11 Nov 2010
The European Parliament has have voted heavily in favour of the Alternative Investment Fund Manager Directive to regulate hedge funds and private equity funds on a pan-European basis for the first time. MEPs adopted the rules by a vote 513 to 92. The formal vote on November 11 brought to a close two years of debate between parliamentarians, European Union member states and the European Commission.
The new rules will introduce capital and disclosure requirements on managers of alternative investment funds but will also deliver pan-European marketing rights to approved fund managers within the EU. Later, funds outside the EU will have access to pan-European market in exchange for meeting several conditions.
The legislation marks a substantial change from the proposals originally introduced. But it is certain to increase the costs to investors. British MEP Sharon Bowles, chair of the parliament’s economic and monetary affairs committee who was heavily involved in the negotiations, termed the legislation “a good result”.
Syed Kamall, a London MEP, and the lead member on the directive for the European Conservatives and Reformists group, welcomed the new rules with a degree of caution. He believes they will be costly to Europe's hedge fund and private equity industries but funds will also be able to sell across the EU without the individual scrutiny of every member state, thus strengthening the single market.
The new legislation will help bring some stability to London's alternative funds sector. But it may also come to be seen as the thin edge of the wedge for Brussels to meddle in financial services industries that are already subject to national legislation.
"This directive emerged out of a spiteful effort from Socialist politicians to make hedge funds and private equity a scapegoat for the financial crisis,” said Kamall. “With a lot of work, we have forged a far more sensible law that reforms the sector without crippling it. Those politicians who wanted to destroy our hedge fund industry have lost."
Tom Brown, Head of Funds at KPMG, said: “Hedge Fund Managers have had to put up with almost 2 years of debate and delay around this directive. The confusion has made it very difficult for them to undertake long term strategic planning and they will welcome the end to this uncertainty. Most Managers are already used to operating in a regulated environment, they will not be frightened of the regulation but will be looking forward to taking advantage of the opportunities presented by the Directive. Now that the log jam has been broken we expect the work of analysing the impact and developing the strategies needed to exploit the opportunities, to begin immediately."
Limited plans for AIFMD
According to a recent poll by PwC of 186 senior industry figures from the hedge fund, private equity and real estate sectors, only 2% of the industry currently has a plan to in place that is being implemented to respond to the AIFMD. And only 16% have set up a dedicated working group to consider the implications and formulate how they should respond.
The poll also revealed that 41% of respondents expect the AIFMD to result in increased management fees and over half of asset managers expect their profitability to be hit by the cost implications of the directive.
There is also an overall lack of appetite to bring funds onshore, as only 13% of the respondents with offshore funds said they were planning to bring them onshore as a result of the AIFMD. Hedge funds had the most appetite, with a quarter intending to onshore. This compares with only 6% of the private equity industry and 8% of the real estate industry.
The new rules will introduce capital and disclosure requirements on managers of alternative investment funds but will also deliver pan-European marketing rights to approved fund managers within the EU. Later, funds outside the EU will have access to pan-European market in exchange for meeting several conditions.
The legislation marks a substantial change from the proposals originally introduced. But it is certain to increase the costs to investors. British MEP Sharon Bowles, chair of the parliament’s economic and monetary affairs committee who was heavily involved in the negotiations, termed the legislation “a good result”.
Syed Kamall, a London MEP, and the lead member on the directive for the European Conservatives and Reformists group, welcomed the new rules with a degree of caution. He believes they will be costly to Europe's hedge fund and private equity industries but funds will also be able to sell across the EU without the individual scrutiny of every member state, thus strengthening the single market.
"This proposal is not perfect but it is workable,” said Kamall. “This directive could have been disastrous for our financial institutions, pension funds and venture capital investment. Instead, we have a directive that promotes transparency without closing our markets.”
The new legislation will help bring some stability to London's alternative funds sector. But it may also come to be seen as the thin edge of the wedge for Brussels to meddle in financial services industries that are already subject to national legislation.
"This directive emerged out of a spiteful effort from Socialist politicians to make hedge funds and private equity a scapegoat for the financial crisis,” said Kamall. “With a lot of work, we have forged a far more sensible law that reforms the sector without crippling it. Those politicians who wanted to destroy our hedge fund industry have lost."
Tom Brown, Head of Funds at KPMG, said: “Hedge Fund Managers have had to put up with almost 2 years of debate and delay around this directive. The confusion has made it very difficult for them to undertake long term strategic planning and they will welcome the end to this uncertainty. Most Managers are already used to operating in a regulated environment, they will not be frightened of the regulation but will be looking forward to taking advantage of the opportunities presented by the Directive. Now that the log jam has been broken we expect the work of analysing the impact and developing the strategies needed to exploit the opportunities, to begin immediately."
Limited plans for AIFMD
According to a recent poll by PwC of 186 senior industry figures from the hedge fund, private equity and real estate sectors, only 2% of the industry currently has a plan to in place that is being implemented to respond to the AIFMD. And only 16% have set up a dedicated working group to consider the implications and formulate how they should respond.
The poll also revealed that 41% of respondents expect the AIFMD to result in increased management fees and over half of asset managers expect their profitability to be hit by the cost implications of the directive.
There is also an overall lack of appetite to bring funds onshore, as only 13% of the respondents with offshore funds said they were planning to bring them onshore as a result of the AIFMD. Hedge funds had the most appetite, with a quarter intending to onshore. This compares with only 6% of the private equity industry and 8% of the real estate industry.
James Greig, a partner, at PwC Legal, said: “The asset management industry is facing a period of significant regulatory pressure. It is therefore vital managers don’t design a solution to the AIFMD which will later have to be unpicked for UCITS, Dodd Frank, FATCA and other proposed regulation. The industry will also need to address which funds will still be viable in the new environment.”
