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Wild talk on alternatives

Such are the tensions over the proposed EU directive on regulating alternative investment funds, including hedge and private equity funds, that rational dialogue has nearly ceased. There is real threat that logical outcome could become unlikely, or delayed, as the two sides of the debate become entrenched.

Fierce political overtones have distorted the debate. Politicians, commentators and lobbyists are letting rip. Rather than comment objectively on a proposed piece of financial legislation, some appear like frustrated TV comedy writers. 

On the one side is the "twin pillars of doom" (concerning funds moving to Switzerland) and a "one-man crusade to restrain the private equity and hedge fund traders", both an attack on the proposal from a UK Sunday newspaper.

The scene continues with the same newspaper reporting a fund manager complaining of "ogres in France and Germany", and a chief executive describing the Commission's proposal as a "‘mish-mash' of rhetoric" based on "deep-seated envy in Europe over the success of the City [of London]".

A financial daily develops this theme as a "blatant attack" on London's financial services industry and as an "assault" from "continental countries that neither have a tradition of alternative investments nor a proper understanding of them". Another London commentator accuses Poul Nyrup Rasmussen, a Danish MEP and president of the Party of European Socialists, ridiculously, of trying to move London's financial services to Antwerp.

Speaking for the team in the red shirts, Rasmussen himself says the proposed regulation is "so light, it's flyweight". With him in the line of fire from the London lobbyists is Christine Lagarde, the French minister of finance, who protests that the present Brussels proposal is a "minimum". Other phrases include the inevitable new cliché, "locust financers", as well as "idiot so-and-sos", and "private equity and the cuckoo clock", from the European Socialists.

Caught in the middle is the Commission, trapped by its use of bureaucratic and technical language that challenges the non-specialist. It talks of "pro-cyclical impact of herding and risk concentrations in particular market segments and de-leveraging on the liquidity and stability of financial markets".

This comes in its explanatory memorandum on the subject of macro-prudential (systemic) risks. It refers to "weakness in internal risk management systems with respect to market risk, counterparty risks, funding liquidity risks and operational risks".

The danger of reversion to passion in communications is explained by a Commission official. He notes: "We are living in election time. Hence, it is not so much the content that counts, it is the strength of the expressions. As a result, the proposal has come in for exaggerated onslaught from all sides of the argument. The issue looks as if it is being dominated by, and will be determined by, emotions. No one is looking seriously at the Commission proposal."

He also recalls that the "flamboyant" and "misguided" language follows a pattern set when the Services Directive was being aired earlier in the decade. The lack of logical reporting resulted in distorted interpretations, such as the "Polish plumber" syndrome, and worse. This contributed to the disastrous French vote in 2005 against the proposed European Constitution. That led to the governance of the entire EU being hopelessly jammed, hindering various imperatives, including dealing with the financial crisis. 

What should be done? Europe head of the CFA Institute's centre for market integrity, Charles Cronin, observes: "You can spend thousands of lobbying money without hope of result once you lock on to a polarised position. The industry does not appreciate that Rassmussen has an opinion and sizable political support. Like him or not, he needs to be treated with respect." Cronin believes "more would be achieved through quiet discussion".

Cronin also makes a point on Article 9, ‘General Principles', in the proposed text of the directive. Provisions require that the alternative investment fund management (AIFM) shall "act honestly, with due skill, care and diligence and fairly in conducting its activities". It continues that the AIFM shall "act in the best interests of the AIF it manages, the investors of those AIF and the integrity of the market" and "ensure that all AIF investors are treated fairly". Cronin describes this as a potential victory for investor protection.
 

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