Dale Gabbert, Partner at international law firm Reed Smith, has read the Funds Directive in detail and has some hard-hitting views on its severity and the impact it will have on the UK and international funds industry.

Dale Gabbert, Partner at international law firm Reed Smith, comments: "The directive is very ambitious in scope, effectively seeking to regulate all private funds indirectly through their managers, depositaries and administrators. It does not distinguish much between different asset classes such as property, private equity or hedge funds. The de minimis thresholds are so low that most funds wouldn't cover their costs and are therefore unlikely to be used."

"In seeking to cover such a broad ambit, including investor protection and market risk, they may have bitten off more than can sensibly be digested. The extensive use of secondary legislation is likely to create a paper mountain just when the financial services industry is trying to get back on its feet."

"To the extent other market participants such as banks are not regulated in a similar way to private fund managers, the 'market stability' measures won't really work."

"The provisions relating to marketing non-EU funds are going to be crucially important. It is hard to see 'Fortress Europe' working with respect to the US, where many of the biggest private fund managers are based. Assuming that the US gets equivalency status, so that US managers may sell their funds into the EU, managers may simply relocate to the US."

"For cultural and policy reasons, it is unlikely that the US will interfere in remuneration of private fund managers to the same degree and this could be a driver for relocation if it is too heavy handed."

"If, regardless of the fact that a manager is based in the EU, there is a pronounced advantage to having a fund domiciled in Europe as opposed to one outside the EU then you will see two things: tax arbitrage between different EU states and increased use of tax transparent structures. No investor is going to want to effectively pay tax twice - once within the fund and once when he redeems his shares."

"Like the UCITs directive, which has clearly been a big influence, this directive leaves plenty of discretion to Member States. UCITs works now but it took decades for it to work efficiently. It is unlikely that all Member States will exercise their discretions in the same way for cultural reasons and because of differing national interest."

"The provisions on depositaries are fairly harsh and don't reflect market practice. If depositaries take on more liability they will charge for it and these costs will be passed on to investors. In practice this means that pension funds will make lower returns on their investments in private funds. This is a hidden public cost of the proposals that will hit the man in the street."