EU Targets Hedge Funds, Bank Bonuses

The European Commission unveiled draft rules on bankers' pay and hedge funds on Wednesday, aiming to quell public anger over financial market excesses but provoking sharp criticism from the industry.

The proposals form part a wider re-regulatory push by the 27-nation European Union and its partners in the G20 group of industrialized and emerging market nations to restore confidence to a financial market hit by the worst crisis in 80 years.

They are intended to help draw to an end two decades of "light touch" financial supervision, but industry groups said the hedge fund proposal may prove unworkable while lawmakers on the left said it was riddled with loopholes.

The EU executive issued non-binding guidelines for EU states to crack down on "rewards for failure" that have incensed the public.

"As the crisis unfolded, there was more than a hint of take the money and run," EU Internal Market Commissioner Charlie McCreevy told a news conference.

Armando Franca / AP Flags of member states of the European Union.

Fury erupted in Britain over news that Royal Bank of Scotland, which needed a government rescue, is paying an annual pension of 703,000 pounds ($1 million) to its former chief executive Fred Goodwin.

The guidelines say banks should be allowed to ask for a bonus to be returned if the good performance it was based on turns out to be a sham, a step experts say will be hard to do.

"If you are going to introduce a scheme which is based on taking money back from people ... the question is how you prove and how you measure that the performance is bad," said Richard Linskell, an employment lawyer at Campbell Hooper Solicitors in London.

A reform of EU bank capital law in June will give supervisors powers to slap on additional capital requirements on banks whose pay policies give rise to unacceptable risks.

Hastily Prepared

The EU executive also proposed that hedge fund managers must register and be subject to close scrutiny to operate in the bloc.

The managers, along with private equity groups, must also report data to supervisors to ensure no dangerous risks are building up that could destabilize the wider financial system.

The two lightly regulated sectors have drawn ire from politicians across Europe who have accused hedge funds of being short-termist and private equity of piling on heavy debt on companies they buy into.

McCreevy, who has opposed mandatory rules for the two sectors in the past, said there was still no evidence they caused the financial crisis.

The draft hedge fund and private equity law has been subject to intense horse-trading ahead of its publication as Britain, the European Union's hedge fund centre, fears overly draconian rules, while France is a keen backer of tighter regulation.

"Hastily prepared and without consultation, the directive contains many ill-considered provisions which are impractical and may prove unworkable," the Alternative Investment Management Association said.

The European Private Equity and Venture Capital Association said the Commission had ended up with something that is delivering not what anyone wanted.

Britain's finance ministry urged a consistent global approach that counters risks and enhances EU competitiveness.

Poul Nyrup Rasmussen, a senior socialist in the European Parliament which will have joint final say with EU states on the draft law said it was inadequate and "super-light" touch.

Global hedge fund sector assets total $1.4 trillion -- relatively small compared to the wider financial market. In a bid to quell criticism from France and Germany over draft versions of the Commission's proposals, the EU executive cut the threshold that triggers application of the new rules.

They will apply to hedge funds with assets over 100 million euros ($132 million) and private equity groups with assets of over 500 million euros.

The rules will only apply to managers based in the EU as many of the hedge funds themselves are registered offshore. McCreevy also published outline proposals for common consumer safeguards on the sale of all financial products.

EU states and the European Parliament have the final word, and amendments to the draft hedge fund and private law are likely, with adoption typically taking about 18 months.

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