August 2009


The European Commission proposes stricter regulation of alternative managers. Fiona Rintoul finds great hostility to this in the UK... iceberg.jpgThe proposed Alternative Investment Fund Managers (AIFM) Directive has created quite a brouhaha, and nowhere more so than in the UK. Always the tantrum-prone toddler of the European Union, the UK has well and truly thrown its toys out the pram this time.

Peter O’Dwyer, director at Trinity Fund Administration, sums up the view from Dover. “The common consensus concerning the directive is that it is a politically driven initiative, which is strongly supported by the Germans and more especially the French. This view has been confirmed by the Commission staff, who have indicated that there is intense political pressure to move this initiative forward at an unprecedented pace.”

It’s hard to find anyone who doesn’t think the proposed Directive – which is targeted at non-Ucits funds, including hedge funds and commodity funds, both in and outside the EU – was politically motivated. But whereas some see the motivation as being a need to be seen to do something about systemic risk in the wake of the global financial crisis, O’Dwyer discerns more sinister motives along national lines.

“The motivation from the German side would appear to be based on a strong traditional opposition to shareholder activism, which challenges the German status quo,” he says. “From the French side, remarks this week by the French finance minister, Christine Lagarde, confirm that they see the directive as a once-in-a-generation opportunity to get significant transferred fund business at the investment manager, prime broker and custodian levels from London to Paris.”

Such notions are dismissed by Jean-Baptiste de Franssu, CEO of Invesco Continental Europe and the recently elected president of the European investment fund trade association, Efama. “There has been a lot of noise, some of it unnecessary,” he says. “I find it difficult to believe that this was done purposefully against the City of London. After all, the commissioner is Irish and the head of the team is English. I find this is rather a low suggestion.”

Neither do all UK-based organisations share O’Dwyer’s view of the directive. Man Investments, for example, sounds rather pleased about the whole business.

“Man has long operated in highly regulated private investor markets, and we have the capital, resources and structure to address the evolving requirements,” says Robert Clow, senior communications manager at Man Group PLC. “In the medium term, the value of well resourced, institutional-quality firms will become evident.”

Middle ground
In the middle somewhere is Paul Myners, the UK’s financial services minister. While effectively asking London’s exercised hedge fund community to play nice when he addressed an industry meeting held by the Alternative Investment Management Association (Aima) recently, Myners has not been slow to document the proposed directive’s perceived shortcomings or to express his disappointment at the way consultation was handled (or rather wasn’t). And while he has stopped short of suggesting that certain countries have got it in for Britain, he did allow that factors extraneous to the simple and laudable goal of achieving a workable regulatory framework for alternative investment funds might be at play in the current proposal.

“It is perhaps easy for other European countries to make political capital out of demanding intrusive regulation of an industry of which they have little or no direct experience,” he said. “But it is woefully short-sighted, bordering on a weak form of protectionism.”

Myners encouraged the alternative investments industry to “make its case with conviction” since “Europe has a lot to gain from a thriving alternative investment industry”. There was little point in crying over spilt milk, he suggested:  “We are where we are.”

This, pretty much, reflects the stoical view of de Franssu, who points out that 60-70% of the directive is fine. “The absence of consultation prior to the release of the paper is a major weakness, but we understand the difficult circumstances in which the directive was produced with political pressure to move forward,” he says. “Consultation is now about to start. Ultimately, we will get where we want to get.”

Others, however, point to obstacles that might derail this cheerful outcome.

“At this stage, no formal consultation is planned prior to settlement of the final terms of the directive, which the Swedish presidency is keen to accomplish by the end of the calendar year,” notes Tim Cornick, a partner at Macfarlanes, a law firm. “The Council and the European Parliament will be driving the process when they reassemble in September but there may be no formal route for getting views across or lobbying.”

Cornick suspects the basics, which appear in the draft, will not change. However, the working out of the more detailed ‘Level 2’ rules may involve some formal consultation, possibly piloted by the Committee of European Securities Regulators, and there could be opportunities to get some changes made then. And the devil, he notes, is in the detail.

But then Cornick is fairly sanguine about the directive’s content, although he agrees that it was pushed through without any of the normal consultation, particularly compared to the Ucits regime, and thinks it was in part a knee-jerk reaction to the Madoff scandal.

“The proposals have obviously caused a lot of disquiet in the alternatives industry,” he says, “although some of them are not outrageous (for example, the requirement for an independent custodian; more transparency for investors). The proposal for a basic rule that EU alternative funds can be marketed across the EU to professional investors, and subject to prior notification to the regulators is rather restrictive but it may have some merit in simplicity and consistency across the EU, in contrast to the patchwork of private placement rules which exist at the moment.”

So what happens now?
At the time of writing, Efama is preparing a position paper on the directive and planning round table discussions with trade organisations in other areas of the industry.

“We support the Commission’s intention to extend appropriate regulation to all actors and activities that imply risk,” says Peter de Proft, director general of Efama, “but we think that AIFM exceeds that goal.”

Efama has five key areas that it plans to highlight in its position paper. These include concerns about the private placement provisions and about how AIFM will play alongside the Ucits and MiFID directives, and the Transparency Directive. De Franssu also highlights concerns about the much-criticised custody provisions in AIFM.

“We need a coherent framework for alternative investment funds and Ucits,” says de Proft, pointing out that, “Ucits is a benchmark that should not be overturned.”

And there, indeed, lies one of the key issues with AIFM: the game of unintended consequences.

O’Dwyer believes the directive’s impact on the European asset management industry is going to be profound. “Each of the 56 articles of the directive has the potential to have significant impact on funds, their managers, the service provider industry and the choices available to investors and the costs which they will incur,” he says. “The implications of each of the parts of the directive are complicated and full of unintended consequences – or intended if you accept the conspiracy theories.”

The road ahead, then, may be tough. “There is a divergence of opinion as to whether a full blown public campaign against the directive  or behind-the-scenes lobbying of individual member states will be the better approach, although both may be necessary,” says O’Dwyer.

Any consultation that now takes place may be held in an atmosphere of non-belief in the directive, at least in some quarters.

O’Dwyer adds: “What is crystal clear is that the directive has absolutely nothing to do with any potential systemic risk of alternative investments, or with the protection of investors, and its proponents have really struggled to make any rational connection with these two alleged objectives.”

De Proft and de Franssu don’t go that far. But they do both point out that it was not alternative investment funds that created the systemic risk that caused the crisis in the first place.

There is much to do. Myners has called on “the clients of this industry – the institutional investors and their advisers” to make their voices heard and has told alternative investment managers themselves to “sell the benefits of your industry to the key people who will shape this directive over the coming months and to explain why the proportionate regulatory framework you want does not pose the excessive risks they may fear”.

There is one consolation, however: though tough, this road, unlike the Ucits road, may not be overly long.

Sweden is keen to complete the directive under its presidency, which means by the end of 2009. That’s an ambitious goal, and it will, says de Proft, be difficult to have something proper and finalised by the then. But, he adds: “There’s nothing wrong with being ambitious in life. Everyone is reasonable and is trying to achieve something that is coherent.”

©2009 funds europe

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