Chancellor faces first EU setback over controversial hedge fund rules

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The Independent Online

Britain's new Chancellor of the Exchequer faces his first European defeat tomorrow when the Ecofin committee meets to sign off the EU's controversial hedge fund directive.

George Osborne did try on Friday to delay the crucial finance ministers' meeting, to give the new Conservative-Liberal coalition more time to marshal its arguments against the highly unpopular measures. But his requests were rebuffed and, despite vociferous City campaigning against the new rules, Mr Osborne is understood to feel that negotiations are too far advanced for him to be able to mount an effective defence.

The meeting is the Chancellor's first foray on to the European stage. But it is widely seen as a "poison pill" left by the outgoing Labour Prime Minister, Gordon Brown, who specifically delayed it until after the general election.

Once passed by Ecofin, the hedge fund directive must go through the European Parliament and the European Commission, but neither is expected to make major changes.

The new rules are strongly backed by Germany, France and Spain, but are wildly unpopular in Britain, which is home to 80 per cent of Europe's hedge fund industry. Proposed restrictions include pay caps, borrowing limits and greater transparency. The biggest concern is a clause requiring funds to apply for a licence to operate in other European member states.

The British Private Equity and Venture Capital Association has slammed the proposals as "one of the least thought-through pieces of proposed legislation for some time", warning that the "excessive administrative burden" would make Europe "a profoundly less attractive place in which to conduct private equity business."

President Obama is also pushing hard for Congress to pass new financial regulations. In his weekend radio address, he said the proposed rules will help consumers, curb predatory lending and reduce risk-taking. After months of discussion, the final vote on the bill may come as early as this week.