Just as talks on new regulations for alternative investment funds seemed close to the finish line, a French attempt to concentrate more regulatory power in Paris has thrown a spanner in the works.
France will propose that a new EU body, destined to be based in Paris, should be responsible for deciding whether hedge funds from outside the EU will be able to reach investors inside the bloc, EU sources said.
According to the French game plan, the European Securities and Markets Authority (ESMA), a new body that will open its doors in January 2011, would be the gatekeeper for non-EU funds as it would check whether the country where the fund is domiciled has the same rules as the country it wants to enter.
"The French want to play a pivotal role in third country rules," an EU source explained.
EU sources fobbed off any hints that France was seeking greater say on alternative investment funds in the EU. "ESMA is not the cornerstone of the French proposal," said one source.
French diplomats were still on the phone to Paris until late last night to see how much of a role ESMA would play in the French plan.
There is now a stalemate between French President Nicolas Sarkozy and British leaders on this issue, which is the main cause of delay.
Finance ministers meeting at the end of this week will try to come to an agreement on the highly contested Alternative Investment Fund Managers' Directive (AIFMD).
French delegates have made a rallying call for their plan and have been meeting with opponents of their ideas to try and get them on their side.
One such opponent is the MEP for London, Syed Kamall, who had been won over by a previous compromise from the EU's Belgian Presidency which proposed a transition period for funds to get used to EU rules.
"If we sign up to an end-date to private placement now, before assessing if and how well the EU passport is working, this could cause a lot of uncertainty and market turmoil," Kamall said.
The EU passport for funds is part of an original proposal from the European Commission which would allow non-EU funds access to EU investors once they had satisfied requirements laid out in the new EU regulation.
At the other end of the spectrum, British delegates would rather preserve the status quo, which is a private placement regime whereby each regulator would grant access based on their own assessment.
The Belgian EU Presidency suggested that both passports and private placement could co-exist with a 3-5 year impact assessment eliminating either one or the other.
Britain had made its peace with this suggestion, but is now faced with a French proposal which is being perceived by industry as a power grab for some of London's financial muscle.
"I am constantly asked by UK fund managers whether this is an attempt by Paris to avoid competition with London," Kamall added.
British diplomatic sources were unavailable to comment on whether London could live with a Paris-based body acting as a gatekeeper for non-EU funds.