With the summer break now over, the legislative machine at Brussels has started to crank back into life.
On the slate is a directive aimed at pinning down transparency. Also in the pipeline are a consultation on pensions mobility and the directive on investment services. But perhaps the most interesting new piece of documentation to emerge from Brussels recently is one that has not yet received much attention.
The new item is a so-called “working document” that has been prepared by John Purvis, the vice chairman of the European Parliament’s Economic and Monetary Affairs Committee.
The subject of the document is hedge funds and derivatives, and Purvis explores whether there is any need for extra regulation to protect investors’ interests. The five-page report suggests the way the committee, which was of course so vital in the preparation and approval of the pension funds directive, may be thinking.
In it, tax regimes and the lack of a single regulatory market are seen as a “deterrent” to hedge funds.
“Pension funds and insurance companies are now becoming significant participants,” Purvis says. “The UCITS Directives permit funds of funds to invest up to 30% of their assets in ‘other collective investment undertakings’, including hedge funds, so long as they meet standards equivalent to the relevant directives.
“There is no single global approach by regulators and in several EU member states legislative changes are currently in place.”
Purvis calls for hedge funds to be domiciled in Europe. “If retail investors are going to invest more in hedge funds, it would be preferable for them to be domiciled in Europe where there could be better supervision.
“Tax regimes and the lack of a single regulatory market are a deterrent with many member states imposing tax penalties on investors who invest in a foreign domiciled hedge fund.”
“Should the EU enact a directive along the lines of the UCITS directive to provide a single well-regulated European market for hedge funds?” Purvis asks.
And he brings up the idea that investors should disclose their hedge fund exposure. “Should there be requirements on investors and lenders to disclose their exposure to hedge funds? Are there sufficient checks on fund managers to ensure that they have adequate risk management systems in place?”
The paper queries if there is a need for harmonised guidelines or rules – whether across the EU or globally. “In terms of the single market, are harmonised rules and tax treatment an essential prerequisite?” Purvis asks.
Purvis says that he, as rapporteur on the issue, favours a “light touch” regulatory regime for hedge funds and derivatives. He says they “contribute to the efficiency and self-balancing of financial markets”.
Moving on from hedge funds, there is the transparency directive, or to give it its full title, the Transparency Obligations Directive. This is designed to improve “the timeliness and disclosure of share issuers throughout the reporting cycle”.
The transparency directive is part of the Financial Services Action Plan and is due to be implemented in 2005, the same year in which International Accounting Standards will be introduced. The timing of the two events could cause problems for companies – and investors. The latter will have to take the new information on board.
The European Commission is proposing mandatory quarterly reporting. The European Parliamentary Financial Services Forum – a group comprising MEPs and financial market executives - says there is a concern that quarterly reporting may lead to increased stock market volatility and short-termism.
Under article nine of the new directive, investors will have to disclose the buying and selling of major shareholdings in listed companies – according to a series of thresholds. The draft’s definition of shareholder also includes custodians and those holding securities for clearing and settlement.
The move could well irritate the market, the group says. “There might be a danger that the market would be more irritated than informed by the expected multitude of notifications.”
The notification requirements also cover derivatives. Investors would need to calculate the potential shares that they could obtain via derivatives. This will clearly be an extra burden on investors – and where there are extra burdens there are usually extra costs.
Investors will have to work to understand the changes to the presentation of accounts. “The timing of the Transparency Directive could therefore be problematic for companies and their shareholders,” the Forum says.
The directive also aims to update EC law on the information provided to shareholders in annual general meetings via proxies and electronic means.
The Forum has criticised some of the Commission’s proposed measures. It says the electronic dissemination of information “has the potential of developing into an efficient method of communication by companies”.
Also coming into view is a consultation paper on pensions mobility. The paper asks social partners to play their role in tackling problems faced by workers who lose out on occupational pension rights when moving jobs, particularly to another member state. Says employment and social affairs commissioner, Anna Diamantopoulou: “We have discussed and analysed the problem of transferring pension rights with all stakeholders.
“It is clear that action is needed at EU level to ensure that workers do not lose out on their rights when they change job, and I am particularly looking to the social partner to take a decisive step in the right direction.”
A response is expected from social partners within six weeks. If social partners do not act, the Commission says it may propose legislation itself. A new directive protecting the pensions rights of workers that change jobs was hinted at being forthcoming earlier in the year.
Leonardo Sforza, head of research and EU affairs at Hewitt Associates, believes that the measures introduced by the Commission would lack teeth.
“The Commission will not want to interfere in national laws and provisions, so I expect what measures there are to be soft. Perhaps an exchange of information and experience between the member states to see how obstacles can be overcome – but nothing binding.”
Another development of significance for investors is the new version of the Investment Services Directive. A recent report by Deutsche Bank says the Investment Services directive would in effect restrict investors’ freedom of choice with its obligation to publish firm bid and offer prices.
“To create a level playing field for European financial services providers and make possible lower trading costs for customers, key items of the ISD 2 draft proposal in its present form must be improved,” Deutsche says.
Theresa Villiers, the British MEP who is the European Parliament’s rapporteur for the ISD, says her latest draft is “a compromise which I think is balanced”.
“I believe that what I’ve put together is workable,” she adds.
She says the aims of the directive are to cut costs for investors. “Why should we introduce a law to stop firms cutting prices?” she says. “I think there are advantages for all investors, whether retail or institutional.” And she adds that it is “plain wrong” to say that the ISD is the voice of large finance firms.
Villiers says the aim is that the directive will be ready in time for European Union finance ministers to draw up a common position when they meet in October.
Whatever the merits of the ISD, it is not clear that its passage will be smooth. Villiers admits that a second reading of the directive is likely. And that could mean that the directive comes up against the end of the current parliamentary session.
Villiers says: “We can complete a second reading by March.” She admits that the directive faces a “quite demanding” timetable. When you consider that the last parliamentary session is in May, any delay at the council of ministers stage – which cannot be ruled out - could mean that the ISD is not ratified in this Parliamentary session.
“The timetable could be a problem for the council of ministers,” Villiers concedes. If the ISD is held over to the next parliament, it would have to go back to first reading stage – it would not have to start from scratch.

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