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He explained the Commission interest to regulate the AIF industry even thought the financial crisis was not born from the asset management sector. The answer is that, with upwards of $60 trillion in assets, under management in conventional and alternative funds world-wide and around £4 trillion in the UK alone. The importance of this sector to investors, the financial markets and the economy as a whole cannot be under-estimated. G20 leaders have all agreed that regulation must be comprehensive: No significant financial market actor can be allowed to slip through the regulatory net.
He summarised the Commission ongoing work on asset management by focusing on three core objectives:
1. Financial stability: The financial crisis was not caused by hedge funds, however, the collective activities of fund managers does impact on the functioning of financial markets. This impact is beneficial in that hedge fund trading contributes to deepen market liquidity and facilitates price discovery. The crisis, however, has also illustrated that the build-up of leverage by hedge funds and their subsequent rapid unwinding of leveraged positions made an already dramatically unstable situation much more dramatic and dangerous. Resultingly regulators were not well-equipped to understand and mitigate the pro-cyclical nature of these risks. The future AIFM Directive will make a significant contribution in this regard.
2. Investor protection: The asymmetries of information and expertise that exist in retail investment markets are well known. Investors are often ill-equipped to understand the products on offer. Those selling products to them can be beset by conflicts of interest. These are not new concerns. However, the experience of the financial crisis has underlined once again how important they are. Products have not performed as investors have expected, guarantees have failed, and investors have found themselves exposed to risks of which they were not fully aware. The proposed AIFM Directive seeks to establish targeted investor protections for the alternative investment industry. This is not UCITS-style product regulation, which would be neither feasible nor appropriate for the professional and highly diverse alternative investment sector. Instead, standards and supervision will focus on transparency and on functions that are core to the investor experience. These include: risk management, liquidity management, valuation and asset safekeeping.
3. The completion of the single market: The Commission proposals on AIFMD will open the single market to managers and funds established outside the European Union, provided that they are subject to similar standards of transparency and supervision. This will further foster competition and choice for European investors. McCreevy is aware that the proposed AIFM Directive has been controversial in this and in other respects. However, he considered that the objectives that he had described before are worth striving for and are firmly in line with the mandate established by the G20. He also recognised that there is room for clarification and improvement. For example, the 'all-encompassing' scope of the proposal does not mean that 'one size fits all'. The Commission will look closely at how requirements can be differentiated to reflect the objective differences between business models.
He concluded by saying that “It is far too late to question the whole AIFM Directive. It will be enacted. Don’t forget the G20 decided there was a need to regulate and supervise hedge funds. The US has proposals in this sense too. So rather than relishing in doomsday scenarios and damming the interference of Brussels, I would urge the industry to engage with constructive input as to how we can make the Directive work. I have said on many occasions that the Commission is open during the co-decision process to take on suggested improvements to the directive that the Council and the European Parliament support, both Institutions are now working on the finer details.”