The Observer is reporting that George Osborne is set to be to be defeated at the next ECOFIN (Economic and Financial Affairs Council) meeting of European finance ministers, where they are set to move forward a directive on regulating “Alternative Investment Fund Managers” (aka hedge funds).
Osborne, as with Darling has sided with the London’s Mayfair set of hedge fund executives. However, the Guardian is pitching the fact that ALDE (Alliance of Liberals and Democrat for Europe), to whom the Lib Dems belong are who introduced the legislation.
However, this is playing up tension that simply doesn’t exist. In an interview on the 4th May, Vince Cable had this to say:
Although hedge funds have been painted as one of the main culprits of the financial crisis but they weren’t, by and large, responsible. Opinion may be split on their social value and regulators were right to ban short-selling to provide stability at the height of the crisis but they contrast favourably with the major banks who used other people’s money - not their own - to engage in high-risk ‘casino’ banking.
Specific European proposals to limit hedge fund activity contained within the draft Alternative Investment Managers Directive - with minimum capital requirements, leverage limits and equivalence requirements for domestic regulation appear overly demanding and even protectionist. The draft directive is controversial and has already been held up for a year. Sharon Bowles has consistently called for legislators to consider this legislation more objectively.
So, what’s at stake here? A number of issues appear to be conflated, not least by hedge fund directors themselves, who are complaining about having to jump through different hoops for different regulatory regimes, and are complaining about their pay being reduced. Which wants to make them leave for the Middle East.
These claims are egregious. Hedge Fund Managers have always complained about having to comply to two different regulatory systems – that of the United States, and that of the UK. In fact, they tended to complain more about the US system, where SEC regulation post-Enron was far more stringent than the FSA’s streamlined processes. In terms of conditions of pay, outlined in Annex II, the directive asks only to link pay with actual performance, and offsets 40-60% of the remuneration over a number of years to ensure long-term performance. This should please investors, if anything.
Where the directive does run into difficulties is calling on hedge funds that wish to gain “passports” to operate in the EU to be domiciled within the EU as well as use a single EU-registered depositor. This doesn’t seem to make sense, as this increases the probability of a hedge fund falling along with its depositors. Furthermore, this does indeed seem protectionist. US Treasury Secretary Geithner expressed exactly these concerns in March, with Brown and Sarkozy in agreement, attempting to seek out a compromise deal.
As the BBC’s Robert Peston points out, most UK hedge funds are legally registered in the Cayman Islands, and they’re unwilling to want to locate. In these cases, the directive allows governments to waiver some of the requirements, but doesn’t specify which. This could end up having fairly minimal impact, since hedge funds will just continue to form as legal entities in those tax havens—it’ll be a faff, but not disastrous. In fact, in Sharon Bowles submitted opinions to ECON (Economic and Monetary Affairs Committee), she has sought to limit the enforceability of the directive with reference to the basic authority of the UK in determining legislation that affects its citizens.
This all leads me to conclude that impact of this directive will be moderate at worst—but since the UK’s financial sector needs to shrink relative to other areas, I’m not going to lose sleep over.
Also, we shouldn’t underestimate the remarkable level of elite intra-party consensus on many economic issues. This means we should discount slightly intra-party fracas at grassroots level and concentrate on the cabinet. Divided government, this aint.
Finally, what’s the future of financial regulation? I think Geithner’s call for greater international coordination on financial regulation will mean we end up with weak policy, backed up with weak enforcement mechanisms. Our best bet at effective financial regulation is in regional bodies, such as the EU, ASEAN and the US/NAFTA. But we need more than just symbolic manoeuvres. When that time comes, we might see some genuine difference between the Conservatives and the Lib Dems, but not now.