Calls for changes to EU funds directive

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Speaking at the Asset Management Sector conference last week Sally Dewar, managing director of the FSA's risk division, said: "Overall, we feel there is much in the directive we can support. But it could be more workable for the range of funds it covers, and a risk-based and global approach is needed."

The first area of improvement in the directive, she said, would be to identify weaknesses in present regulatory arrangements and address them in a "proportionate way".

The second would be to differentiate between types of alternative investment fund management.

"Given the diversity of the alternative investment fund sectors, a single, standardised approach will not work once we start getting into any degree of detail," she said.

"The issues around a hedge fund prime brokerage business model, for example, are quite different from those around the management of a private equity or real estate fund."

She pointed out that leverage and liquidity issues and capital risks were different for closed-end funds. She also said the additional investor protection afforded by requiring independent custody was "quite different" for private equity or real estate fund assets than for funds that invested in financial securities or derivatives.

The third area of improvement, she said, would be the adoption of a risk-based approach. According to the FSA, the scope and thresholds of the directive need to "strike the correct balance" between imposing additional costs and enabling regulators to identify and mitigate systemic risks.

"These concerns would, of course, be significantly increased if the thresholds were to be removed altogether, as some have suggested," Ms Dewar added. "In the absence of significant changes to ensure the provisions of the directive apply in a proportionate manner, we strongly oppose such suggestions."

The fourth, she said, would be a global approach that recognised the international nature of the sector without imposing "unjustifiable geographical restrictions" on companies' business models.

"Europe should be neither a fortress nor a prison," Ms Dewar said. "Restrictions on delegation to non-European entities in terms of management services, custody and depositary activity are misplaced, as are blanket prohibitions on the marketing of non-European funds to professional investors."

She warned investors they would have to be "realistic" and accept that the UK's "precise vision" of what the directive should look like would not be universally shared.

"We will do our best to explain our vision and why we see it as proportionate and effective, and we would urge all stakeholders to explain their views to all those involved in the legislative process if you wish to secure particular outcomes."