09 May 2007

FT: Brussels resists clampdown on hedge funds

Hedge funds operating in the European Union will not be subjected to tighter regulations for now, but political pressure is building for the booming sector to accept greater transparency and a voluntary code of conduct.

Over the past year, the risks posed by the rapid growth of hedge funds – estimated to hold assets of $1,600bn (£800bn) – have triggered ever-louder calls for greater scrutiny and tighter rules. Many EU countries share concerns over the risk that hedge funds pose to financial stability but are divided over how best to tackle the sector.

In their first official statement on the issue, finance ministers from the 27 EU states said the present system of supervision was adequate and that hedge funds had, on the whole, contributed to the efficiency of the financial system.

The statement called on investors and regulators to show 'vigilance' towards the sector but was more notable for the absence of tough language or concrete demands for regulatory changes. This finely balanced approach reflects the division between countries such as Britain, where most European hedge funds are based and which opposes tighter rules, and Germany and France, where the industry has come under fierce attack from policymakers and trade unions.

Peer Steinbrück, the German finance minister, said his country, which holds the EU presidency and chairs the G8, would continue to press the issue. 'We are hoping very much we can sign a code of conduct by the end of this year,' he said, adding the issue would be raised at a G8 finance ministers' meeting in Potsdam this month.

Mr Steinbrück said after yesterday's Ecofin meeting, which comprises the EU's finance ministers, that there was widespread backing for a voluntary code of conduct for hedge funds, increasing transparency in the sector. 'We agree the regulatory approach is wrong and we are going for an indirect approach, which everyone says is the right way,' he said.

Charlie McCreevy, the EU internal market commissioner, would be happy to see the industry set up its own code of conduct but stressed he saw no role for Brussels in overseeing it.

Free market liberals, including Ed Balls, UK treasury minister for the City of London, and Mr McCreevy, believe they have headed off Germany's earlier plan for tougher scrutiny or regulation. However, EU officials concede that Mr Steinbrück will try to toughen up the supervisory framework at the G8 finance ministers' meeting and perhaps to the G8 heads of government summit at Heiligendamm in June. Critics of the initiative believe his campaign is partly for German domestic consumption, and that the US is likely to be equally resistant to any tough moves against hedge funds at the G8. 'It is hard to see how he will get any further at a forum which includes the Americans if he can't get it through at an EU level,' said one official.

© Financial Times