Europe's Finance Industry Regulations London's Lobbyists Prepare to Return Fire
Hedge fund regulations, a tax on financial markets, a ban on naked short selling. The EU's bid to rein in the speculators has the financial industry up in arms. Lobbyists are already preparing to systematically attack the new proposals.
A day after the European Union outlined proposals to increase regulation of the financial markets, London's financial professionals are preparing a counter-attack. Some greeted the proposed regulations with contempt, others conjured up horror scenarios to campaign against the planned regulations.
"We are very disappointed by the proposals from Brussels," says Andrew Shrimpton, a partner at the leading London hedge fund consultancy Kinetic Partners. If the rules were really to be implemented then the sector would shrink massively, he says.
He was reacting to the announcement of several pieces of bad news for the financial industry this week. On Tuesday the German banking regulators BaFin announced that it was banning naked short-selling on government bonds issued by EU countries and naked credit default swaps. Chancellor Angela Merkel's ruling center-right government in Berlin said that it wanted to see a Europe-wide tax on financial markets introduced. And EU finance ministers, along with the Economic and Financial Committee of the European Parliament, voted for tougher regulation of hedge funds and private equity companies, despite objections from the British government.
The planned limits on hedge funds have provoked particular criticism in London, Europe's financial mecca. The industry there is particularly aggrieved as 80 percent of European hedge funds are based in Great Britain -- and many working in the City point out that Germany would not tolerate Brussels attempting to curb, for example, its automotive industry.
'Switzerland Is Waiting with Open Arms'
The ban on naked short selling has also been a cause for complaint. It was a knee-jerk reaction by the German government, says Manoj Ladwa of the Internet trading platform ETX Capital. "Angela Merkel's comments added fuel to the fire. They exacerbate the fears about the euro," he said.
The financial industry is threatening Europe with possible consequences. Half of all hedge funds in Britain are branches of US companies, says Shrimpton. "It really is an Anglo-American industry." The US managers will now be thinking about whether it is worth maintaining a London office.
Ladwa also claims that financial institutions in Frankfurt and London could be in danger if the EU regulates unilaterally. "Switzerland is waiting with open arms," he says. The danger is real, he insists, adding that he knows people who have already moved their company offices.
The threat is an old one. It belongs to the standard repertoire of traders and fund managers and is reiterated whenever higher taxes or stricter regulation are under discussion. The last time London's finance professionals threatened a mass exodus was in December 2009 after Gordon Brown's government decided to impose a one-time 50-percent tax on bankers' bonuses.
However, the great exodus didn't actually happen. Most of them stayed put.
That could be because there are other factors that are much more important when choosing the location for a company's headquarters. A survey by the commercial real estate agency Cushman and Wakefield showed that fund managers named proximity to international airports, local business infrastructure and access to well-educated staff as their top priorities. The financial metropolis of London beats Geneva hands down on all these points.
Trading of Blows
Yes, a few companies are establishing offices in Switzerland and other countries, but many are following the example of Blue Crest Capital: It recently opened a branch in Geneva with a staff of 50 but it still kept its headquarters in London along with its 300 employees.
It is unlikely there will be many companies moving this time either. What is likely is an even nastier trading of blows between the financial industry lobbyists and the EU. The two drafts by the European Parliament and the EU finance ministers on the regulations of the hedge funds are far from the final word. In the coming weeks, the two drafts must become one, and the British, via representatives in Brussels and finance industry lobbyists -- are going to try to overturn as many of the measures as they can.
In particular the European Parliament's draft, which is much tougher than that of the finance ministers, has come in for sharp criticism. Sources in the City say that it is clear that professionals were at work when it came to the finance ministers' proposals, whereas the European Parliament did not understand the material.
Both drafts contain suggestions that are "impractical and unworkable" says Andrew Baker, who heads the Alternative Investment Management Association (AIMA). That includes the idea of an EU fund passport. The proposal would impose strict EU rules on non-European fund managers but would leave the enforcement of the new rules to foreign regulators such as the US Securities and Exchange Commission (SEC). The lobby group is concerned that since these bodies will presumably refuse to work according EU law, US funds could be excluded from the European market.
The industry is also adverse to the limits on the investments that the European fund managers can execute in the future. That could squeeze profits and in the end European investors would bear the costs, AIMA warns.
Doubts About the Entire Approach
The lobby group is hoping that negotiations between the European Commission, the Council of Ministers and the European Parliament on the final text of the directive could see these measures scrapped. AIMA is relying on the member states to prevail over the parliament. The European Parliament draft is "disproportionate to the point of being punitive," and amounts to singling out hedge funds and private equity companies for special treatment within the financial sector. The finance ministers' proposals are "much more practical and realistic" AIMA argues.
In fact it is not just the lobbyists who have slammed the new financial regulations. Independent experts are also highly critical. "A step toward regulating hedge funds makes sense," says Hans-Peter Burghof, professor of banking and finance at the University of Hohenheim. The decisive flaw in the new rules, however, is that the hedge fund managers have to reveal their investment strategies. "That is like forcing Coca Cola to reveal its secret recipe." Innovation would be choked off, he argues.
Thomas Heidorn of the Frankfurt School of Finance and Management has doubts about the entire approach. In fact, no one really knows how much naked short selling with credit default swaps on European government bonds there has actually been, he says. According to the available data, there has not been a lot, he says.
And the EU Commissioner for the Internal Market and Financial Services, Michel Barnier, thinks the regulations could even be potentially dangerous. "The issue is extremely complex," he told financial daily Handelsblatt. Political mistakes could have "extremely serious consequences."