EU hedge fund debate is getting an injection of commonsense

17 Sep 2009

The European Union's headlong rush to be seen to be tough on hedge funds - which many in Europe find an easy target to blame for the financial turmoil of the last couple of years - is being slowed down. The debate on the Alternative Investment Fund Managers Directive (AIFMD) has so far generated rather more heat than light with alot of misguided lobbying from the City of London, epitomised by Boris Johnson's high profile sortie to Brussels. What he, and many in the City, fail to understand is that the supporters of the directive as it currently stands just rub their hands with a ghoulish relish when people complain that it will damage London: that is precisely the point of it as far as many in France, Germany and elsewhere are concerned. They see hedge funds and their various high risk cousins as lying at the heart of the reckless risk culture that brought once famous financial institutions to their knees.

Fortunately, some wiser voices are being heard in this debate.

As expected the Swedish presidency of the EU is taking a rather more measured and co-ordinated approach to the complex issues arising out of the global financial crisis. The pre-G20 summit meeting of EU leaders is part of that more thoughtful approach. The Swedes have realised that crudely attacking London will damage the whole EU and that the AIFMD as it currently stands would effectively prevent any EU citizen, pension fund or investor getting access to a very wide range of offshore funds (and offshore is where they would go under these proposals). Consequently, last week the Swedes told members states that they would prepare a modified version of the directive for discussion at the EU meeting on 22 September, prior to the G20 summit two days later in Pittsburgh.

A similarly conciliatory view is being taken by the new chair of the important European Parliament Economic and Monetary Affairs Committee, Sharon Bowles, a UK Liberal Democrat. She criticised EU regulators for their "impatience and need to be seen to be doing something", adding that many of the issues that have caused problems in the past are already being addressed by national regulators such as the UK Financial Services Authority.

This does not mean that hedge fund managers can sit back and think nothing will change. There will be new rules, and it is unclear still whether these will be dictated by national regulators, Europe or through the sort of co-ordinated global action that is likely to emerge from the G20 summit. They are likely to be quite tough rules too. However, they will not now be framed in such a way as to "punish" London and New York.

Topics: regulation, Hedge funds, G20 Summit, Europe

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EU gets ready for G20 regulation debate

24 Aug 2009

We are just a month away from the next G20 Summit which is due to take place in Pittsburgh on 24-25 September and yet you would hardly know it was happening. Unlike the last G20 summit in London in April which had a long high profile build-up, especially in the UK, the Pittsburgh summit is almost creeping up on us unnoticed. Except in the labyrinthine corridors of European Union power that is.

There is no agenda yet for the G20 meeting but its main topics will be restoring confidence in financial markets and setting up new structures for their supervision. The meeting will also tackle the vexed questions of whether and how to scale back the economic stimulus packages and the huge expansion of the money supply undertaken by some countries. The EU is already busy preparing for this and readying itself to push its own extensive agenda of regulatory reform.

While the UK government has been on holiday and the Obama administration in the US distracted by the healthcare debate, the EU has been laying plans for the G20 summit, led by the Swedish presidency. It has arranged an informal meeting of EU finance ministers for 2 September, followed by a two day meeting of finance ministers in London on 4-5 September. It is due to decide later this week whether it will hold a formal meeting of the EU leaders the week after the finance ministers.

The Swedes are trying to play down all this pre-summit manoeuvering by saying that it wants to ensure that the EU states that are not attending the G20 summit are fully informed about the agenda and are able to comment on the approach the EU should take. In reality what it wants to do is to create a very powerful common position on its regulatory reform agenda as set out in the Larosiere report and, if the French and Germans get their way, agree a tough line against the sort of huge government support for the financial sector and the economy that the UK and US governments have undertaken. It will be an interesting few weeks of summitry.

Topics: regulation, Larosiere, G20 Summit, Europe

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Irresponsible bankers will smile at the global regulatory reform chaos

22 Jun 2009

The last week has seen a flurry of activity around the world on the regulatory front but I have a suspicion that the only people who will be really satisfied are the very people at whom the reforms are aimed - the institutions that caused the financial storms of the last year or so. As far as I see it, the United States and Europe have such fundamentally different approaches to this that it is hard to see any global regulatory consensus emerging, let alone concerted action to put in place a regulatory system that would prevent the near collapse of the western financial system again. We have to remember that we are only looking at a slightly calmer scene now because of the billions of public money poured into propping up the system and its institutions. As Sir Martin Sorrell observed on Radio 4 last Friday, the amount of public debt racked up dealing with this is equivalent to the cost of a major war and it should be inconceivable that no-one is held account for causing that war.

Let's start in the UK.

At the annual Mansion House Dinner in the City of London last week, we saw the government and the Bank of England at loggerheads over the path regulatory reform should take. One was pleading for very limited action, saying that we should just look to the boards of the banks and other financial institutions to take a longer term, more responsible view. The other argued for some tough action to ensure that we didn't create monsters that were "too big to fail", suggesting that there could be a Glass-Steagal like split of investment and retail banking. You might have thought the Governor of the Bank of England was the one arguing for just having a quiet word in the ears of the City grandees. You would be wrong. It was a Labour Chancellor of the Exchequer, talking in the wake of the worst financial and economic crisis in over 60 Years.

New Labour has always been in thrall to the City. It is one of the reasons why the credit bubble was allowed to grow so huge before bursting and why so many high risk products were allowed to corrode institutional balance sheets. Labour trusted the City, probably because it doesn't really understand it, and its whole approach to regulation has been to allow the City to get on with making money, naively it thought for the country. I have seen no clearer indication that this is a government that has run out of ideas, incapable of changing course even when its previous course took the country onto the rocks, than its failure to grasp the need for a radical overhaul of financial regulation and the failed tripartite system.

The day after this stunning public divergence between the government and the central bank in the UK, the Obama administration in the United States came out with its proposed reforms. I don't want to be too dismissive of such a complex plan but it is a mess. There seems to be a regulator for everything, a whole new tier of federal regulation to overlay the already cumbersome regulatory system that some parts of the financial sector, such as the insurance industry, have to contend with at state level. In some ways it is reminiscent of the UK's first stab at comprehensive regulation of the financial services sector with the 1988 Financial Services Act which spawned a real alphabet soup of narrow sector regulators. There is a certain sense of déjà vu in reading US commentators attacking the Obama plan on the same grounds. It will leave gaps and create opportunities for regulatory arbitragemand these will be exploited by those who don't want to be properly supervised.

In Europe, meanwhile, there seems to be a greater sense of purpose, even if couldn't look more different to the US approach if it tried.

The European Union wants to move to fewer, supranational regulators and has an ambitious plan for getting there. Despite UK doubts - opposition would probably be a more accurate description of the government's stance - this plan is edging ahead and was largely approved at the summit of EU leaders at the end of last week.

So far, despite fierce attacks on "Anglo-Saxon" attitudes to regulation and the contribution these have made to the crisis, EU leaders have been keen to keep the dissenting UK government on board and have made compromises around the chairmanship of the proposed new regulators to achieve this. To understand why they have done this you have to look at the wider political scene in Europe.

The EU needs to get the Lisbon Treaty ratified, a process that will probably take until the end of this year. The Labour government backs the treaty and has never been prepared to contemplate bowing to demands for it to be put to a referendum in the UK. The Tories oppose the treaty and have said that if it is not ratified if (or as they see it, when) they become the government, they will stop the ratification process, possibly putting the treaty to a referendum. This is a doomsday scenario as far as the rest of the EU is concerned so they are prepared to go quite a long way to making Gordon Brown's life as easy as possible to ensure he survives until the treaty is finally nailed down. While it is very hard to imagine a British government falling over a dust up in Europe on financial regulation, such is the febrile nature of British politics at the moment EU leaders are not prepared to contribute to the Prime Minister's discomfort and risk him being forced into an autumn General Election.

So, where does that leave the much vaunted desire of world leaders (as expressed at April's G20 Summit) to make sure we never have to go through the same crisis again? Frankly, it is desperately hard to tell but I still think that the most coherent and focused case for reform has been that made by the EU. The challenge they will face is translating that into a global plan.

Meanwhile, those most in need of a firm regulatory grip being placed on their collar will look at this huge divergence of approaches with a smug satisfaction.

Topics: regulation, Larosiere, Gordon Brown, G20 Summit, Europe

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Financial services regulation: House of Lords backs the global option put forward at G20

02 Jun 2009

As the political chaos unleashed by the MPs' expenses scandal continues to dominate the headlines and totally absorb political leaders of all parties, there are some sharp reminders that life - real life - goes on in the world of politics. It was interesting to see in yesterday's Financial Times that business leaders have started to air concerns about just how far politicians have become distracted from the important agenda flowing from the financial and economic crises of the last year. This morning we had another reminder of just how important a debate is brewing up around financial services regulation when the House of Lords Economic Affairs Committee published its report on banking supervision and regulation.

This is a big report with alot to say about regulation and banking supervision, much of it very obvious criticism of the failures of the tripartite regulatory regime and the lack of clarity in the roles of the Financial Services Authority, the Bank of England and the Treasury. I want to look at the contribution the report makes to the wider international debate about the reform of banking supervision. This is buried in paragraphs 128 to 143 of the report under the heading International Supervision.

The House of Lords argues strongly that any extension of supranational banking supervision should be on a global, not a regional basis. It does sympathise with the critique that the European Union's Larosiere Report offers of the failures of the existing mechanisms but rejects its conclusions that the answer is a series of new and strengthened European institutions, arguing instead that the solutions need to be global, not regional. In coming to this conclusion, The House of Lords is lining up firmly on the UK government's side and gives strong backing to the proposal developed by Gordon Brown at the London G20 Summit that a new Financial Stability Board should be established in partnership with an enhanced role for the International Monetary Fund.

In normal times, this would have been seized on by the Treasury as it needs to do find some allies to help it stand up to what looks, at the moment, to be an unstoppable tide in favour of a European solution in the EU. These are not normal times. We have a government paralysed by an unprecedented political crisis with a Chancellor looking increasing doomed. Picking up and reading a lengthy House of Lords' report is not likely to be one of Mr Darling's priorities this week. The pile of reading will only get bigger in the next week as the House of Commons Treasury Select Committee report covering many of the same issues is expected to be published. It is hard to see just how and when these important issues are going to get addressed in the current fevered political atmosphere.

Topics: Treasury Select Committee, Treasury, regulation, Larosiere, Gordon Brown, G20 Summit, Europe

The EU is now out in front in the race to reform financial services regulation

29 May 2009

It looks as if the initiative in reforming the regulation of the financial services sector has slipped out of Gordon Brown's grasp. For a brief moment after the G20 Summit in April the Prime Minister was setting the agenda and steering the world towards a co-ordinated but limited reform of regulation in the wake of the banking crisis. It has been some weeks now since he has uttered a word on this topic. In the meantime, the debate has moved on with the European Union forcing its ideas to the fore.

The European Commission this week whole-heartedly backed the Larosiere report, which proposes a new, pan-European, regulatory system that would transfer powers away from the FSA, especially for firms that operate in more than one member state. The UK has been very lukewarm about these proposals but looks increasingly isolated and ineffectual in its opposition. Many will see the failure to follow through on the initiatives announced at the G20 Summit as one of the casualties of the MPs' expenses scandal which has totally consumed the British body politic for the last three weeks. With the prospect of an autumn General Election growing by the day it seems that our attention will continue to be diverted while the EU turns these proposals into legislative reality.

There are a few unknown factors to take into account, however, which may influence the course of this debate. The first is the European elections next week. At the moment, support for the Laroisiere report seems to spread right across the political divide in the European Parliament: this could change. The second is the next installment of its report on the banking crisis from the Treasury Select Committee which is expected next week and will focus on regulation. If this gives its backing to the Financial Services Authority as the lynchpin of regulation then the debate about the direction of the European debate might gain new vigour. If, on the other hand and as seems more likely, the Select Committee casts doubt on the ability of the FSA, Bank of England and Treasury to be an effective regulatory force then the European proposals will look increasingly unassailable.

Topics: Treasury Select Committee, Larosiere, Gordon Brown, G20 Summit, FSA, Expenses, Europe

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G20 points to a new era of regulation - but by whom?

03 Apr 2009

There will be hundreds of thousands of words written over the next few days analysing the outcome of yesterday's G20 Summit in London and I will be looking hard for an answer to this question: who is in charge of the new, tougher, regulation that has been promised?

The communique from the summit says that the Financial Stability Forum will be revamped into a Financial Stability Board and given new powers to oversee (note, not regulate) banks and international markets. However, it also says that the International Monetary Fund should take a stronger role in supervising the world financial system. Are the seeds of conflict being sown here?

The communique from the summit certainly sets out a tough sounding manifesto for regulation and supervision but is too quiet on how that should be delivered. This probably leaves the door wide open for the European Union, with the strong backing of France and Germany, to pursue the agenda it has already set out in the Larosiere Report. This could create further conflict with the newly emboldened FSB and IMF.

Of course, another key point of interest to many of us will be how this will play out in the battlefield of domestic politics. Gordon Brown has won alot of praise for getting a consensus on so many points out of the summit, although he did fail on the major fiscal stimulus he was hoping for. This throws the focus back onto the Budget later this month. Without the extra help he was hoping for from the rest of the world and UK government spending already seriously over-committed, he has limited room for manoeuvre with time running out. The potential medium to long term benefits of the summit deal will not be enough to revive Labour's political fortunes. They need something that is going to make a major impact in the next 12 months if the Prime Minister's success on the international stage is to help him towards electoral success next year.

Topics: Larosiere, Gordon Brown, G20 Summit, Budget 09

ABI pitch for London-based regulator is a canny move as G20 meets

02 Apr 2009

Well, they have arrived at Excel and within a few hours we will find out was has been agreed and what has not been agreed. It will no doubt take a forensic scrutiny of every word in the statements published by the G20 leaders to work out what has really happened. It will also trigger months of debate and negotiation over the detail of how to deliver what was agreed.

In this context, the comments the other day by Stephen Haddrill, the director general of the Association of British Insurers, making a pitch for any new pan-European regulator to be based in London seem rather shrewd. I am sure he has sensed the direction the debate about future regulation is taking accurately as we do seem to be heading towards an European regulator in the wake of the Larosiere Report and the strength of the Franco-German alliance on the need for tougher regulation yesterday gave further impetus to that move.

So, Mr Haddrill's approach of acknowledging the inevitability of a European regulator but then making a case for it to be based in London seems quite smart. What he is saying is that by basing in London we could ensure that it absorbs more of the UK approach of prudential regulation and avoids a lurch back to the pre-1992 system of product-based regulation that was widespread on the continent and which has its strong supporters in Brussells, Paris and Berlin.

It is an interesting contribution to the debate.

Topics: regulation, Larosiere, G20 Summit, Europe

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What can Brown salvage from the G20 Summit?

25 Mar 2009

I am still struggling to see where this consensus the Prime Minister keeps talking about over fiscal stimuli and international agreement on future regulation is going to come from. His current mini-world tour in the run up to next week's London Summit doesn't seem to be getting him anywhere very fast. It is almost as if he is saying the same thing over and over again in an attempt to convince himself that everyone agrees with him but he is actually beginning to look very isolated.

The only clear consensus I can see among the UK, the US and the European Union is over the push for greater transparency on the part of tax havens and can easily imagine this being trumpeted as a major triumph in order to cover up the divisions elsewhere.

On regulation, it looks as if there is very little meeting of minds and, as I have said before in this blog, Europe is making the running here, although there is now some very tough talk emerging from the US too. So far, the UK hasn't put any specific proposals on the table so it is hard to see exactly where the expectations are being set for the summit.

When it comes to pumping even more public money into beleaguered economies, this message has gone down well enough in New York where the new administration has embraced this route with vigour but it is being met with a frosty reception on this side Atlantic. The main EU countries are not struck on this approach, although both France and Germany have indulged in some targeted public support, especially in the automotive sector.

It is at home where the support for this approach is collapsing. Yesterday, the Governor of the Bank of England made it clear that the central bank does not believe further extension of the public debt is sensible and, right on cue, the markets gave it a thumbs down today when they failed to fully support the gilt auction the the first time in seven years, an ominous sign that even if the government wanted to do more it simply won't be able to.

It is getting very hard to see where Gordon Brown is going to be able to take the G20 Summit.