FSA confirms Directive's high costs

A recent report by the UK Financial Services Authority says that proposed EU regulations could impose substantial one-off compliance costs of up to €3.2 billion on alternative investment fund managers, while driving capital to non-EU competitors.

The report, compiled by Charles River Associates, said that fund managers will also be hit with €311 million in ongoing compliance costs, with private equity funds responsible for the biggest portion of that tab – €248 million. In addition, private equity funds within the scope of the European Commission’s “Directive on Alternative Investment Fund Managers” will face costs of up to €52 million related to disclosing information about underlying portfolio companies.

Such disclosures have been opposed by industry groups which say they will put EU private equity funds at a competitive disadvantage by having to reveal confidential information and strategies about portfolio companies. The need for independent valuators and depositories, new capital requirements and cost of re-domiciling funds from outside the EU were also factored into the report’s overall cost estimates.

The report also said that European investors will lose the ability to choose from the best funds, as the directive would ban them from investing in funds not domiciled in the EU. If funds choose not to fulfill the requirements and costs to re-domicile in the EU, the number of private equity funds that European investors will have access to could shrink by 35 percent.

“It is clear that the costs to investors – largely pension funds and university foundations – are staggering,” Simon Walker, chief executive of the British Private Equity and Venture Capital Association, said in a statement. “The notion of a one-off cost to private equity and venture capital combined of €800 million and ongoing costs of €280 million is simply shocking. It will make Europe a relatively unattractive location in which to conduct private equity or venture capital business. It will drive investments elsewhere and as the report acknowledges would have a highly detrimental effect on employment prospects.”

While Walker added that he believes regulation of some form is inevitable, he also urged the Council of Ministers and the European Parliament’s economic and monetary affairs committee against any action that would damage the industry and the European economy.

The UK government announced in August that it would launch its own inquiry into the directive, as the country is home to about 60 percent of Europe’s private equity firms. The FSA report also comes as the country’s treasury minister recently traveled to Spain – which will take over the EU presidency at the start of next year – to lobby for reform of the directive ahead of a planned debate in the European Parliament.

A similar study released by London-based research organisation Open Europe in September estimated that that additional compliance costs could total as much as €1.9 billion in the first year of implementation and €985 million annually after that for hedge fund and private equity managers. The research firm recommended that restrictions such as limits on leverage should be scrapped, the directive’s organisational requirements should be brought in line with existing EU law such as equivalent requirements in the UCITS directive, and protectionist elements like requirements for various reciprocal agreements with non-EU countries should be dropped.