Cicero Policy Briefer

Issue 27, August 2008

Regulating Private Equity and Hedge Funds in the EU

By Michael Cooper

It has been a trademark of Charlie McCreevy’s tenure at the European Commission to champion a deregulatory agenda which aims to improve the competitiveness and efficiency of the single market in financial services. Time and again he has been quoted as saying that over-regulating the industry will be detrimental to the EU’s position as a key global financial centre, and has resisted calls from left-leaning parliamentarians and even from within the Commission calling for greater supervision and regulation.

We are, however, witnessing an interesting period in Brussels and predictions of a quiet, uneventful year ahead of parliamentary elections and a new Commission are unlikely to come true. The continuing credit crunch has focused minds on making a name for the European Parliament through championing strengthened financial regulation in the name of consumer protection. We have seen credit rating agencies taking the brunt of attacks for their lack of accountability, conflicts of interests and overly powerful roles in the packaging of risk, but the regulatory bug is spreading. As we heard from Poul Nyrup Rasmussen MEP earlier this year, there are major concerns within the Parliament that the private equity and hedge fund industries are other players in global financial market benefiting from a debt-laden financial system. Both he, and German Christian Democrat Klaus Heiner Lehne MEP, have drafted reports in different parliamentary committees which look to shed light on how these actors raise capital and pay back loans, who holds interests in them and what their intentions are. These reports are currently causing headaches for the Commission and McCreevy.

With the reports set to be finalised in the autumn, DG Internal Market accepts that it needs to be seen as taking the issue seriously and respond quickly. As one MEP put it recently, calls for these industries to remain ‘private’ are no longer credible as the actions of their business model have exacerbated the volatility of the entire financial market. This plays into a growing belief in Brussels that a root and branch review and restructuring of global financial systems is necessary. Many MEPs are confident that this time they have made a good enough case to the Commission that they cannot be brushed off in favour of industry-led, non-regulatory measures.

Buoyed by the headlines of huge financial institutions having to be rescued by the taxpayer (take your pick from Fannie Mae, Freddie Mac, Northern Rock etc.), the already-strong socialist, interventionist voices in the EU are finding added weight behind their calls for greater regulation. Industry will therefore need to be singing from the same hymn sheet more than ever in making its case for light-touch regulation. But while these arguments will need to be persuasive in front of the Commission, the job to do in Parliament is very much an educational one—taking the politics out of a debate this heated is difficult, but parliamentarians need a better understanding of exactly how these industries function and the extent to which they are already regulated at a national level.

What is for sure is that even if the Commission resists calls for regulation, this issue will not go away. A new Internal Market Commissioner, who may well be of a more interventionist bent than McCreevy, will have this issue high up their to-do list.

Michael Cooper can be contacted on +44 (0)20 7665 9530 or click here to email.