Baroness Cohen of Pimlico on Tuesday criticised the European Union's pending Alternative Investment Fund Managers Directive for misunderstanding the investment management industry and confusing the directive’s own objectives.
Speaking during a debate in the UK's House of Lords, she noted that while greater disclosure requirements and leverage caps might be good ways to help mitigate risk, the final version agreed of the directive must “differentiate more effectively between different types of alternative investment funds in order to prevent the disclosure requirements from placing EU funds at a competitive disadvantage”.
She voiced similar concern over disadvantaging non-EU fund managers and EU investors as regards the controversial “third country” rules, which have been addressed differently in two drafts of the directive.
It is critical that EU investors should continue to be able to access alternative investment fund management throughout the world.
The Council of Ministers’ version allows for national private placement regimes to continue, provided that there are cooperation agreements in place between the particular EU country’s regulator and the regulator of the third country where the fund is domiciled. If the fund manager wins the seal of approval from that particular EU country, the manager could then freely market throughout the EU. The version approved by the EU Parliament’s Economic and Monetary Affairs Committee (ECON), however, would prohibit foreign fund managers from marketing within the EU unless they can demonstrate that they are subject to a regulatory regime of equivalent rigour in their home country. Should this version pass, the manager must gain approval from each EU nation to get the needed passport.
“I would like to ask the minister how he will ensure that an effective compromise is found between the Council's and Parliament’s texts that does not disadvantage non-EU fund managers, mostly us, or EU investors,” she said.
Speaking for the government, commercial secretary and Treasury spokesman Lord Sassoon reiterated that the EU negotiations were “far from over”. A definitive document reconciling the two drafts had been expected by the end of July, but the timeline has been pushed out to September.
On third country arrangements, what he called “perhaps the most difficult issue under the directive”, Lord Sassoon said the directive should be non-discriminatory and should not restrict investor access. “It is critical that EU investors should continue to be able to access alternative investment fund management throughout the world. In line with these principles, the government will push for what we call a dual regime, with an achievable EU passport operating alongside national regimes.”
As regards proposed disclosure requirements, however, Lord Sassoon said that the government disagrees with the ECON committee's position, which does not make any distinction regarding the size of manager or fund, and instead supports the more “proportionate approach” of the Council of Ministers.
One area of agreement, Lord Sassoon noted, was in both texts’ opposition to the “one size fits all” principle that would regulate, for example, big hedge funds in the same way as small property investment funds. “Both the Council and Parliament texts adopt a more proportionate approach to the various types of AIFMs by including a number of important thresholds and carve-outs,” he said. “For example, the Parliament approach looks to exclude investment trusts and private equity from certain requirements in the directive and the Council approach recognises smaller private equity firms and self-managed firms by requiring lower capital requirements”.
He said that the government will continue to push for a compromise that adopts a “tailored approach”, but acknowledged there remains significant disagreement regarding the directive in its entirety. “It is very difficult to predict how this debate will unfold,” he said.