The European Union has been forced to shelve controversial plans to regulate hedge funds after Gordon Brown intervened to tell his counterpart in Spain that the terms were unacceptable to Britain.
The EU was attempting to push its proposed Alternative Investment Fund Manager directive into law, but the terms proved too divisive to reach an accord yesterday. It was due to be finalised by the Economic and Financial Affairs Council (Ecofin), but the item was deleted from the agenda by Spain, which holds the EU presidency, shortly before the start of the meeting.
On Monday night, Mr Brown had telephoned the Spanish Prime Minister, Jose Luis Rodriguez Zapatero, to say that Britain would not support the directive in its present form.
European ministers admitted after the Ecofin meeting that they needed more time to reach agreement. Elena Salgado, the Spanish Finance Minister, said she wanted "as much consensus on this as possible and we think there is more room to manoeuvre so we can get it". She added: "It is a major priority of ours to get a deal on hedge funds through during our presidency, so we still have a few weeks ahead of us to get this done."
One hedge fund expert said Spain had shelved the vote because it did not have enough support.
The Chancellor, Alistair Darling, said ministers must not put Europe and its only global financial centre, London, "at a competitive disadvantage". "That would only drive more funds to less well-regulated offshore centres," he said. "That's why we agreed today that further discussions are needed."
Senior officials will discuss the issue further at meetings this week and at next month's summit of G20 finance ministers. Any reforms will not be decided before the general election, with the next official Ecofin meeting not scheduled until May. Mr Darling said: "There is no free pass for hedge funds. Tougher regulation is necessary. But nor can there be a deal at any price. Europe must get this right."
One British diplomat said Britain has support from Sweden, the Netherlands and the Czech Republic. The French and Germans favour tougher clampdowns on industries they see could cause systemic damage to the financial markets.
Andrew Shrimpton, of the management consultancy Kinetic Partners, said: "Probably 80 per cent of Europe's hedge funds are based in the UK and a lot of those are connected to the US. This is seen as an Anglo-American industry. The proposals in their current form will damage UK competitiveness."
Michel Barnier, the European commissioner for financial services, said: "It is crucial we get this done as this is a key part of financial architecture." He warned London that European competitiveness depended on "having financial markets that serve the real economy and not the other way round".
He is preparing to fly to the US to head off potential diplomatic problems raised by the US Treasury Secretary, Tim Geithner, to a piece of legislation he sees as protectionist. Mr Geithner angrily waded into the row earlier this month, warning Mr Barnier that the US would hit back with regulation of its own. He has written to Ecofin and urged it to overhaul the directive.
Syed Kamall, the Tory MEP for London, supported the delay, saying: "We must not rush into a directive that will damage the whole of the EU's economic competitiveness. This directive, as it stands, could reduce the value of millions of workers' savings and pensions and push much-needed investment out of the EU and hamper economic recovery. We need to take a step back now and look at how we can agree a more workable directive."
He added: "It is wrong to punish firms that benefit from investments made by hedge funds and private equity, simply because politicians are looking for a convenient scapegoat for their own regulatory mismanagement."
Last week, the European Council's permanent committee of representatives said progress had been made, but sticking points remained.Reuse content