Financial lobby rules

Pathetic finale to a historical battle on financial regulation

On Thursday the 11th of November, the European Parliament cast the final vote on a new set of EU rules for hedge funds and private equity funds. The adoption of the Alternative Investment Fund Managers Directive (AIFMD) marks the end of a battle over investment fund regulation that can be traced back seven years to when Parliament first passed a resolution on the issue. In fact, the new regulation is very much the fruit of a sustained effort from the Parliament, not least the Social-democratic group. They were joined by several powerful governments along the way, particularly  France but Germany also gave support now and then.

As Corporate Europe Observatory’s report, "Investment funds: the power of filthy lucre", shows, the full story behind this directive reveals the power and the politics of investment fund regulation.

There was and still is ample evidence of the need for far encompassing rules on transparency and effective of regulation. The current headlines are about the economic crisis in the Republic of Ireland, and the people who really seem to understand the depth of the problem are not ministries or central bankers, but hedge funds. And if Greece has taught us anything on this subject, speculative attacks on Irish bonds by hedge funds could make everything worse very soon.

Nevertheless the rules adopted are weak at best. Under the new regulation it’s an easy thing to work around any inconvenience caused by the new rules. For a start, big hedge funds could, to avoid new regulation altogether, split their fortune and loans in to portions of 100 million euros or less. A base in a UK tax haven like Jersey or in the Cayman Islands would help them escape too. In fact, the easy access to EU member states that the AIFMD prescribes, could weaken member states opportunities to block certain behaviour and certain aggressive funds.

With an expression from the Social-democrat’s main man on investment fund regulation, now chairman of the PES, Poul Nyrup Rasmussen; the new rules are as full of holes as any “Swiss cheese”. An expression he used when commenting on shortcomings of the Commissions original proposal from April 2009. Back then, he and his party colleagues phrased five "minimum requirements" that had to be “concretely addressed”. In the final version, none of them are. Despite this, the PES expressed no serious concerns when explaining why all its MEPs voted the directive through together with the Conservatives and Liberals. Though admitting the AIFMD is "not perfect", Robert Goebbels (MEP) stated it will "shine a light into the dark hole of world finance". True. Like a torch in a dark forest. But not a light that will prevent the funds from adding to financial instability in the future, just as they have in the past.

The particular shortcomings of the new rules aside, there's another equally shocking dimension to this. For the first time ever, the financial lobby had to fight their ground both in Parliament, the Council and in public. And judging from the end result and their reaction, they won.

For those who feel that the financial crisis is a wake-up call to tighten regulation so as to avoid any repetition, that story is especially important. Though in the end, this is about power relations that stretch beyond the reach of rules on lobbying the EU institutions, much could be achieved by imposing strong rules on transparency, preventing privileged access to decision makers, and regulating the conduct of lobbyists in the Brussels bubble. In fact, battles to come will be easily won by vested interests in the near and distant future if such rules are not in place.