EU to consider pay limits for hedge funds

London dominates the $5-trillion-a-day foreign exchange market, trading twice as many dollars as the United States and more than twice as many euros as the entire euro zone, according to TheCityUK study.

The European Union will consider as soon as this week rules to limit the pay of hedge fund managers, a spokeswoman for the Swedish minister in charge of reaching agreement on the legislation said on Thursday.

The EU is scrutinising a raft of new regulations for hedge funds and others that include imposing tough borrowing limits, which the industry has warned could force it into exile.

But so far the industry, which in Europe is concentrated in London’s upmarket West End, has avoided any clampdown on pay despite an international consensus that remuneration for bankers should be controlled.

On Thursday (12 November), the spokeswoman for Sweden, which holds the EU presidency, said it would propose a law to European countries to restrict pay at hedge funds and other investment firms such as private equity.

“It is important that we create a level playing field between different parts of the financial industry,” she told Reuters.

Her comments follow a surprise announcement this week by Sweden’s financial services minister, Mats Odell, on pay rules for the funds one politician dubbed locusts and which are known for making reverse bets on company stocks rising or falling. 

Although the funds did not play a central role in the global financial crisis, many politicians have long been suspicious of their activity, prompting the EU’s executive European Commission to draft rules to keep close tabs on them.

There has been a general drive to clamp down on financial services. The G20 group of leading countries, which includes the European Commission and several EU states, agreed to guidelines on banker pay drawn up by the Financial Stability Board, a global regulatory body.

These lay down how remuneration should be structured and outline, for example, when a banker’s bonus should be paid.

Industry cautions against pay curbs

The Alternative Investment Management Association, a hedge fund lobby, said it supported the G20 remuneration measures but cautioned against wider application of bank pay curbs.

“Hedge fund managers earn their fees only if they are successful, that is if they increase the value of their clients’ investments,” AIMA Executive Director Florence Lombard said.

“Secondly, much of the concern expressed on banking bonuses relates to the fact that many banks have been bailed out by governments. There is no single hedge fund in the world that has either been bailed out or received a handout.”

Funds driven out of Europe?

Last month, Sweden, concerned that the draft rules as they stood could drive the funds out of Europe, had proposed a radical compromise.

It attempted to reach a deal with European countries to drop a central part of the proposed EU rules – a cap on borrowing by the funds.

The Swedes are also against closing entry to Europe by foreign hedge funds whose rules at home are softer – another contentious part of the original plan.

But the move by the Swedes prompted a backlash, with some diplomats expressing disappointment with what many saw as a watering down of the rules.

Many financial industry experts also see a need to shine a light on the secretive and lucrative industry. “Hedge funds are invisible and they want to stay that way,” said Karel Lannoo, chief executive of the Centre for European Policy Studies, a think-tank. 

“No one knows what they are doing – the ban on short selling in the UK showed how hard they are to control. Regulating their pay would be the ultimate option in terms of monitoring.”

(EURACTIV with Reuters.)

On 29 April, the European Commission proposed a new set of rules for hedge funds and private equity firms, requiring mandatory registration and disclosure of their activities to regulators, while at the same time easing their access to European markets in the long term (EURACTIV 30/04/09). 

The main regulatory component of the proposed legislation is an obligation for EU-based managers of so-called 'alternative investment funds' to register and disclose their activities, in order to improve supervision and avoid systemic risks.

The obligations are not applied to the funds themselves, but only to their managers, who are considered responsible for key decisions. However, critics said that the exemption of funds from the proposed new regulation would leave hedge funds and private equity free to develop their investment policies, despite the fact that their risk-prone attitudes were strongly criticised during the financial crisis.

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