EU Committee: Alternative Investment Fund Managers

Lord Sassoon Excerpts

Tuesday 6th July 2010 Lords Chamber

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, I thank the noble Baroness, Lady Cohen of Pimlico, for bringing forward this debate and I thank noble Lords for their contributions. It has been an important and thoughtful discussion. She started by giving an admirable summary of the importance of the alternative investment fund industry to the UK and indeed to Europe, and she drew attention to the troubled and tortuous history of the directive. It is striking that, in the debate, noble Lords have focused on the same series of key issues.

I commend the European Union Committee on producing such an excellent report. The Government have fully noted its conclusions, and my honourable friend the Financial Secretary has responded to the committee outlining the Government's position on the issues that it raised. These have indeed been difficult negotiations, with a wide range of views being expressed across the EU. We have considered a number of drafts and potential solutions but it is regrettable that, throughout this process, we have had no proper Commission impact assessment to refer to. We have stressed that this should absolutely not set a precedent for EU legislation. The noble Baroness rightly emphasised the importance of that point. I can assure the House that the Government will press for that, bearing in mind that decisions on the scope of Commission impact assessments are taken independently of member states.

Nevertheless, Ministers and officials have been in regular discussion with representatives of the industry and their associations to understand the impact of various measures in the directive and to find a way through. Of course, the EU negotiations are far from over. At ECOFIN in May, the Chancellor made clear that progress was needed on key issues before the UK could offer its support to the directive, and he secured an important minute statement from the Council to endorse further discussion on the issues. Separately, the European Parliament voted on its own compromise text. Following that, the trialogue was initiated, with a view to reconciling the different positions of the Council and the Parliament, with some significant differences still remaining.

I should like to outline some of those issues and, in doing so, respond to some of the points that noble Lords have raised, but first I shall set out the Government's overall position on the directive. The Government are committed to finding an acceptable compromise, and are looking forward to working constructively with the Belgian presidency in that spirit. However, we have made it clear to our European partners that we should not be seeking agreement for agreement's sake. We need to ensure that the directive is non-discriminatory, in line with our G20 commitments. We also need to find workable and proportionate solutions that provide a sufficient level of regulation, while allowing the industry to function effectively. The Government will use our influence with the European Commission, Members of the European Parliament and other member states to improve the drafts on the table to find a solution that meets the broad objectives that I have just outlined.

I turn to some of the specifics raised in the debate. First, on the question of international consensus—a point raised by the noble Baroness and by the noble Lords, Lord Tunnicliffe and Lord Woolmer of Leeds—the G20 agreed at its London summit in April 2009 that all systemically important institutions, including hedge funds, should be subject to regulation and supervision. Developing a harmonised EU framework for the regulation of hedge funds and other alternative investment fund managers is clearly consistent with that objective.

The Government are keen to ensure that, in line with the G20’s broader commitment to global co-operation in addressing those issues, and in line with the G20 communiqué of 5 June, the final directive adopts an open and non-discriminatory approach in respect of non-EU fund managers and service providers; and that, where it imposes equivalent standards, these are consistent with the emerging global norms. Furthermore, we support the approach in the Council text to align co-operation agreements between EU supervisors and international supervisors to international standards, such as the IOSCO standards, where such standards exist. We consider that using that approach is more likely to ensure that co-operation arrangements are achieved with third-country jurisdictions.

That takes me to the direct question of the third-party arrangements, which were drawn attention to by most noble Lords who spoke. That is perhaps the most difficult issue under the directive. The majority in Council favoured an approach that maintained national regimes but restricted a passport to EU managers of EU funds only. On the other hand, the European Parliament took a completely different approach that is more similar to the Commission’s original proposal. The Parliament voted for a harmonised EU regime to allow a passport for all EU and third-country alternative investment fund managers. However, those failing to meet the conditions of the directive would be excluded from marketing to member states. In other words, national regimes would come to an end. In addition, ESMA, one of the new supervisory authorities yet to be created, would have a role in ensuring that third-country managers of third-country funds were effectively suspended.

The Government agree with the conclusion of the European Union Committee report and have taken a clear position. First, we believe that this directive should be non-discriminatory. The G20 agreed this in principle and it is important. We therefore also do not believe in reciprocity as a condition for access to EU markets. Secondly, the directive should not restrict investor access. It is crucial 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. This is precisely the position advocated by the committee. We have presented this to others as the middle ground between the ECOFIN and Parliament positions. It is very difficult to predict how this debate will unfold. Given the significant difference of view, it is one of the key issues in this debate for the Government.

The noble Baroness made a point about requirements for disclosure to regulators. There is some history here because over the past five years the FSA has been gathering information on the potential impact of hedge funds on the market through its survey of prime brokers. It is in the process of completing the second year of a hedge fund survey that focuses on the 50 largest managers that have the greatest potential impact on the effective functioning of markets. Deciding exactly what information alternative investment fund managers should provide to their supervisor is one of the questions that the FSA has considered in developing this survey. The FSA will continue to refine its approach as it undertakes further iterations of the survey, including reflecting on whether to broaden the range of managers to whom the survey should apply.

The Council’s general approach on the directive allows aggregate data to be provided for small firms. Managers above a threshold would have to provide more detailed information to their supervisor. However, the Council text envisages level 2 measures on this issue, and there is a clear requirement on the Commission to take into account the need to avoid an excessive administration burden for supervisors. The Parliament position does not make any distinction on the size of manager or fund and applies all the requirements on all managers. The Government clearly favour the more proportionate approach and so support the Council’s position.

A number of speakers raised the one-size-fits-all question. The Government agree with the committee that the one-size-fits-all approach of the original Commission proposals did not properly cater for different types of fund structure. In common with many other member states, the UK has argued for a more tailored approach. There have been significant improvements in this area in the text. The Council and the Parliament texts adopt a more proportionate approach to the various types of AIFM by including a number of important thresholds and carve-outs. 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. The Government will continue to push for a compromise that adopts a tailored approach as far as possible.

The noble Lord, Lord Woolmer of Leeds, talked about ESME. I find it hard to see how a directive that is now being finalised can prescribe a role for a body that has not yet been created. The Government certainly believe that it would be inappropriate to set out roles for ESME through the AIFM directive. They certainly do not concede that there should be direct supervision at the European level more generally than there is over credit rating agencies, which has been the sole agreement to date.

The noble Lord also made an important point about depositories, which is another key issue of the provisions that remain open. While neither the Council’s nor the Parliament’s texts are ideal, we are working hard to find an acceptable compromise and we will continue to work to see that there is a proportionate system of liability in the framework for depositories.

My noble friend Lord Newby made a rather wider series of points that are fundamental to the UK’s approach to directives more generally. I completely agree with him that the rearguard action that the previous Government took was a bit late, although they pursued it with considerable vigour, and that we have to find a way of getting on the front foot more generally on directives. The UK has not been good at this over the past few years, and my noble friend the Financial Secretary spent a considerable time in Europe recently discussing the forward pipeline with Commissioner Barnier.

My noble friend also talked about being in other European capitals. I completely agree. The Financial Secretary was precisely on this type of operation last week in Paris. Yes, this is a charm offensive, but we have to be tough and realistic in our negotiations. As my right honourable friend the Chancellor of the Exchequer has made clear, we should be prepared to trade concessions on non-financial services directives, where appropriate, for what is in the UK’s interests on critical issues in financial services dossiers.

Finally, I endorse my noble friend’s point about getting the best UK officials into key positions in the European Commission. I was pleased that he recognised that my right honourable friend the Foreign Secretary highlighted this very point in a recent speech.

The noble Lord, Lord Tunnicliffe, talked about leverage buyouts and private equity. I trust that the Government’s position on private equity is clear. We consider that EU private equity should not be unduly disadvantaged against its competitors, and again the requirement should be proportionate to the size of the business. The Government are well aware of the proposals in the EU Parliament text on private equity, and consider that many of the provisions that are proposed would increase costs to EU private equity and would be likely to leave those investors at a disadvantage compared with other forms of investors. We consider that the threshold for private equity disclosure is set at a more appropriate level in the Council text, which is the definition that is used in the Commission’s recommendation on micro, small and medium-sized enterprises. We also consider that the directive should take care not to require the disclosure of sensitive information about target companies so that it is in the public domain and could be used by competitors to secure an advantage over it, thereby risking not only the prospects of the target company but possible returns for EU investors. We also consider that the Parliament’s approach to apply the second company law directive to private companies may be problematic, so we do not support that approach.

The noble Lord, Lord Tunnicliffe, also talked about investment trusts and the scope of the directive. We agree that investment trusts should in principle be excluded from the scope of the directive. The European Parliament text on this matter is very positive. It applies a more proportionate approach to investment trusts and private equity by drawing all firms into the scope of the directive but then disapplying a number of the provisions of the directive for these managers. However, not all member states in the Council or the Commission agree with that approach. They instead favour the Council’s approach to have a simple scope threshold without any disapplications of provisions. The Government will continue to push for a proportionate approach to cater for small and large firms. We are also supportive of the European Parliament’s approach, which we consider to be to the benefit of investment trusts and private equity.

Before I conclude, it may be helpful if I set out the likely next steps for these negotiations. Given the difficulty of some of the issues, it now seems extremely unlikely that there will be consensus on a single text before the summer break. However, I anticipate the Belgian presidency taking up this dossier as a priority in September. The Government will use the time available to further the UK’s position on this directive. We do not want to stand in the way of agreement, but it is clear that progress needs to be made before the Government can support the directive.

I hope that noble Lords have found this statement useful in setting out the Government’s position in the negotiations as they progress and in responding to the many important points that have been made this evening. I would welcome continued support and co-operation from both Houses as we continue this vital work.