09 December 2009

Interview with MEP Gauzès, rapporteur on hedge fund directive – not intended to demolish the financial industry

Gauzès said that hedge funds are a particular category of funds that invest in operations, but which can be removed quickly, seeking profit. They are not necessarily pointless for the economy, but are speculative and, therefore, risky.

Centre-right French MEP Jean-Paul Gauzès faces the unenviable task of merging several divergent viewpoints on a contentious issue - financial regulation.

The extent to which hedge funds should be regulated is one of the key issues facing MEPs on the Economic and Monetary Affairs Committee. In the spring they must square the circle and find consensus around a directive on how such ‘alternative investment funds’ should be regulated. Many on the left want more regulation whilst the right fear such steps will stifle the industry or force it out of the EU. Parliament's rapporteur for the issue is Jean-Paul Gauzès, from the centre-right EPP group.

Gauzès’ report tabled at Parliament's Economic and Monetary Affairs Committee last week is based on a Commission proposal for a directive to ensure that fund managers in the EU are subject to supervision. However, some countries are concerned about too much regulation. Among the main issues are the appetite for risk and concern over a lack of transparency and regulations.

 [Europarl] Many Europeans have only a vague understanding of the subject and, in particular, the aim of the directive on alternative funds like hedge funds.   

[JPG] The directive deals with the managers of ‘alternative’ funds, like hedge funds, property funds, private equity - these are financial instruments used to finance the economy and at the same time allow those who invest in these instruments to make a profit.

These funds are normally open only to institutional investors; in other words, people like you and me don't have access to these products. Nevertheless, we want to regulate them because we have learnt the lesson from the crisis that in the financial area everything must be regulated and supervised.

The idea of this directive is to establish a licensing system for managers of these funds and establish supervisory review by national and European regulators to ensure that risks don't arise which would create problems for the entire financial system.

Gauzès report proposes

• Reduce risks
• Increase transparency
• Ensure authorisation and registration for all alternative investment funds managers
• Increase supervisory and regulatory control
• Set the investment threshold according to the proportionality principle, to take account of the size of funds
• Grant access to third-country funds to the European market - they will be granted a 'European passport'

[Europarl] What are the implications of hedge funds on the European economy?

[JPG] The directive doesn’t only regulates hedge funds. All these funds are a way to finance the economy and provide funding to companies which need and deserve it. Among the range of funds there are some which are more speculative, which produce ‘interesting’ returns, as against funds which are invested in the economy in a more lasting way.

But when we talk about hedge funds, we speak of a particular category of fund that invests in operations that can be removed quickly, seeking profit. They are not necessarily pointless for the economy, but they are above all speculative and therefore risky.

[Europarl] Can hedge funds be regulated without affecting the profitability of European industry?

[JPG] First of all, hedge funds didn't cause the crisis, but the nature of the investments and the mode of operation can involve systemic risk. That's why we want to regulate them. It is possible that some will no longer be able to engage in activities that bring a lot of money but are too risky for the whole economy. Otherwise, regulation is not intended to demolish the financial industry or even encourage the industry to relocate away from Europe.

Today, most people who run hedge funds embrace the principle of regulation but they try to ensure that regulation is as light as possible. But we must try to be pragmatic.

The report will be discussed in committee in February and is scheduled to go to plenary in July.

Full interview

 

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