MINISTER FOR Finance Brian Lenihan will attend a meeting of EU finance ministers in Brussels next week at which proposed legislation on the regulation of hedge funds and other alternative investment funds will be discussed.
Last April, the European Commission published a draft Directive on Alternative Investment Fund Managers amid concerns that the largely unregulated hedge fund industry had contributed to the global financial crisis.
If passed, the AIFM Directive would have significant implications for Ireland’s fund industry. Ireland has one of the largest hedge fund administration industries in the world. Approximately €689 billion of hedge fund assets and over 5,000 funds and subfunds are administered in Ireland. According to the Irish Funds Industry Association, this represents approximately 40 per cent of all hedge fund assets globally.
Ireland has been opposed to the proposed legislation regulating the industry. But despite international reports that Ireland, along with Malta, Austria, Sweden and the Czech Republic, is strongly against the proposals, it is understood that the Department of Finance has tempered its opposition to the new rules.
The issue of increased liability of depositories is still one of the department’s main concerns. Under the proposed legislation, any funds that are not UCITS (undertakings for collective investment in transferable securities, which are already regulated by the Financial Regulator) will require a higher “duty of care” from custodians than is currently in place. The majority of Irish-administered funds are non-UCITS funds. Increased liability and responsibility on the external valuer is also understood to be a concern.
The wording of the directive is expected to dominate discussions at the meeting next week. The European Parliament is scheduled to vote on the law this year.
Yesterday, British prime minister Gordon Brown said he had constructive talks with French president Nicolas Sarkozy on the new rules. France is strongly in favour of the proposed changes; the UK is strongly against.
Fionán Breathnach, head of the investment funds and regulatory practice at Mason, Hayes and Curran, said that while the funds industry is against the directive, the new legislation may provide Ireland with an opportunity to attract new business. “If the directive goes through, non-EU-based managers will be restricted in their ability to raise money in their non-EU-based funds. This means they will be looking to domicile funds in Europe. Ireland provides an ideal location for this.”
