When the European Commission decided to regulate alternative investment funds in 2009, hedge fund managers jumped on the Eurostar with Boris Johnson in tow. The industry presented themselves as scapegoats, innocent victims of the EU’s meddling in UK affairs. It wasn’t exactly a successful strategy, with European lawmakers describing hedge fund managers as "arrogant and aggressive" as a result of their megaphone diplomacy.
The original proposal was described by commentators in Brussels as the “ugly baby” since it was drafted in such a rush in the aftermath of the financial crisis. The European Parliament, lobbied massively by industry, presented around 1,000 amendments – high by any standards. After months of negotiations between the UK and the Franco-German duo, the Alternative Investment Fund Managers Directive (AIFMD) was finally adopted in November 2010.
Since then, hedge fund managers have returned to their Mayfair offices but does it mean the policy-making process is over? Actually, the process is far from over.
The European Commission is about to adopt implementation measures for the AIFM Directive based on European Securities and Market Authority (ESMA)’s recommendations. The new regulatory authority (based in Paris) took a conservative stance on certain issues, drifting away from the Directive. Particularly worrying for the hedge fund industry is the liability regime for depositaries. This provision could make depositories liable where a custodian loses financial instruments – even where the depository has no control. The potential costs are seriously high.
As the industry should know, what looks like technical details on implementation can in fact have huge financial consequences. Seemingly benign expert groups and discussions around technicalities are often where the most important political games take place and where scope for making lasting changes to a market can take place. Hedge funds, more discretely this time, have at least been pro-actively involved in discussions in Paris: through the Securities and Markets Stakeholder Group, and through ESMA’s consultations and public hearings. Boris Johnson hasn’t been seen in Paris and it is no doubt helping a more mature discussion take place.
Lobbying will now continue behind the scenes, until the draft implementing measures and technical standards are sent to the Council and the European Parliament in March 2012. Hedge funds need to maintain a close dialogue with the Commission’s senior officials and engage with ESMA for the preparation of technical guidelines. This needs to be done in a positive and helpful way.
The initial lobbying campaign around AIFMD with the involvement of British politicians defending the City in a very undiplomatic way was counterproductive. So why is the UK using the same clumsy approach to protect the same interests, with the same negative results at the level of Heads of State and Government? Rather than protecting the City interests, Cameron will only manage to isolate the UK even more and business will pay the price.