Osborne loses fight against hedgie rules

EUROPEAN Union governments yesterday dismissed British objections to a draconian crackdown on hedge funds and private equity houses, and threw their weight behind tough new regulations.

The move comes as a major blow for George Osborne, who opposes the plans but had already resigned himself to defeat in the face of overwhelming support from other EU finance ministers.

The chancellor insisted that yesterday’s qualified majority vote in favour of the Alternative Investment Fund Manager (AIFM) directive was not a total defeat, insisting there was “still much to play for” when the law is debated by member states, MEPs and eurocrats.

He said that the new rules were “not entirely consistent with the single market” which stipulates that there should be open business conditions throughout the European Union, adding that hedge funds “should have access to the whole of Europe”.

Chief among the hedge fund industry’s concerns is the “third country rule” which would restrict European Union investors from investing in non-EU funds. The proposal that was supported by finance ministers yesterday would allow individual member states to decide whether a non-EU fund can be marketed within their borders, instead of allowing funds to market their products across the EU.

Such a rule could hurt hedge funds in London, as lots of managers are domiciled in offshore jurisdictions like Jersey for tax purposes. It would also make it harder for US-based hedge funds to attract European investors. Critics of the “third country” rules say they will restrict investor choice, push down pension fund returns and make Europe less competitive.

Meanwhile, Osborne yesterday demanded a total freeze on the European Union’s budget for 2011, in a sign of the tough negotiating stance he is expected to adopt when it comes to Europe. He said it was unacceptable for Brussels to increase its budget by six per cent while member states were being forced to cut public spending.

“I put it that there should be a cash freeze for 2011 in the budget, given what many member states are having to do,” Osborne said on his first day representing the new coalition government in Europe.