Brussels, 28/07/2006 (Agence Europe) - At a public hearing organised in July on investment funds, EU Internal Market and Services Commissioner Charlie McCreevy briefed participants on his initial conclusions regarding three reports on Undertakings for Collective Investment in Transferable Securities (UCITS), capital investment funds and hedge funds written by three expert groups from the financial industry set up in the wake of the European Commission's Green Paper on asset management (see EUROPE 8991). The Commissioner said he would prefer a low-key regulatory approach. Interested parties have until 20 September to react to the three reports, which the Socialist group at the European Parliament accuse of being biased. The Commission will publish a White Paper on investment funds in November this year.
'Over the last decade, investment funds have come from nowhere to become one of the core pillars of our financial system. The UCITS market now comprises more than 30,000 funds managing over EUR 5 trillion - circa 50% of EU GDP,' explained Charlie McCreevy, adding that the European Commission was wrestling with UCITS law because asset management was in massive flux and EU law was struggling to keep pace. He explained that the UCITS expert group had identified obstacles hampering efficiency in the European industry, namely 'lengthy delays in fund authorisation and notification; absence of a management company passport; no possibility to merge funds on a cross-border basis or pool assets; and national rules which preclude cross-border delegation of custody functions.' McCreevy said that the Commission now had a 'detailed road-map' to help it implement the UCITS expert group's ideas, which will require adjusting regulation and enforcement practice and parallel measures at national level, like on the taxation of fund mergers. The November 2006 White Paper will also look at inefficiencies in fund distribution not covered by the expert group. 'Distribution costs account for around 0.9% of assets under managme4net for active equity and capital protected funds. They exceed all others costs in the industry combined,' explained the Commissioner.
Member States regulate part or all of the private equity value chain but Europe's national regimes do not interlink. The Commissioner explained: 'The industry is internationalising. The cross-border dimension of this business could be significantly enhanced if a number of legal and tax barriers were tackled. The first set of issues concerns fund structuring. Cross-border capital-raising is hampered by failure to recognise partner country funds a fiscally transparent…. Proposed solutions build on the concepts of mutual recognition of existing national laws and fund structures - rather than new harmonising measures. There is no need to super-impose European harmonising measures on the industry. What is needed is to free the industry from punitive double taxation and legal uncertainty that currently hold back onshore business - the advantage of offshore structures. Most answers are in the hands of the Member States… If Finance Ministers are serious about doing something to improve the regulatory and tax environment for private equity, here is a ready-made agenda.'
This is the first time that the European Commission has asked the capital investment market to assess the European hedge funds market. Some 1250 hedge funds manage around EUR 260 billion - of the global hedge fund total of EUR 950 billion. A third of global hedge funds are located in the City of London. The Commission argues that the expert report demonstrates that the hedge fund industry has been a success story without requiring intense surveillance by regulators and makes a convincing case that regulating hedge fund products and the hedge fund industry would prevent its further expansion. Charlie McCreevy repeated several times that he didn't want to introduce EU legislation on hedge funds (see EUROPE 9185). In a speech to the European Parliament in June 2006, the President of the European Central Bank, Jean-Claude Trichet, suggested that better analysis of the hedge funds sector and greater transparency in the industry, growing at an exponential rate, was necessary but that action was only possible on a global scale (see EUROPE 9216).
The main question facing hedge funds, raised in the expert report, is whether the financial industry has sufficient maturity to develop on a pan-European scale and expand its investor base to private individuals. On whether retail access to hedge fund investment would be desirable, McCreevy said: 'Let's be realistic: if part of the industry wants to make hedge fund investing available to the mass market there will be close regulatory engagement. The hedge fund industry cannot expect to have red-carpet access to the mass market while the rest of the fund industry is subject to strict regulatory controls.' The UCITS expert group backed the idea of retail access to hedge fund investment but did not agree on how it should be organised. It recommends a minimum investment of EUR 50,000 for private individuals wishing to invest, to prevent people from investing imprudently or ill-advisedly. It calls for a lifting on the maximum levels imposed by some Member States on the amount institutional investors can invest in hedge funds. It argues that new asset valuation is not something that can be covered by legislation or independent third parties but would best be covered by codes of conduct launched by the hedging industry itself, as long as there is transparency regarding the assessment process.
Disgruntled Socialists at European Parliament
Can wolves be suitable advisors on how to manage the safety of the chicken run?, asked Luxembourg Socialist Robert Goebbels in a press release, referring to the expert report on hedge funds. In a parliamentary question, he asks the European Commission how it is planning to react to the expert report's recommendations. He also queries the European Commission's plan to, in his words, turn hedge funds into a black hole of EU legislation and queries the independence of the group of experts commissioned to write the reports. Socialist President of the European Parliament's Economic and Social Affairs committee, Pervenche Beres, commented that the main priority for hedge funds had to be ensuring better funding of the real economy and a very high level of protection for consumers. She warned that as legislators, the EU had adopted rules for UCITS funds but hedge funds and private equity funds were free to expand without being covered by any rules for the healthy management of financial markets. At the public hearing, Charlie McCreevy said: 'Let me correct any misunderstanding on the status of these reports. These reports express industry views and recommendations on how the European regulatory environment can be improved. They do not bind the Commission. I will take all views into account. And I want to hear from consumers.'