BRUSSELS — European Union governments overrode British objections — and U.S. worries — by agreeing today to tighten rules for freewheeling hedge funds, a move some fear will block American funds from the region and cause the lucrative industry to flee London’s financial district.
The decision reflects Europe’s newfound resolve to strengthen its regulatory grip on financial markets and crack down on what officials call speculation, which some blame for worsening the financial crisis.
It is also a blow for Britain’s newly elected government led by Prime Minister David Cameron, though the final law may be softened in negotiations between EU governments and lawmakers — who must jointly agree financial rules.
Some 80 percent of European funds are based in Britain — which failed to muster support for its call to give a foreign fund the automatic right to market itself anywhere in the 27-nation bloc once it is cleared to do business in one country.
France and others fear that Britain’s softer regulatory touch could allow risky and unsupervised foreign funds free access to the rest of Europe.
Britain’s new treasury chief, George Osborne, refused to accept today’s decision as a total defeat for the country’s new government, saying there was “still much to play for” in negotiations with the European Parliament.
He said he was worried that the new rules were “not entirely consistent with the single market” which guarantees open business conditions across Europe.
Hedge funds “should have access to the whole European market,” he told reporters.
Hedge funds are lightly regulated investment vehicles that cater to rich and institutional investors. They promise high investment returns and tend to use complex trading strategies that can involve large amounts of leverage, or borrowed money.
The new EU rules would regulate managers of hedge funds as well as private equity, real estate and commodity funds for the first time, requiring them to register with regulators and hand over information on their trades. They will also have to set aside capital to counter risks — as banks do.
These funds manage some euro250 billion ($311 billion) in assets in Europe.
Crucially, the proposed rules don’t give funds the automatic right to sell across the 27-nation bloc. U.S. Treasury chief Tim Geithner has complained that this was a “protectionist” move that could shut American funds out of the EU.
To finalize the law by July, governments must now seek a compromise between their version and one voted by the European Parliament. The result is likely to give more rights to foreign funds to do business across Europe.
EU governments said in a statement that they wanted better supervision to match a pledge made in the wake of the financial crisis “to regulate all players in the market that might pose a risk to financial stability.”
They said “alternative investment funds” were not harmful but their trades can “spread or amplify risks through the financial system.”
The fund industry warns that “flawed” rules could hurt the wider European economy by limiting venture capital for small businesses and curtailing investment in real estate and infrastructure such as schools and hospitals.
The Alternative Investment Management Association said curbs on how much Europeans could invest in funds outside the EU could damage pensions and insurance funds, costing them up to euro25 billion in lost revenue every year.
“Closing Europe’s borders would send all the wrong signals out to the rest of the world about Europe’s place both as a global center for financial services and as a destination for international investment,” the group said. “It would significantly affect international trade and capital flows.”
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