By James Kanter
(C) The New York Times 2010
BRUSSELS -- European Union finance ministers approved a draft law on Tuesday, May 18, that would make it harder for foreign hedge fund managers to do business in the trading bloc and that could threaten London's preeminence as a financial center.
But in a diplomatic concession to Britain -- and to its newly appointed chancellor of the Exchequer, George Osborne -- the ministers issued a statement "taking into account the concerns" of London.
Osborne now is likely to turn to Michel Barnier, a French commissioner for financial services, and to the European Parliament to try to ensure that the final results mostly reflect London's wish that foreign hedge fund managers be able to continue doing business across the 27-member bloc without too many impediments.
Those rules have been the subject of a fierce lobbying battle over the last eight months by British officials who fear that the rules will erode the position of the City of London as a global financial hub while doing little to protect the financial system.
Criticism also has come from the United States, where Treasury Secretary Timothy Geithner has warned that the measures could be discriminatory.
Regulators and lawmakers worldwide are tightening their scrutiny of hedge funds and private equity firms on the grounds that they may have been partly to blame for the worst financial crisis in a generation. Many in Europe also see the hedge fund and private equity industries as too opaque and secretive.
That has raised a serious challenge to London, which is the headquarters for the managers of many non-European Union funds and where about 70 percent of hedge funds in Europe are based.
The Czech Republic also is skeptical about the legislation.
Britain already won a reprieve in March, when European Union finance ministers delayed a decision on new rules for hedge funds that are part of draft legislation called the Alternative Investment Fund Managers Directive.
That reprieve allowed Gordon Brown, the former British prime minister, to campaign during the general election this month on promises to continue fighting for hedge fund rules that suited Britain.
But countries like Germany, France and Spain have continued to back tougher rules on foreign funds.
The proposal agreed to on Tuesday would impose transparency standards on hedge funds and managers based outside the European Union by requiring them to win permission from individual member countries, and it would set restrictions on managers' bonuses and on the use of debt.
But EU governments and lawmakers still need to reach agreement on a single bill.
British officials would like rules that ideally allow hedge funds based in countries with roughly equivalent standards of financial regulation to be given automatic permission to operate in Europe.
In reality, Britain probably will have to settle for a system that puts somewhat higher thresholds on foreign hedge funds and gives a European agency -- probably the European Commission -- the responsibility to decide which funds from which countries are eligible to do business across the bloc.
Barnier, the commissioner who will continue to have a role in helping to draft the bill, suggested Monday that he favored a version of the legislation under consideration by the European Parliament and currently favored by British officials.
"I assure you I am still in favor of equal treatment between fund managers," Barnier said at a news conference in Brussels.
"That's why we put forward this idea of a passport," said Barnier, referring to one version of accreditation for managers to do business across Europe on the same basis as funds based in the Union.
The Economic and Monetary Affairs Committee of the European Parliament, meeting in Strasbourg, agreed late on Monday on its version of the legislation, which includes some of the concessions sought by Britain, including the passport provision.
A final agreement could take some months. Barnier said he would seek a "dynamic compromise," and he emphasized that his views on how to regulate hedge funds were far closer to those of the parliamentary committee than to those of governments like Spain's.