Finance ministers meeting in Brussels today secured an agreement on the contested Alternative Investment Fund Managers Directive (AIFMD), after a vote in the European Parliament yesterday on the issue.
But the two camps sit on different sides of the fence, leaving the European Commission to pick up the pieces.
The crux of the issue comes down to whether foreign funds can gain access to all EU countries once they have a European "passport", or whether these funds would have to establish themselves in each individual member state.
The European Parliament is in favour of an EU passport, while the EU's finance ministers are against it, allocating some of the blame for systemic risk in the financial crisis to hedge funds and other such vehicles.
Though MEPs voting in the Parliament's economics committee (ECON) largely agreed on a draft version of a law creating an EU passport, there is still some resistance from liberal (ALDE) and conservative (ECR) camps, who argue the passport will be difficult to enforce in jurisdictions, which do not subscribe to OECD rules on tax and money laundering.
Early reports this morning quoted the German Finance Minister Wolfgang Schaeuble as saying the UK was no longer resisting AIFMD, despite having openly deemed it protectionist.
Tensions to persist until June
Diplomats insist that tensions will still emerge in talks in June, when the EU's three institutions - the Parliament, the Commission and the Council - lock heads to reconcile their opposing positions.
"We are going to work on trying to find a dynamic compromise which ensures the equal treatment of third country fund managers," Internal Market Commissioner Michel Barnier said ahead of ministerial and parliamentary talks yesterday.
Negotiations are now expected to take place between MEPs, the European Commission and the Council of Ministers ahead of a first-reading vote by the full European Parliament, scheduled for July.
"There are going to be differences," Barnier told members of the press yesterday.
"To be frank, it will come as no surprise to you that the original text from the European Commission is much closer to [French centre-right MEP Jean-Paul Gauzès'] report [a parliamentary draft] than to the Spanish Presidency [of the European Council]," he added.
Commissioner Barnier indicated yesterday that he would try to convince EU finance ministers of the merits of the Parliament's draft proposal, which would see non-EU funds meet certain conditions – like OECD tax rules – to get an EU passport.
This will likely please British observers, who say they are happier with the Commission's thinking on third country funds than that of their European partners.
Home to the majority of the EU's alternative investment funds sector, Britain is in favour of a single passport, while France and Germany are not.
Plot against Britain
Brussels diplomats foresee "some flexibility" in the French and German camps but this will probably only emerge once the EU's three institutions, the Council, the Parliament and the Commission, lock heads in June 'trialogue' talks to clinch a compromise.
In British quarters, the directive has been interpreted as a political ploy to clamp down on London's City as a sensible thing to do after a financial crisis or as a way to lessen the UK's dominance of the sector.
"This is an overarching political message to Britain's financial sector driven by the EU's member states," said sources who did not wish to be named.
"And others just don't have a dog in the fight," the source added.
However, sources at the European Commission tried to sideline any hint of a political plot against Britain, insisting that hedge funds regulation was a priority that was set at the G20 talks of world leaders and not just an EU initiative.
