In her 1957 novel, Atlas Shrugged, Ayn Rand, a Russian-born American novelist and philosopher, described a dystopian world in which business people had grown so tired of the burden that regulatory change placed upon them, they shut their businesses and went away. These giants, who had previously held the world on their shoulders, had shrugged and left society to manage without them.
Is “Fortress Europe” running a US-focused Atlas shrugging risk? If it is, it seems wholly unaware of that fact. Here are two examples.
The first is the oft-maligned Alternative Investment Fund Managers Directive. Conceived in the immediate aftermath a crisis, policymakers hoped the AIFMD would deliver European financial stability and greater investor protection. But the law of unintended consequences has applied.
Non-European managers of non-European funds are now obliged to give notice to, or secure the permission of, the authorities in every European country in which they want to market a private equity or venture capital fund. The costs associated with this are moderate in and of themselves. But, all too often, they are enough to stop a manager offering a fund to European investors.
This has several consequences. Potential investors, who are more than well equipped to understand the risks of the investments on offer and do not need the protection the AIFMD purports to provide, do not see as many investment opportunities as they would like, or they are required to invest through intermediaries and meet additional fees and expenses along the way. In addition, if the AIFMD has been triggered, fund managers think twice before investing in unlisted European companies, because of the additional restrictions and obligations the AIFMD imposes if they do. So European companies do not have access to as much capital as they need; and European policymakers have to implement other initiatives to attract investor capital into Europe.
The second example is the UK’s Persons with Significant Control Register rules. These rules, which came into force in April 2016, require every UK-registered company to maintain a “Persons with Significant Control Register”.
That register must include information about (a) every “registerable relevant legal entity” in the company’s ownership chain; and (b) every individual who has “significant control” over the UK-registered company (unless there is a “registerable relevant legal entity” between the UK-registered company and that individual).
It is clear, even from this simplified description, that the rules are complex and difficult to apply in practice. These problems have been compounded because the rules are poorly drafted and their requirements are spread across several government documents. It is sometimes difficult to work out which companies and individuals are registerable, and which are not.
It is, however, clear that those companies and individuals can be outside the UK, and even outside Europe.
Like the AIFMD, the policy is well meaning: the aim is to enhance transparency, as a way of reducing money-laundering, tax evasion and aggressive tax avoidance. But these rules marginally increase the cost of running a UK company; and they occasionally lead to the publication of information about non-European fund managers and investors, when the managers and investors have sound commercial reasons for keeping that information private.
These initiatives are unlikely to cause a non-EU fund manager to shrug in the same way as Rand’s Atlas shrugged. But each of them represents another small step in that direction. Western policymakers should be more careful in what they wish for; and how they bring it about. Otherwise, dystopia is calling.
Chris Finney is a partner in the London office of law firm Cooley LLP