France and UK seek hedge fund deal

Gordon Brown and Nicolas Sarkozy will on Friday try to hammer out a compromise deal over European Union reforms that the US and UK believe could damage the hedge fund and private equity industries.

The British prime minister shares the concerns of Tim Geithner, US treasury secretary, that a draft EU directive to introduce tighter regulatory controls could impose new barriers to business.

London believes that French cultural opposition to hedge funds lies behind the drive to clamp down on the operation of "alternative investment funds". British officials say Mr Brown will discuss the issue when he meets the French president in London on Friday, ahead of an EU summit this month.

The debate over the shape of financial regulation and the EU directive has raised transatlantic tensions.

Mr Geithner, in a letter to Michel Barnier, Europe's internal market commissioner, voiced concern about "various proposals that would discriminate against US firms".

The US has stopped short of threatening retaliatory action. However, if the directive becomes law in its current form, Europe-based fund managers could face reprisals in the US Congress for what is being seen as an attempt to dictate the global regulatory landscape.

Senior EU officials hit back on Thursday at the US criticism. A spokesman for Michel Barnier, the new EU internal market commissioner who is responsible for financial services regulation and to whom Mr Geithner addressed his concerns, said that the EU decision to act on hedge funds was in line with a G20 decision to reinforce transparency in the financial system.

Diplomats from the EU's 27 states again failed to agree a compromise package of rules.

Britain, Europe's biggest centre for hedge funds, is leading opposition to aspects of the directive, which it fears could impede the operations of funds based in London.

He added that the new commissioner wanted to "work closely" with the US, to ensure "robust standards" in financial services. Mr Barnier is due to visit the US shortly, although no final date has been set.

The spat comes at a sensitive time. Diplomats from the 27 EU member states again failed on Thursday to agree a compromise package for regulating hedge funds and private equity funds on a pan-EU basis.

Britain, by far Europe's biggest centre for hedge funds, is leading opposition to aspects of the directive, which it fears could impede the operations of funds based in London.

Alistair Darling, UK chancellor of the exchequer, has argued that hedge funds authorised by regulators to operate in one EU country should be allowed to operate under a "passport" in all other countries.

He has sided with Mr Geithner in opposing provisions that would mean that US hedge funds - or funds operating from London but registered for tax outside Europe - would need authorisation from each European jurisdiction.

A US Treasury spokesman said: "All financial institutions, including hedge funds, should be covered by the global regulatory net.

"But we need to ensure any regulation is sensible and proportionate. There have already been significant improvements to the EU proposal since it first emerged last year and we'll keep working with our European partners to improve it further."

Other countries unhappy with aspects of the proposed text are thought to have included Ireland, the Czech Republic, Malta, Sweden and Austria.

The latest setback comes after lengthy discussions that have now been under way for about six months.

However, Spain, which holds the rotating EU presidency, is understood to be anxious to take a text to a scheduled meeting of EU finance ministers next Tuesday. Further negotiation and efforts at finessing the text are expected to continue over the weekend.

People involved in the discussions say a couple of issues remain particularly difficult.

The biggest is the so-called "third country" issue - the access, and the terms on which this would be given, for alternative investment fund managers (AIFMs) from outside the EU to market to professional investors within the bloc. This was the issue that Mr Geithner raised and which has sparked fears of protectionism.

The Spanish compromise text proposed allowing access, provided that there were "appropriate co-operation arrangements for the purpose of systemic risk oversight and in line with international standards … in place between the competent authorities of the member state where the fund is marketed and the competent authorities of the AIFM".

However, without more detail on how these so-called "equivalence" arrangements will work, the fund management industry is concerned that the directive will become protectionist.

"All the guys here are very worried about the free flow of capital," said Javier Echarri, director-general of European Private Equity & Venture Capital Association, speaking from an investors' forum in Geneva.

He pointed out that economic conditions had led to an unprecedented drop in fund-raising and investment last year, and said he was concerned that the regulatory hiatus might deter recovery.

"Investors say they need legal certainty," Mr Echarri.

The hedge fund rules will also need approval from the European Parliament, as well as individual member states.

MEPs are working on their own amendments to the original, much-criticised European Commission proposals. While these have not yet crystallised, there are signs that the MEPs may take a more conciliatory approach on the "third country" issue - allowing current national arrangements to remain in place for a transition period while the equivalence standards are drawn up.

Managers from third countries which met the equivalence standard might also enjoy EU-wide marketing rights - a so-called "EU passport".

However Spain, which holds the rotating EU presidency, is understood to be anxious to take a text to the next meeting of EU finance ministers on Tuesday. Negotiations are expected to continue over the weekend.

Reporting by George Parker and Sam Jones in London, Nikki Tait in Brussels and Tom Braithwaite in Washington

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