The EU wants to subject the transfer of management responsibility to new rules.
(Photo: AP)
Brussels The practice is popular, especially with hedge funds from Great Britain: Investment companies that want to serve the European market have a branch in an EU country that is little more than a letterbox company. The legal requirements are thus fulfilled, but the investment decisions are made in London.
This is convenient for hedge fund managers. Not only do they save expensive offices in Luxembourg or Dublin, they also evade the control of European supervisory authorities. Critics see this as a danger, especially for consumer protection.
The EU no longer wants to stand idly by the “delegation practices” and subject the transfer of management responsibility to new rules. The requirements are part of the legislative package on the Capital Markets Union that the EU Commission intends to present next week. The draft is available to the Handelsblatt.
In Great Britain, the reform is likely to cause displeasure. The financial center of London is of outstanding importance for the British – and is already suffering from Brexit. The EU initiative is interpreted in the British financial scene as an attempt by France to give its own fund industry a competitive edge.
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The new regulation requires that financial service providers have to employ at least two full-time employees who live in the EU. In addition, the role of the European securities regulator ESMA is to be strengthened.
“Foreign hedge funds are not allowed to circumvent European rules”
In future, investment companies should inform the Paris authorities about the extent to which they are transferring risk management and portfolio management to a third country. At the same time, ESMA is obliged to inform the EU Parliament, member states and the Commission in “regular reports” about the delegation practices of the fund companies.
The regulation on managers of alternative investment funds, known among experts as the AIFM Directive, is to be revised accordingly. It is a matter of ensuring “that missing information is collected at EU level in order to record delegation practice,” writes the EU in its explanatory memorandum.
ESMA had already proposed tightening the rules last year – precisely because the financial center of London has no longer been under its control since Britain left the country. To ban the delegation of fund management altogether would, however, go too far. European funds invest worldwide and can benefit when some of the investment decisions are made by investment experts in Asia or Latin America.
In the European Parliament, the initial reactions to the Commission’s initiative have been positive. The planned tightening “points in the right direction,” says CSU financial expert Markus Ferber. “Foreign hedge funds are not allowed to circumvent European rules by setting up a letterbox company in the EU and then outsourcing key management functions to third countries.”
In the next step, the Commission’s draft must be brought into line with the ideas of Parliament and the member states. Only then can the reform come into force.
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