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Letter of concern

After hearing evidence from industry witnesses about “protectionist” elements of proposed EU regulations, the UK’s House of Lords has written to the Financial Services Secretary about the threat to the EU’s global competitiveness.

More than a month after hearing industry testimony about the impacts of proposed EU regulations on private equity, the UK’s House of Lords has written to Financial Services Secretary Lord Myners to express its concern that EU alternative investment funds could lose their competitiveness globally.

The move comes as the European Parliament and European Commission are preparing to reconcile their various proposed changes to the “Directive on Alternative Investment Fund Managers”, which if passed could result in billions of dollars in additional compliance costs, impose stringent new disclosure requirements and potentially curb compensation for EU-domiciled fund managers. A vote on the directive may occur sometime by the middle of next year.

The House of Lords in November heard testimony from Danny Truell, chief investment officer of the Wellcome Trust charitable foundation, who said that the directive in its current form would seriously restrict investment opportunities for many EU foundations and charities. During the same session, Dan Waters, the director of conduct risk for the UK’s Financial Services Authority, said that proposed marketing restrictions had set the bar too high and would prohibit many foreign managers from being able to raise and market funds in the EU.

In its letter to Lord Myners, the Lords’ EU Committee pointed to such testimony in calling the marketing restrictions “protectionist”, and said they would damage the EU economy by both erecting a barrier to foreign funds and keeping EU funds from investing outside member states. He also said that there is a danger that pension funds, charities and other institutional investors in alternative investment funds will see diminishing returns.

The Committee also reiterated Waters’ concerns about the “one-size-fits-all” approach of the regulations, as well as the potential for regulators to become swamped with unnecessary paperwork from systemically insignificant funds. Waters said in November that the FSA was coordinating with the Securities and Exchange Commission to come up with a more efficient system for culling information such as portfolio positions, leverage and liquidity.

Finally, the Committee also argued that the directive would give an unnecessary level of protection to LPs who are typically well informed institutional investors and banks, and called for more coordination with the US regulatory regime. Absent equivalent regulatory proposals from Washington, many US managers would appear to be among those that could be blocked from marketing in the EU.

“It is vital that the European Commission have regard to the international competitiveness of European-based alternative investment funds,” Baroness Cohen, chairman of the House of Lords EU Sub-Committee on Economic and Financial Affairs, said in a statement. “The most important thing is that regulation in Europe complements international regulation and works alongside proposals in the US. We are concerned that the current proposals do not achieve that.”

Cohen added that the Committee will continue to scrutinise the directive until it is convinced the directive has been improved to suit the best interests of the UK and EU economy and investors, and would publish a full report next year.