House of Lords slams AIFM

Lawmakers want the UK to fight the EU's proposed AIFM directive, arguing the rules would 'damage' the UK private equity industry.

The UK government has been urged by lawmakers to stand up to the European Commission’s attempts to overhaul regulation of the alternative funds industry, who warned it could “seriously damage” British fund managers and the wider economy.

A critical report from a House of Lords committee Tuesday warned the Commission’s directive on alternative investment fund managers (AIFM) was attempting to introduce a “one size fits all approach” to regulation that would penalise smaller managers and give US-based GPs a competitive advantage over their UK counterparts.

The UK Government should do everything it can to ensure that the final proposals that emerge in the AIFM directive do not damage the EU and UK economies to which the City of London makes an important contribution.  We urge [the UK government] not to agree to the directive in its current form.

Lord Woolmer of Leeds, House of Lords European Union Committee  

Calling on the British government to reject the directive in its current form, the committee said it had become “increasingly concerned” about the practical fallout of the European directive during its evidence sessions.

One major area of concern was the need to ensure any European legislation was matched by comparable regulation in the US. Hearing evidence from asset manager BlackRock and trade body The Association of British Insurers, the committee was told US plans to impose new disclosure requirements were “much less onerous and much more practical” than those in the AIFM.

The European directive would require increased disclosure of investment and also require any fund wanting to market to EU investors to prove it is subject to sufficiently rigorous regulation in its home country. This would be a blow to US-based asset managers, as the US currently does not qualify as a rigorous enough system, and US funds would not qualify for a fundraising “passport”.

The Wellcome Trust told the committee the directive in its current form could prompt managers to “give up raising capital in the EU rather than comply with onerous regulations”. However, it could also penalise EU and UK managers with added layers of regulation.

Although there were efforts to “harmonise” the two approaches, the committee said it was vital European – and particularly UK – private equity and real estate fund managers “not lose competitiveness at a global level”. With UK managers accounting for 60 percent of all European private equity activity and alternative managers employing more than 40,000 people in the UK, primarily in London, Lord Woolmer of Leeds said the British government had to do “everything it can” to ensure the directive didn’t damage national interests.

We agree with the European Commission that Alternative Investment Fund Managers should be subject to regulation at an EU level but it is vital the Commission get the details right and do not damage what is an important industry for the European economy.


Critics warned the committee the directive would cost the alternatives industry up to €1.9 billion to operate in its first year, with an annual cost of between €689 million and €985 million.

Saying the rules could be “very damaging” to the whole of Europe just as “economies are … emerging from a long and deep recession”, Woolmer added: “We urge [the UK government] not to agree to the directive in its current form.”

The committee did though call for the industry to be subject to European-wide regulation, but stressed it was “vital the [European] Commission get the details right and do not damage what is an important industry for the European economy”.

As part of its 79-page report, released today, the committee said any directive should offer a tailored rather than “one size fits all approach” recognising the differences between hedge fund, private equity and real estate fund managers. The committee also said retail-level protection for informed and experienced institutional investors was “not required”; urged for more detailed work on planned valuation mechanisms and called on the European Commission to consider imposing minimum capital requirements for managers through alternative regulations.

The House of Lords committee is not binding on the UK government and merely adds to the UK's consultation process regarding the directive. However, it adds weight to calls for the directive to be further amended before EU legislators vote on the issue. A
final AIFM directive was at one point expected to be passed by mid-2010, but a large number of amendments proposed by Members of the European Parliament looks set to push back any final vote.