Committee report on Alternative Investment Fund Managers Directive

10 February 2010

The House of Lords European Union Committee have today published a report on the European Commission’s Directive on Alternative Investment Fund Managers (AIFM) in which they call on the Commission to ensure that their proposals complement global arrangements

The Committee state that unless the directive is compatible with a global regulatory approach it will "seriously damage the EU and UK Economies". They stress that the UK Government should not agree with the Directive unless it is compatible with equivalent legislation in third countries and in particular the United States. They argue that this is essential to ensure that EU AIFM’s do not lose competitiveness at a global level. This is a particular concern for the UK and the City of London which has a large Alternative Investment Fund industry that employed an estimated 40,000 people in 2009.

The Committee recognise the risk the aggregate activity of hedge funds could cause to financial stability and welcome the principle of EU regulation of the managers of Alterative Investment Funds. They state that the Directive has the potential to reduce risk posed by fund managers and be beneficial to the single market and the EU economy as a whole. They also agree that it is appropriate for the regulation to focus on fund managers rather than the funds themselves.

The report supports the introduction of EU Passports in principle for Alternative Investment Fund Managers which would then allow them to operate across the EU upon authorisation. However the Committee state, that as drafted in the original version of the Directive, the proposal for passports would impose significant obstacles to managers wishing to market non-EU funds in the EU and prevent EU investors from investing in non-EU funds.

Some witnesses to the Committee described these proposals in their current form as "protectionist". The Committee argue that the proposals for an equivalence test to assess compatibility with third country regimes will only work if it adopts an outcomes, principles based, definition of equivalency.

The Committee also stress that EU investors should continue to be able to invest in non-EU funds, a situation that the current proposals may prevent.

The report also considers the Directives requirement for disclosure by fund managers to Supervisors. The Committee stress that requirements on provision of information should be proportionate and carefully thought out to ensure Supervisors are provided with the relevant data.

The Committee also criticise the "one size fits all" approach of the Directive. The reported noted the Directive covers a wide variety of fund managers including hedge funds, private equity and infrastructure funds. The Directive’s detailed requirements must differentiate between types of managers to avoid unwanted outcomes that could restrict the operation of fund managers unnecessarily.

Commenting Lord Woolmer of Leeds, of the House of Lords Sub-Committee on Economic and Financial Affairs, said:

"We agree with the European Commission that Alternative Investment Fund Managers should be subject to regulation at an EU level but it is vital the Commission get the details right and do not damage what is an important industry for the European economy. The key will be to ensure that the new regime complements global regulation efforts and Europe does not become less competitive, particularly in relation to the USA.

"The Impact Assessments of the European Parliament estimated that the proposals could reduce EU GDP growth by 0.2 per cent a year. This would be very damaging at a time when Europe’s economies are just emerging from a long and deep recession.

"The UK Government should do everything it can to ensure that the final proposals that emerge in the AIFM Directive do not damage the EU and UK economies to which the City of London makes an important contribution. We urge them not to agree to the Directive in its current form."

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