By Marta Andreasen MEP
"The AIFM directive was in response to the financial crisis and its aim was to protect against systemic risk by bringing alternative funds under control. Instead we have a directive that will put burdens on small companies at the cost of jobs. It will reduce returns to all investors including institutional investors and pension funds."
London is home to one of the the largest financial districts in the world and is a competitor with New York for the world’s financial capital. Over one million people in the UK are employed by the financial services industry out of which the alternative funds industry employs 18,000 people and pays over € 6 billion in taxes.
I am in favour of taking the necessary steps to prevent the crisis recurring but I see the AIFM Directive as a serious threat to the industry.
The AIFM directive is the EU’s response to the 2008 Rasmussen report of the European Parliament. This report was passed in the heat of the financial crisis. It was a demand for a scapegoat and the hedge funds were deemed it. The rationale was that hedge funds were heavily leveraged and were big users of derivatives. It did not matter that banks and monoline insurers were even bigger users of leverage and it was irrelevant that banks had ceased to use normal lending practices and the only criterion for a loan was to have a pulse.
The single most controversial part of the directive is the rules applying to third country managers and funds, those from outside Europe investing in Europe and those investing European money elsewhere. The restrictions on third countries could cause retaliation from outside Europe and in fact earlier this year the United States Secretary of the Treasury warned against making the directive protectionist. Another concern was that by making the rules too tough developing countries would not be allowed to seek European investors because their regulating body would not qualify under our strict regime.
At the time of writing there is still no agreement between the Council and Parliament on how to treat these cases, in fact negotiations are uncertain and at a very difficult stage. There is the proposal for a passport to be issued to non-EU managers if ESMA, the new European securities authority, approves the manager as conforming to the directive. In this case the manager would be accepted in a member state of reference and would be able to manage and market funds throughout the EU. It remains to be seen if this proposal survives the negotiations.
The second remaining contentious part of the directive concerns private equity (PE). As things stand at the time of writing it is still not clear how much sensitive information such as its level of ownership in a company and its strategy for the future the PE firm has to publicly disclose. This would place it at a disadvantage compared to other investors and threatens to create an uneven playing field. It would discourage PE investors who invested 33 billion in Europe in 2009 from continuing to do so. As usual these requirements favour larger companies over small ones.
It should be remembered that this directive was in response to the financial crisis and its aim was to protect against systemic risk by bringing alternative funds under control. Instead we have a directive that will put burdens on small companies at the cost of jobs. It will reduce returns to all investors including institutional investors and pension funds. But perhaps worst of all if it penalises managers from third countries it will contribute to protectionism, the last thing we need when things are tough.