AIFM Directive would jeopardise billions in tax revenues and development funding
EU leaders make political mistake by undermining new British government on vital national interest
Ahead of the votes Open Europe warns that forcing through the Directive could cause serious damage to the UK's economy and jeopardise billions in funding to developing countries. It would also be a blow to the fragile British coalition government.
Despite the UK being home to the bulk of the industry in the EU, the decision is being taken by the bloc's finance ministers only one week after the new UK government has taken office, leaving it virtually no room to prepare for the negotiations. This is a clear break with conventional negotiation practice in the EU, where national interests are usually taken into account. Under majority voting rules, the UK government could be outvoted.
According to Open Europe estimates, the hedge fund and private equity industries contribute £5.3 billion in tax revenues to the UK economy every year - enough to pay for the salaries of over 200,000 nurses. These revenues are under threat if the Directive is passed in a flawed form.
The Directive's protectionist rules could also jeopardise investment in emerging and developing markets worth billions of pounds, cutting off fund mangers in these markets from vital European investors. The Association of European Development Finance Institutions (EDFI) has said that its members alone have committed to invest around £4.3 billion in emerging markets through private equity firms, with the aim of creating jobs and reducing poverty.
In addition, if not substantially amended, the Directive could cost European investment firms around €8.2 billion by 2020 - a cost which in large part will be passed on to investors.
Open Europe's Director Mats Persson said:
"It would be a serious mistake for EU leaders and MEPs to impose a highprofile defeat on a new British government only one week after it assumes office, by forcing through this Directive by a majority vote. Europe is already a very complicated issue for the UK's coalition government, and landing such an early blow on a matter of UK national interest certainly won't help this government's relationship with the EU."
"Restraining this sector will undercut Europe and the UK's ability to cope with their challenges of low growth, large public deficits and an ageing population. In addition, several billions in investment to fight poverty in developing countries are under threat if the Directive is passed in its current form. There has rarely been a law with so many losers and so few winners."
Research by Open Europe shows that EU Finance Ministers and MEPs could drastically reduce the negative impact of the Directive by:
- Resisting overly strict restrictions on funds and managers based outside the EU. Proportionate rules for marketing offshore funds in the EU would boost returns and choice for investors (including pension funds), while providing more capital for European firms. EU leaders should also allow fund managers to get a 'passport', allowing them to market their funds throughout the EU. Proportionate offshore rules would also allow firms in emerging markets to raise funds from EUbased investors.
- Clarifying that the EU Commission will not have the mandate to instruct national regulators to impose preset caps on the amount of money fund managers are allowed to borrow. As the Swedish EU Presidency warned, such caps will in fact worsen the risk of market instability.
- Introducing more flexible rules on which depository institutions fund managers are allowed to use. Rules on custodians which take into account the global nature of the industry would avoid a concentration of risk and unnecessarily large costs for the industry and investors.
- Exempting smaller firms from the Directive. Excluding these smaller players would encourage growth, capital and job creation in Europe - and is consistent with the EU's 'Better Regulation' principles.
- Exempting listed, closedend funds from the Directive, for example Investment Trusts. These companies differ fundamentally from other types of funds covered by the proposed rules and are already subject to a sufficient degree of regulation in the UK and EU.