EU hedge fund rules keep Britain and France at odds

Hedge fund and private equity regulation still dividing European finance ministers after a year of arguments
hedge funds
French president Nicolas Sarkozy and German chancellor Angela Merkel threw down the gauntlet to Britain before the G20 summit in London in April last year, demanding stricter banking regulations. Photograph: Sipa Press/Rex Features

Britain and France are expected to resume their fierce battle over hedge fund regulation tomorrow when European finance ministers meet in Luxembourg.

After more than a year of wrangling, the parties have failed to agree on plans to impose greater controls on the hedge fund and private equity industries, which many blame for helping create the conditions for the financial crisis.

It is understood that France wants non-European hedge funds to apply for permission to operate in each separate country, whereas other nations, including Britain, favour the creation of a single "passport" to work throughout Europe.

Part of the Anglo-French disagreement is over a clause under which some countries could opt out of the directive. London is home to about 450 hedge funds, or about 80% of the European total, managing a combined £250bn, and the UK government has fought hard in Brussels to oppose the directive and support the industry. British-based hedge funds employ 10,000 professionals directly and 30,000 others indirectly, including service providers such as lawyers and accountants.

The finance ministers' meeting may bring some consensus, after talks between the countries' EU representatives in Brussels fell through last week and a press conference, expected to announce an agreement, was cancelled.

Division between European Union countries became apparent last summer, when Germany imposed limits on short-selling, a technique often used by hedge funds, without the support or the cooperation of other European countries.

Hedge funds are expanding as they benefit from an investors' rush into alternative assets, given the current volatile credit and equity markets. Brevan Howard, one of Europe's largest and most respected hedge funds, said last week that it planned to list a credit fund on the London Stock Exchange. Other hedge funds have threatened to move outside Europe because of the new rules.Hedge funds were blamed for betting on a drop in bank share prices, including those of Royal Bank of Scotland and HBOS, pushing the banks into the freefall that ultimately caused the government's multi-billion pound bail-outs.Recent research reports, including one by the Financial Services Authority, the stock market watchdog, have argued hedge funds didn't cause or had any major influence in provoking the near collapse of the financial system two years ago.