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As clear from the recent FT article (City fears EU regulatory onslaught, June 10), British hedge funds and private equity groups fear that recent European proposals on regulation of financial supervision will damage the competitiveness of the City.



But, in fact, the European Commission’s plan for private equity and hedge fund regulation does not go far enough to address the regulatory concerns over these powerful financial players and that the narrow scope of the directive will make it too easy for firms to avoid its application.



The Commission’s directive makes no advances in mitigating systemic risk, contains little that would help ensure consumer protection or maintain market integrity and holds nothing that would help minimise social externalities. It focuses almost entirely on investor protection but is so riddled with loopholes that it fails to make much headway even on that issue. At a time when tackling tax havens has been on the top of the international agenda, the directive fails to even mention taxation or reigning in offshore funds.

By making exceptions on size and applying it only to managers located in the EU, the directive provides major loopholes that will undoubtedly be exploited at the expense of consumer and investor protection. The directive only pays lip service to the principle of transparency.



It is wrong to say that financial markets are over-regulated; rather they are mis-regulated. The current regulatory system favours big banks over small banks, international banks over national banks and complicated products over simple products. It supports an oligopolistic rating structure that is damaging to financial stability and to competition and it encourages excessive risk taking, with the cost in case of failure being much lower than the corresponding risk.



Financial markets are inherently unstable and risk taking is an essential element. Regulation cannot – and should not – eliminate risk, but risk must be backed by higher capital requirements. It is clear how vulnerable society is to a break-down of the financial system, and there must be a plan in place to reduce the magnitude of future crises. The proposed integration of European financial supervision is essential to this and no country should be allowed to opt out of such a framework.



There is a strong need for profound reform of the current regulation on hedge funds and private equity and financial markets in general. The exercise is not about over-regulating markets and paralysing business by imposing administrative burdens. Regulation must be simple and clever and underpin a sustainable, long-term oriented and diverse finance industry. Cutting administrative burdens should not be used as an excuse to deregulate markets.