Lord Myners Breakfast Speech

Check against delivery

Good morning. I'd like to thank BVCA for hosting this breakfast.

I have addressed the topic of the Alternative Investment Fund Managers Directive on multiple occasions since the Commission first published its proposal for the Directive last April.

And today, I would like to not only address the state of play in the Directive, but also how Government and the industry and its clients will need to engage with the European Union on a number of fronts as we seek to confront the challenges that lie ahead.

Year of challenges in EU

The global financial crisis has forced us to revisit some of our assumptions - the hypothesis that global markets were efficient, our exaggerated belief in the resilience of the system and our confidence that we fully understood its complexity and interconnectedness.

It has been made abundantly clear that no country can insulate itself from risks originating elsewhere in the global system. Whether business is done in the City, Paris or Frankfurt, we cannot consider ourselves immune to weakness in Rio, Wall Street or Shanghai.

This has necessitated a new global approach to regulation. One that is not isolationist and skewed in the favour of domestic markets, but based on coordinated action from countries around the world.

And there have been some huge accomplishments.

Through the G20 we have, for example, established the Financial Stability Board with a new charter to significantly enhance the global regulatory architecture; the Basel Committee has agreed steps to strengthen prudential regulation and there has been agreement on stronger regulation and oversight of systemically important firms.

The UK has been at the forefront of the global effort. We have pushed forward reforms in line with G20 agreements to tackle irresponsible compensation practices and prepare internationally consistent recovery and resolution plans.

But there is more to be done, and an onus on G20 nations to implement the agreements made.  There are signs, including from within Europe, of attempts to water down G20 agreements.  We must avoid this - we have a window of opportunity to put in place strong, sustainable high standards of regulation across financial services internationally, an opportunity we must not squander.

We have been industrious in our engagement and work within the European Council and this work has reaped rewards.  Most of the new European Supervisory Authority's direct supervisory powers have been removed from the Council text on supervision, and in the third iteration of the Capital Requirements Directive we have succeeded in keeping the Council text close to the Basel proposal and removed the damaging concept of a 'highly complex re-securitisation'.

And having worked hard on the Level 1 text for Solvency II we have a solid platform that enshrines the core principles of risk based, market consistent capital requirements and regulatory approaches; facilitating a constructive debate on the Level 2 implementing measures.

And more must and will be done.

For example, in addition to work in train on Supervision, CRD and Solvency II, there will be important discussions on market infrastructure, deposit guarantee schemes, Systemically Important Financial Institutions, Recovery and Resolution Plans and Crisis Management.

We are not oblivious to the increased costs to the financial sector that higher standards often entail and will press the case in Brussels for comprehensive and credible impact assessments.  It is also critical that each individual strand is seen in the context of the system as a whole and the need for it to service the real economy.

We need credible solutions aligned with the economic realities of risk that genuinely strengthen the system.

This is best achieved through international action and we must continue to lead the way engaging constructively with our international partners, both within the EU, and farther a field.

But whilst we will lead the debate on reform we recognise the need to remain 'part of the convoy', moving in step with both the international community and the world's financial centres.

And we must at all times ensure that our approaches to regulation and supervision are consistent with allowing UK financial firms to be competitive, in terms of their profitability and their ability to generate capital and wealth.

There is no economic advantage to adopting an approach to regulation which burdens the UK financial services with uncompetitive costs of capital, introduces unjustifiably onerous operating and reporting requirements, or constrains the availability or cost of credit.  Indeed earlier this week the FSA evidenced its commitment to this approach announcing a change in the implementation timetable for its new liquidity requirements for banks allowing them to fully reflect developments in other areas.

Risks to be met

We must not be blind to the risks that poorly conceived or implemented reforms present.  We must eschew regulation for its sake in the mistaken belief that you can never have too much.  It is rather like someone popping pills for every conceivable illness 'just in case', including those that have not been diagnosed as a source of concern.  Regulatory hypochondria will serve no one well.

Some of these risks have their roots in a misunderstanding of a complex sector and a lack of awareness of the value that the City, and financial services across Europe, add to their respective economies.

It is undeniably in Europe's wider interest that Britain's financial hubs flourish. Six hundred overseas financial institutions operate in the UK and 420, over two thirds of them, are European, playing a vital role in capital raising and risk management for the EU economy.

But some risks will be borne out of a misguided desire to protect national markets, or an attempt to skew the playing field against or in favour of particular member states.

And we will need to continue to defend against attempts to force infrastructure to be located outside of the UK in the Eurozone area.

To address these risks, be they inadvertently or intentionally conceived; we must extol the benefits of an open, stable and competitive single market.

Firstly, Government and industry must be clear and concise about the benefits the industry provides and how misguided regulation places this in jeopardy.

Secondly, we need to hold Brussels to account.  There have been a number of worrying instances in recent months of proposed EU legislation risking a fragmentation of the single market.  Regulatory repair should seek to further and deepen the single market.  We should have no fear exposing our financial services industry to competition; competition that should drive standards up and improve levels of service and choice to both clients and the economy.

Thirdly, we must avoid tendencies towards protectionism and national interest.  Instead we should focus on the ultimate prize of greater convergence in international regulation, with an eye to not only longstanding partners such as the US, but emerging economic powerhouses in Asia and beyond.

Fourthly, and more generally, we must keep our eyes on the cumulative impact of regulation, and the implications of this for industry, the economy, and importantly - society. We need strong and sustainable financial services to provide much-needed support to the real economy in the medium and long term, supporting the recovery and long-term sustainable growth.

There is a growing consensus across the EU and we must seize this opportunity to strengthen the system for our mutual benefit.

AIFM

And this brings me to the crux of what I would like to address this morning - the Alternative Investment Fund Managers Directive.

The Directive was one of first pieces of legislation proposed by the European Commission following the financial crisis aiming to harmonise EU regulation of hedge fund managers, private equity funds, and other forms of alternative investment funds.

The Commission has acknowledged that hedge funds, private equity and other forms of alternative investment management have not been the cause of the financial crisis, and we agree with them.  But it has highlighted that recent events illustrate a need for public authorities to ensure effective monitoring of the risks that alternative fund activity may pose. 

We agree with this in principle, and in line with the G20, and are committed to cooperating with European and international partners to mitigate any potential risks.

But we were clear from the outset that the original proposal was deficient in many areas.   We have been in close consultation with UK industry and trade bodies such as the BVCA to secure common ground on where improvements are necessary - and have taken this case to Europe.

This has helped us to develop constructive counter proposals that seek to deliver a high level of regulatory protection, without imposing disproportionate burdens.

As a result of the hard work of the Government, in partnership with industry and colleagues in Europe, the text has moved a long way from the original Commission proposal.  But there are still a number of areas where the text needs to be improved. 

3^rd country issues

Passporting sits atop this list.

A fundamental tenet of the single market is single market regulation.  If you meet EU standards in one jurisdiction, you should not have to jump through the same set of hoops 26 times.  Instead you are granted a passport giving you freedom of movement across the EU - a cornerstone of the single market in financial services.

We will continue to vigorously argue that funds managed both inside and outside of the EU that meet the standards of the Directive should be entitled to an EU passport.  In the absence of a passport, the justification for the EU determining the standards that AIFMs would be required to meet in seeking to market into Member States is unclear.  In the absence of a passport, the principle of subsidiarity would normally apply, leaving member states free to set their own national standards.

Rather than imposing the costs, without the benefits of doing so being clear, we believe Member States should be looking to attract capital from both within and outside the EU, and the Directive should be consistent with this. 

We need to remember what we are trying to achieve here - we want and need diverse sources of capital for our financial services industry, ultimately to allow them to properly serve the economy.  We will continue to advocate these overarching aims. 

We are not in the business of seeking to protect our domestic fund management industries from the challenges of global competition, indeed this is a challenge the industry has risen to admirably over the years and one which I am confident it will meet in the future.

Remuneration

Remuneration remains contentious.  The UK cannot be accused of shirking this difficult challenge.

From the outset of the crisis, the Government has been focused on eliminating rewards for failure and ensuring that remuneration does not incentivise excessive risk taking or inadequate risk management.

And we will continue to lead on this issue - David Walker's proposals will be implemented to give shareholders much more power and information to shape remuneration policies at banks. And in some cases we may go further.

Later today the Government will publish draft regulations on greater disclosure on pay for the top earners at banks.

This will include proposals for narrower disclosure bands than Walker proposed, starting with salary packages below the £1 million floor that he suggested. We will consult on the idea, but as the Chancellor has said - most people are convinced that more disclosure is important if we are to have real transparency on remuneration practices and effective shareholder stewardship.

But this does not mean we support the verbatim copy across of requirements for banks agreed as part of the Capital Requirements Directive.

Alternative managers are not banks, and to simply apply the CRD to them fails to reflect the economic realities of the risks involved and the deontology of the investment concepts of private equity and hedge funds.  I understand the political impetus acting in this area, but our job as legislators is to rise above the furore and seek reasoned approaches that actually address the underlying problems.

Leverage Caps

Similarly, insistence on hard, quantitative leverage caps fails to properly reflect the complexities of risk.  There are many forms of leverage and many different strategies that use it.  Thus defining and legislating against 'leverage' is actually not as simple as it sounds, and to do so in a crude manner could engender unintended consequences, proffer false security and inappropriately influence business models.

If leverage is to be managed and controlled, we should start in the banking sector.  Our experience of the crisis has shown us that banking leverage was a significant contributor to systemic risk and underpins agreements made by the G20 to move over time to binding leverage constraints on banks.  Yet perversely the same Member States who are pulling back from these commitments are their most vociferous proponents for alternative funds - this flies in the face of evidence.

So on a number of fronts we have from the outset brought strong reasoned arguments, based on economic realities and empirical evidence, to address the technical deficiencies of this Directive.  And we will continue to do so.

But in seeking to address these fundamental issues we must of course continue to be mindful of the realities of any negotiation in which qualified majority voting prevails.  While we have convinced our negotiating partners on a number of important points, some big political differences of opinion remain with some of the loudest voices expressing deeply held views about the behaviours of private equity and hedge funds.

Our arguments must continue to be focused and evidence based - in a negotiation where compromise is necessary to reach any agreement we need to focus on our top priorities. 

We support rigorous and effective regulation providing investors with the protection they need, but must not tilt at "mythical windmills" and use investor protection as an excuse for poorly conceived regulation. We want an appropriate level of regulation that enhances the competitiveness of the EU financial services industry, and the UK's place within it.

And we will continue to work closely with the BVCA and other industry leaders to secure this.

The UK has a dominant role in these specialist markets.  The industry is important to our economy.  I want to see the UK continue to develop as the natural place from which to manage private equity and hedge funds.

Conclusion

So, I'd like to finish by saying that of course there are risks here - but risks always present opportunities.

Much has been made of 'more EU' and more EU regulation, but it gives us an opportunity to shape the single market and to engage in constructive reform that breaks down barriers, rather than erecting them.

And we must seize this opportunity. We want a system of many members, one market, rather than many members, many markets.

We are leaving partner states in Europe in no doubt about our views.

Thank you.