City welcomes signs of EU thaw on private equity regulation

The private equity industry is optimistic that it will escape tighter European rules

• Phillip Inman
• guardian.co.uk, Monday 29 June 2009 15.07 BST
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The private equity industry has scented victory in its battle to avoid more intrusive regulation from Brussels after a recent series of speeches from EU and UK officials that point to a more lenient interpretation of proposed rules for the City.

Industry body the BVCA said comments from Jacques de Larosière, author of the EU's report on a regulatory reform of the financial system, showed the private equity industry should be excluded from a hard-hitting EU directive that would demand greater transparency and limit their activities.

Sir James Sassoon, author of a report on financial regulatory reform for George Osborne, the Tory shadow chancellor, and Dan Waters, asset management sector leader at the Financial Services Authority, also backed a rearguard action to maintain supervision of the industry in the UK.

De Larosière, a former IMF managing director and ex-Bank of France governor, said at a meeting last week he "had some doubts on the wisdom of some aspects of the directive", and that "private equity should be kept out of heavy regulation". Sassoon added over the weekend: "It's hard to find a kind word to say about a directive so disproportionate in scope, so protectionist in its effect, and so poorly drafted."

Echoing comments by FSA chairman Lord Turner, Waters said: "Perhaps out of necessity, it was produced under extraordinary time pressure. This has yielded a directive whose scope and content are a surprise and in many cases a complete shock to the markets that are affected. The impact analysis, performed at a high level on the back of the early general thoughts, could not possibly have addressed the myriad detailed impacts of the sweeping scope of this directive."

The proposals

The FSA has already urged the European Commission to amend its proposed directive on Alternative Investment Fund Managers (AIFMs), which aims to toughen regulation of hedge funds and private equity firms.

It was produced last year ahead of wider debate about the appropriate response to the banking crisis. In London the directive was perceived to be a thinly veiled attack, sponsored by the French and Germans, on London's dominance of the industry. The objectives of the draft directive are to control systemic risks, enhance investor protection and increase transparency.

The BVCA said: "While the explanatory memorandum of the draft directive recognises the differences between different types of funds and associated risks, the legislative proposal does not take these differences into account. As a consequence, it would impose undifferentiated provisions, which are mainly directed at hedge fund strategies (an area where there are concerns about systemic risk to the financial markets), upon all AIFMs. This would result in other types of alternative fund managers, particularly private equity and venture capital firms, being burdened by inappropriate, irrelevant or disproportionate regulations."

Simon Walker, BVCA chief executive, said: "These comments are merely the latest distinguished experts to agree that the directive as it stands is fundamentally flawed and would do immense damage to private equity at precisely the moment when it could and should be at the centre of a European economic recovery strategy. The clear logic of these remarks is that private equity should be excluded from the provisions of this directive and that is what we call on European officials and politicians to do."

Outdated patchwork

De Larosière chairs a high-level group of officials who in February recommended reform of cross-border financial supervision in the EU to remedy flaws in the bloc's patchwork of nationally based supervision.

Faced with member state fears of losing local regulatory sovereignty, the report suggests changes should be phased in over four years and stops short of introducing an all-powerful, pan-EU regulator.

The report, which De Larosière clearly believes should supersede the earlier directive on alternative investment managers, offers a two-level approach to reform - a new oversight of broad, system-wide risks and a beefing-up of co-ordination among national supervisors in day-to-day oversight.