EU Committee: Alternative Investment Fund Managers

Lord Woolmer of Leeds Excerpts

Tuesday 6th July 2010 Lords Chamber

[Lord Woolmer of Leeds]

My Lords, I congratulate my noble friend Lady Cohen on opening the debate and on her chairmanship of the committee over a considerable time. It is 14 months since the draft directive came out. It was conceived in a rush, it was supported by a very weak impact assessment, and it was conceived in a heavily political and politicised context both before and following the financial crisis. In many respects it is a very good example of how not to bring forward legislation in such an atmosphere.

I suppose it is easy now to forget that the mood at the time of the financial crisis was one of “something has to be done”. When something has to be done, people pile in behind that to solve many other problems at the same time. The objectives were stated to be twofold. The first was to increase the stability of the financial system. The second was to facilitate a single market in financial services. Those were the stated objectives but for some there were, in addition, at least two others. The third objective was to bring tighter controls on activist hedge funds and intrusive private equity in different cultures and environments, such as Germany and, in particular, France. The fourth was to bring all remaining financial services under regulation and have a full house of all nine UCITS funds—so achieving a single market, but achieving it with political aims and controls which often conflicted with the wider global nature of the financial services concerned.

There was also, at the time, very little discussion about who uses alternative investment funds and what their views were and are. It struck me, as I think it did many members of the committee, that much of the evidence was from people who felt that something had to be done and saw problems with the industry itself. However, there was not much discussion—certainly in the European Parliament—about who is investing in these funds. What were the benefits of them? Of course, in part, it is high-wealth individuals but, as we know in this House, hedge funds receive something in the order of three-quarters of their capital from institutional investors, particularly pension funds and endowment funds. This is not a retail operation; these are people who take a lot of time and care over which hedge funds they invest in. It is a very professionalised business. As my noble friend said, the industry itself is extremely important, not only to the UK but to Europe.

In a sense, this was a draft directive that was conceived as a series of objectives, many of which conflicted. In the European Parliament in particular, one sensed that, having got the draft directive going, there was then an attempt to reconcile those conflicting objectives in a way that was inherently very difficult, if not impossible. I am not at all surprised by the European Parliament for sticking to the directive as it is amended. Essentially, there are some objectives in the minds of Members of the European Parliament that conflict with a global environment and open global markets in finance, as I shall comment on in a moment.

What are the remaining issues 16 months after the draft was published? I shall mention just very few; the Minister will have all this at his fingertips. He knows that there are many problems but some are slightly more important. To everyone who has a problem, every problem is important, but some are probably more significant than others. There is no doubt that third-country issues are extremely important, not only for the operation of the alternative investment fund industry in this country, but because of the global nature of the marketplace. These issues include the ability of European fund managers to market non-European funds, which is a large part of the business; the ability of non-EU managers to market into the EU funds and non-EU funds into the EU; and the question of passport versus single placement.

In principle, I would like to see an EU-wide passport and so would the committee; that is, a measure conferring the ability to sell funds anywhere within the European Union on the basis of a single approval. However, the tough issues that remain of the equivalency conditions, access conditions, who would regulate and who would supervise are exceptionally important and conflict with the global nature of the business, as I said. The idea that we can simply say in Europe, “These are the rules, you have got to play by them; otherwise you do not sell into Europe” is not in my view the way in which we should handle relationships in global markets. When the crisis arose I sensed that the European Union felt that it had an opportunity to set global standards and to be the leader. It was slightly fed up with the United States always setting down the rules. There was a feeling that this was Europe’s chance to be the leader, that it should set the terms and that you either traded on those terms or you did not. Those feelings have moderated a little but when it comes to getting votes through the European Parliament, such views are not always easy to reconcile. That mood still exists in the European Parliament.

I mentioned supervision and the role of the European Securities and Markets Authority. I understand the position of the European Parliament is that ESMA—the European Union’s supervisor—should supervise whether funds meet the necessary criteria or equivalency tests. As I understand it, the Council of Ministers does not go along with that. I should be grateful if the Minister could confirm the UK’s position on that. As regards the Commission’s proposals for credit rating agencies, Her Majesty’s Government appear to be saying that they accept that the European regulator—or supervisor in our language—of credit rating agencies should be the body that approves them. That seems to me potentially something of a precedent. I am beginning to wonder whether we are seeing the early stages of Her Majesty’s Government beginning to believe or accept that supervision of European-wide matters will have to be carried out at European level. Rather than being given a simple yes or no answer, it would be helpful to be given an explanation of the thinking behind this. Will credit rating agencies be an exception?

Clearly, private placement is not ideal. In many senses it would be much better to move beyond individual countries approving funds for marketing. However, if that has to be the case, I will support it. I certainly would not want to see a European passport going forward on terms that were simply unacceptable to the industry and unacceptable to us in terms of supervision. There are still some unrealistic and uncommercial limitations in the draft directive and in the discussions going on regarding who can be used as depositories and on the liability of depositories. The Council of Ministers’ position seems to be more reasonable than that of the European Parliament, but there are deep concerns among alternative investment fund managers about the liabilities that might be imposed on depositors.

I will not say that the committee had an enjoyable time, but it had a busy time looking at this draft directive. It threw up a number of issues and I am greatly concerned that after 14 months the Council of Ministers has not been able to reach an entirely agreed position without the need for dissenting notes, and that the European Parliament seems fundamentally not to have changed its position, but in the fine print is seeking to retain what I would regard as a rather insular view of a very global marketplace. It also does not recognise the enormous experience and contribution that this country can make in the discussions on and resolution of difficult but nevertheless important global relationships.