The European draft alternative investment fund managers (AIFM) directive has come under scrutiny in the UK and Brussels this week as efforts to improve the document continue.

The European parliament's committee on economic and monetary affairs held a hearing and a workshop examining the directive on Tuesday (November 10).

Meanwhile, the UK's House of Lords EU economic and financial affairs and international trade sub-committee heard evidence from the UK Treasury's financial services secretary Lord Myners detailing the British government's stance on the proposals.

The European parliament hearing came after the publication of a critique of the European commission's impact assessment for the directive. Commissioned by the economic and monetary affairs committee, the report was heavily critical of the commission's rationale for the regulation.

"We find the commission IA's [impact assessment's] analysis of the policy problem to be vague, sweeping and inadequate as a basis for justifying regulation," said the report's authors Andrew Lilico and Jonathan Todd of consultancy Europe Economics and Maurizio Conti of the University of Genoa.

European argument

Presentations to the committee by industry participants offered similar views. Gerben Everts, head of the global regulations and compliance team for Dutch company APG, an asset manager for pension funds, said the proposals were disproportionate.

Everts told the committee principles of better regulation were not being followed and little information had been shared with the industry.

State Street's Europe, Middle East and Africa compliance head Robin Oliver said the bank supported a common framework for authorisation and supervision of alternative investment fund managers and measures to increase transparency.

But Oliver said current provisions in the directive would "seriously undermine" the collective investment fund market.

Much of the discussion in both the hearing and the workshop concerned the role of depositaries and the liability potentially placed on them by the directive. Deutsche Bank global securities lending head Anthony Byrne said the proposals would lead to increased costs and withdrawals from the market.

During the afternoon workshop speakers including Lord Eatwell, director of Cambridge University's Centre for Financial Analysis and Policy, said regulation should follow a rules-based system as proposed recently by the Group of 20 (G20).

Eatwell said industry regulation should be on a more international level. Disagreeing with some of the industry speakers, he added that he thought hedge funds were systemically relevant institutions and more information about the way they worked was crucial.

UK government approach
Giving evidence to the House of Lords committee, Myners also referred to the G20. He said equivalency between European and US regulation was achievable.

Myners welcomed recent amendments proposed by the Swedish presidency of the European parliament and said the UK government was "broadly aligned" to the Swedish views.

But Myners said the directive was only "modestly additive" to efforts to manage systemic risk and authorities should look to regulate lenders to the financial markets rather than borrowers such as hedge funds.

He thought alternative investment managers were more attuned to risk than conventional investment managers.

Myners said the UK was strongly in support of the ability of funds domiciled outside the European Union (EU) to market within Europe. He said investors and the industry in Europe and the UK benefitted from third-country funds.

Impact critique
Myners's views on third country funds were shared by the Europe Economics critique of the directive. The critique said provisions restricting the ability of investors to invest through non-EU vehicles were "a very significant restriction on investor choice" and "protectionist".

The report also noted the commission had underestimated the compliance costs of the AIFM directive and had given little attention to proportionality issues.

While the critique said there was a strong argument for additional regulation of the alternative investment industry, the rationale for the directive was weak. It said regulation of the banking sector should also be considered.

"We consider this directive in its current form poorly constructed, ill-focused, and premature," the report concluded.

European committee chair Sharon Bowles said the legislation was on a conveyor-belt type process but it was possible to keep an eye on developments in other countries and industries as the committee, parliament and the European council continued to debate the directive.