of interest," he wrote. "It cannot safeguard pension funds and it will not protect workers' rights. That the industry cannot even get behind standards heralded as being intended to ward off legislative regulation is the final straw."
UK-based hedge fund managers who accounted for four-fifths of the $460bn (£320bn) of European assets under management at the end of 2007, say there is no legal or regulatory definition of a fund in the UK, making it nigh-impossible for the EU to impose common rules. They also insist that the industry is much less heavily leveraged than banks and "it is not advisable to have a distinct set of regulations applicable to an arbitrary subset of market participants."
But Rasmussen, who will open the hearings with McCreevy, said it had taken a "near financial meltdown" for EU leaders to act. "The global approach must not be at the expense of European legislation. We need global action as well as regulatory action in Europe and the US."