House of Lords hits out at EU reforms

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European Union plans for tighter regulation of hedge funds could "seriously damage the EU and UK economies" and the British Government should "not agree to the directive in its current form", according to a House of Lords committee.

The report, from the House of Lords European Union Committee, is the latest warning from Britain that the EC's directive on alternative investment fund managers, which could become law by April, would be damaging to the City of London, where much of the industry is based.

The Committee said it was particularly concerned about the way in which proposals to force fund managers to seek clearance to operate in the EU would effectively bar North American hedge funds from the single market. That could trigger similar rules in the US that would hit European hedge funds, many of them based in the UK.

The Committee also criticised the directive's "one size fits all" approach, amid complaints that it will cover not only the hedge fund sector but private equity firms and infrastructure funds.

"We agree alternative investment fund managers should be subject to regulation at an EU level, but it is vital the commission gets the details right," added Lord Woolmer, a member of the House of Lords Committee on Economic and Financial Affairs.

The House of Lords warning follows concerns expressed on Monday by the Financial Services Authority, the City regulator, about the latest draft of the directive, which has already been substantially amended amid concerns about the effect it would have on parts of the financial services industry.

Lord Myners, the City minister, is leading the attempts of the British Government to get the directive watered down. The European Parliament is to begin debating the latest version of the reforms in 10 days' time, before taking a vote on the directive in April.