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Unite and conquer?

A Frenchman, a German woman and a Scotsman walked into a bar…

The Frenchman, Nicolas Sarkozy, and the German woman, Angela Merkel, were championing a regulatory framework covering all EU financial markets, including hedge funds, that may pose a systemic risk.

The Scotsman, Gordon Brown, was probably fighting the move, especially on behalf of 80 per cent of the EU’s hedge funds who call the UK home.

But after a meeting in Berlin on Sunday with heads of government and finance ministers from Germany, France, the UK, the Netherlands, Czech Republic, Luxembourg, the president of the European Commission and central bankers, the EU found its common position.

They agreed on developing an overarching regulatory plan that will apply to “all financial markets, products and participants”, including hedge funds and other private pools of capital that may pose a systemic risk.

The details are yet to be decided but are likely to be fairly comprehensive.

Martin Currie head of product development Toby Hogbin says for hedge funds the devil will be in the detail, but there are concerns about the cost and complexity of new regulation.
He says: “If you introduce regulation there is increased costs for investors and there is increased costs for managers working through the complexity of the rules. The concern is that there may be no clear benefits for consumers.”

In January this year the Treasury and the FSA responded to the EU consultation on hedge funds, making it clear that it did not support a regulatory focus in this area.

It stated: “…while we agree that a re-examination of the EU regulatory framework that applies both to hedge funds and hedge fund managers is appropriate, we do not believe that EU legislation aimed at hedge fund activity alone is likely to be the right means to deliver the necessary improvements.”

The FSA has previously made it clear that in general it is not a fan of an EU-wide regulatory solution.

In its International Regulatory Outlook published in September 2008, the FSA said: “There continue to be calls from some quarters for more radical changes to supervision in the EU. Some argue for the creation of a single European level financial services regulator, some for a common European rule book, others for radical reform of the Level 3 committees – CESR, CEBS and CEIOPS to give them a more institutional role. We do not see how these kinds of solution would work.

“A key feature of regulation is that we are close to the people and the markets we regulate. A central institution located somewhere in Europe would not be close to most of the financial markets, wherever it was.”

But the EU seems to be grasping an ever-stronger hold of regulation across the continent, including in the UK, whether the FSA and the Government like it or not.

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