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Mar 31, 2010

New EU commissioner for internal markets pledges reform

Michel Barnier, the new commissioner for Europe’s financial markets, speaks about genuine reform and curbs on speculation

‘Don’t let’s pretend we are going to reform. We are going to reform,’ said Michel Barnier, the EU’s new commissioner for internal markets, in a Q&A session at the European Parliament. He was speaking at an inauguration hearing earlier this year, during which he outlined his plans for the regulation of Europe’s financial marketplace. The precise shape and scope of such reform remains unclear. With Barnier in the driving seat, however, it seems likely curbs on speculation are on the way.

Much has been made of Barnier’s political background. A former colleague of French President Nicholas Sarkozy, he appears to relish the idea of cutting hedge funds and other speculators down 
to size. When Barnier was elected to his new post, following intense lobbying by Sarkozy, the French leader couldn’t help but gloat at London’s expense.

‘Do you know what it means for me to see for the first time in 50 years a French European commissioner in charge of the internal market, including financial services, including the City?’ asked the president. ‘I want the world to see the victory of the European model, which has nothing to do with the excesses of financial capitalism.’

Many suspect Barnier will 
use his position to push through the agenda of his former boss, although the commissioner defended his independence at 
the inauguration hearing. In response to a question doubting his impartiality, Barnier said: ‘I will take no orders from Paris, London or anywhere else.’ But he also offered few concessions to those most worried by his reforming zeal: the British. At the hearing, UK MEP Godfrey Bloom warned about the damage of new regulation for the UK and London, saying: ‘Don’t kill the goose that lays the golden egg.’ Barnier countered that it ‘isn’t in the interests of the British financial industry to keep undergoing crises caused by a lack of control and supervision.’

How London is treated by Barnier is one of the key questions yet to be answered. ‘I think his comment about London is significant, as it suggests Barnier would like to treat the UK as just another one of the 27 member states, and not offer it any special position,’ comments Rudi De Ceuster, senior director of European business development at Business Wire, who is based in Brussels. ‘But I feel London needs to be treated as a special case due to its important position in the global financial market and the way it connects Europe with the rest of the world.’

Battle lines are being drawn over a recent piece of legislation to come before the European 
parliament, the catchily titled Directive on Alternative Investment Fund Managers (AIFMs). Proposed in April last year, the directive seeks to regulate the activities of groups like private equity firms and hedge funds, which some blame for contributing to the financial crisis through speculation.

The British are most concerned, as financial services form such an important part of the UK economy. A report by the Bank of England’s Financial Markets Law Committee, released in February, said the directive would trigger ‘systemic failure and widespread market disruption’. Among the committee’s complaints was that the EU had yet to properly define what an alternative investment fund manager is.

Slow progress
There’s little chance of a swift resolution, however. In February European MPs tabled more than 1,600 amendments to the draft legislation, all of which must be debated. Barnier has also said he will visit each of the EU’s 27 member countries to discuss the proposals with key industry figures. In any case, the history of European financial legislation suggests the end result of the directive will look very different from what is conceived at the outset in Brussels.

De Ceuster worked very closely on the Transparency Directive, which took three years to move from initial proposal to implementation by the member states – and that was fast, he says. Even now, some European countries still have not implemented it properly and no action is being taken to hold them to account, he adds.

‘I think the intentions are all very well and some corrections need to be made, but look at the theory and then look at the practice,’ advises De Ceuster. ‘The question is how to organize reform with 27 member states that each has its own interests.’ That’s the principal challenge facing Barnier as he begins his five-year term.

Fact box
Directive on Alternative Investment Fund Managers (AIFMs)

Proposed: April 2009

Current stage: 1,600 amendments being debated by the European parliament

Aims: Rein in alternative managers like hedge funds and private equity firms, which some accuse of contributing to financial crisis, by enhancing their transparency with supervisors, investors and other stakeholders. Ensure AIFMs are subject to appropriate governance standards and have robust systems in place to manage risk, liquidity and conflicts of interest.