A French plot? There are whispers of it in London, and it has an almost Napoleonic resonance. The plot, if such it is, involves two European Union directives grinding their way through the EU's bureaucratic procedures, heavily backed by the Elysée, and which may one day have the final effect of moving the UK's lucrative hedge fund business out of Mayfair and into some suitably chichi quarter of Paris.
Could President Nicolas Sarkozy be using his war of rhetoric against Anglo-Saxon market capitalism as a cover for a conspiracy to secure a magnificent prize for his capital? Could the City's wider pre-eminence in financial services be undermined, as HM Treasury claims?
The first arm of this pincer is, so the conspiracy theories go, the innocuously named "Directive of the European Parliament and the European Council on Alternative Investment Fund Managers and amending directives 2004/39/EC and 2009/EC".
While they accept the need for monitoring, the UK's hedge fund industry pretty obviously fears and loathes this in equal measure. Understandably, given the Commission's uncompromising language, which asserts that, while hedge funds "were not the cause of the crisis, recent events have placed severe stress on the sector.... For example, hedge funds have contributed to asset price inflation and the rapid growth of structured credit markets. The abrupt unwinding of large leveraged positions in response to tightening credit conditions and investor redemption requests had had a procyclical impact on declining markets".
To curb their activities the Commission proposes three measures that strike at the very heart of the hedge funds' business model. Up to now the hedge funds have worked in a fairly simple way for such complex operations: the money is kept offshore, in tax havens such as the Cayman Islands; the managers live and work onshore, usually in London and New York, where national regulators keep a sophisticated eye on them. The directive proposes that only those territories that subscribe to a regulatory regime approved by the EU can provide funds to be managed within the EU. Even if that unlikely condition is met, a three-year delay has been imposed while the EU works out whether those conditions have been met. Few hedge fund managers seem willing to hang around for so long when they could be doing useful business in New York or Hong Kong. The three-year rule seems so extreme it is hard to believe it will survive the long discussion ahead: much European legislation ends up as a pale imitation of its draft.
Another issue is leverage. The EU wants to be able to impose limits on hedge funds' borrowings. The industry, and Lord Turner's FSA, is prepared to live with them being monitored. In fact, the letter of the EU's directive is close to that notion, even if the tone is hostile – the limits only apply "where this is required".
The fear for London is that the hedge funds, being forced to do more business onshore because of the EU directive, may choose to move to Paris, and not just for its exceptional restaurants. Paris is host to a few funds already, and is the home of the CESR, Europe's Committee of European Securities Regulators, and will host its more powerful successor, the European Securities Authority. Throw in a few tax concessions and M. Sarkozy may tempt the hedgies to France. Or he may not...
As with all conspiracy theories, the worst fears about Brussels – backed here by Berlin and Paris – seem overdone. Take the idea of two new supranational supervisors, for example, endorsed by yesterday's meeting of EU finance ministers.
The Treasury minister Lord Myners yesterday wrote that there could be never be a British chair of the new ESRC – the European Systemic Risk Council – even if the UK welcomes the idea of an early warning system for highlighting risks to financial stability. The Treasury say that that job is reserved for the president of the European Central Bank, on which the UK, outside the eurozone, is unrepresented.
Yet the EU's proposal, possibly as a result of UK lobbying, actually states that the chair can, alternatively, be "a Governor elected by the ESRC members" – and the central bankers of all 27 EU members will be on the ESRC, including Mervyn King, the Governor of the Bank of England. Memories of the Northern Rock debacle will keep any Brit out of the chairmanship for years, but the possibility is open. And while the directive offers the ESRC a role in "macroprudential powers" – the regulation of the banking system and the credit cycle for the purposes of macroeconomic stability – there are no levers for the ESRC to alter capital requirements, for example.
Lord Myners also says that the FSA wouldn't be represented on the ESRC, though national regulators will attend the ESRC as observers.
Far more of a bogey creature is the other new Euro regulator, the European System of Financial Supervisors, and its subsidiaries, the European Banking Authority (in London), the European Insurance and Occupational Pensions Authority (Frankfurt) and the European Securities Authority (Paris).
The Commission says: "On micro-prudential supervision, the EU has reached the limit of what can be done with the present status of the EU Committees of Supervisors – which are merely advisory bodies. The EU cannot remain in a situation where there is no mechanism to ensure that national supervisors arrive at the best possible supervisory decisions for cross-border institutions."
Lord Myners argues that "by proposing to move some financial supervision powers from national to European level, the Commission's proposals risk undermining the ability of governments to confront future crises... national supervision must be pre-eminent". The Chancellor has pointed out that regulation cannot be split from paying for its failures.
The battle lines seem clear. But there are few real powers for the new bodies. They will spend their time issuing guidelines, making recommendations and cajoling member states to harmonise their rulebooks, to level the playing field and prevent regulatory arbitrage.
The truth behind these Euro conspiracies is the same as ever: it depends on political will more than rules. A big personality, someone like Jacques Delors or Jean-Claude Trichet, say, could soon become a powerful single European regulator in all but name. But if, as is more likely, the regulatory role is filled by a less capable figure, little may change in practice. The fund managers of Mayfair need not call the removal men yet, and Sarko can leave the champagne unpopped.
Alphabet soup: An A to Z of Euro regulation
* ESRC: European Systemic Risk Council. An "early warning" body under the European Central Bank, with representatives of all 27 EU central banks, not only members of the eurozone. Proposed by the de Larosière Group and endorsed by the Commission.
* ESFS: European System of Financial Supervisors. Three new sub-bodies of a new ESFS would replace the existing CEBS, CEIOPS and CESR and oversee "microprudential risk". The board of each would comprise representatives of 27 national supervisory authorities. The three new bodies will be: EBA – European Banking Authority; EIOPA – European Insurance and Occupational Pensions Authority; and ESA – European Securities Authority.
* ESA: The ESFS and its sub-bodies will be collectively known as "the European Supervisory Authorities".
* ECB: European Central Bank. Principally concerned with eurozone monetary policy, but with a new role in supervising "macroprudential" systematic risk through the European Systemic Risk Council.
* BSC: Banking Supervision Committee of the ECB.
* EFC: Economic and Financial Committee. Supervises EU government bonds and bills markets.
* JCFC: Joint Committee on Financial Conglomerates. Co-ordinates work of CEBS, CEIOPS, CESR.
* CEBS: EU's Committee of European Banking Supervisors. Current body only has advisory powers, to be replaced by a sub-body of ESFS, the EBS.
* CEIOPS: EU's Committee of European Insurance and Occupational Pensions Supervisors. To be replaced by EIOPA.
* CESR: EU's Committee of European Securities Regulators. To be replaced by ESA.Reuse content