I propose to take Questions Nos. 190, 207, 225 and 226 together.
The European Commission's proposal for a Directive to regulate the managers of alternative investment funds was due to be discussed at Ecofin on March 16th. However, the Spanish Presidency withdrew this item from the agenda because it believed that it had not received sufficient support at that stage for the proposed compromise text. Negotiations will continue and the Presidency aim to discuss this issue at Ecofin in the near future.
Many believe that, instead of focussing on the managers of these alternative investment funds, it would have been preferable to regulate the funds themselves directly. I understand that the European Commission considered such an approach but, because many funds are domiciled in jurisdictions outside the EU, they decided that the best approach would be to regulate the managers of all non-UCITS. I understand that the main reason for this is that the Commission would have encountered problems in trying to find a legally sound definition of a "hedge fund". They were unable to devise a definition that could not be exploited or create loop-holes, therefore it decided that the best approach was to regulate the level of the managers rather than the fund, the so-called "all encompassing approach". I appreciated the Commission's difficulties in that regard and supported their approach.
In view of the fact that the proposal would apply to all non-UCITS, it was proposed that a threshold be established to allow Member States apply proportionate rules to all fund managers, bearing in mind that the prevention of systemic risk was one of the main reasons behind the proposal. The proposed thresholds would allow supervisors to apply a lower regulatory standard to the managers of smaller funds, such as forestry funds for example. This is a practical approach to the issue of thresholds, while meeting the wider issue of systemic risk prevention.
The treatment of fund managers established outside the EU, so-called "third country managers", was one of the most difficult issues that arose with this dossier and a number of issues arose in relation to this. On the one hand, there was a view that third country managers should be allowed to operate within the EU without restriction. On the other hand, there were concerns that such an approach would not be consistent with the objectives of the Directive and would leave EU fund managers at a competitive disadvantage in relation to non-EU managers. In view of the range of complex issues associated with this, the Spanish Presidency proposed a draft compromise text whereby these third country managers, would have to comply with certain reporting and disclosure requirements before they could operate in a particular Member State, but that they could not avail of the "passport" to operate throughout the EU, without establishing a physical presence in a Member State. The proposal requires that appropriate co-operation agreements should be in place between the relevant Member State and third country. On balance, I believe this to be the best option available in the circumstances.
The original Commission proposal contained a provision to impose a limit on the amount of leverage a fund manager could employ the so-called "leverage cap". While such a leverage cap found little support among Member States, in recognition of the importance of monitoring the leverage employed by managers, provisions have been maintained to ensure that supervisors will have all the relevant information available to them to allow them to properly assess exposures. I believe that this is an appropriate approach.
It is clear that one of the key aims of the proposal was to strengthen the disclosure, reporting and transparency requirements. The proposal contains a large number of measures which impose additional reporting obligations on fund managers. Many industry commentators have criticised the scale of these additional requirements and regard them as onerous and burdensome. However, I believe that an appropriate balance has been found.
The other points which were raised regarding naked short-selling, stealth acquisitions and empty voting are not included within the scope of the Commission's initial proposal, although the proposal does contain provisions regarding the acquisition of non-listed companies.
Effective and efficient financial market regulation and supervision is central to the safeguarding of consumer interests, ensuring that financial markets and financial institutions operate in an open and transparent manner consistent with their stability and the stability of the financial system as a whole. It is also important that the legislative and policy framework for financial services supports the competitiveness of the sector and maintains in an appropriate way a level playing field among market participants. It is an important priority in formulating legislative proposals at EU level to strike an appropriate balance between these objectives. The funds industry is a valuable sector of the economy which provides direct employment to approximately 12,500 people with many more indirectly employed. The proposal, like all other measures aimed at improving the internal market, has the potential to impact on the financial services industry in Ireland, but equally it offers opportunities for developing new business practices aligned with the new regulatory regime as it evolves in the period ahead.