More disagreement on EU hedge fund laws

The EU has inched closer to a stand-off with the U.S. over proposed new hedge fund regulations after Britain and France disagreed on the granting of licences for foreign funds who want to operate in the EU. France wants tighter regulations for foreign firms, but Britain has defended the hedge fund industry. The finance ministers of the two countries will meet next week.

(Reuters) – Talks to break deadlock between Britain and France over the shape of new EU hedge-fund controls ended in disarray on Wednesday, putting their finance ministers on course for a clash when they meet next week.

Central to the row is whether or not to grant a licence to foreign funds that want to work across the European Union’s 27 countries. French economy chief Christine Lagarde had opposed this on the grounds that controls on foreign firms would be lax — her opposite number in Britain, George Osborne, is in favour.

“It’s more bad news today,” said one EU diplomat with knowledge of the talks, which are latest in a series of failed attempts to resolve the row. “We now hope there will be an agreement next week among finance ministers.”

Continued discord could trigger a laborious mediation with the European Parliament, delaying the introduction of the symbolically important law, as well as antagonise Washington, which believes planned French curbs are protectionist.

Lagarde and Osborne are expected to be in contact in the coming days in a last-ditch attempt to reach agreement on the shape of controls for hedge funds and private equity before they meet at a gathering of finance ministers early next week.

The hedge funds blueprint has also provoked a row between Paris and Washington, which is worried that French moves could block U.S. funds from doing business in Europe.

On the eve of France taking over the presidency of the influential Group of 20 countries, U.S. Treasury Secretary Timothy Geithner has written to Lagarde warning her against curbing foreign hedge funds. [ID:nLDE695209]

Despite being one of the EU’s more modest financial reforms, Brussels’ attempts to change the rules for hedge funds, chiefly by putting them under the watch of a new pan-European supervisor, has taken on what one expert called a totemic significance.

It has put French President Nicolas Sarkozy at loggerheads with Britain, which has defended hedge funds, an industry London sees as important for its status as Europe’s financial capital but which a German politician dismissed as “swarms of locusts”. [ID:nLDE69A114]

Diplomats, increasingly anxious on Wednesday to keep talks going, had put a number of proposals on the table to coax agreement including delaying or granting opt-out clauses on the most controversial part of the law — an EU-wide licence for foreign funds to work in Europe.

Michel Barnier, the EU official in charge of broking a deal on the law, had earlier signalled that there could be a delay or “transitional period” to this licensing scheme.

Hedge funds currently must apply to national authorities in each country to sell investment products there — lawmakers want to replace this scheme with a single permit to operate in all EU states.

Other proposals presented by diplomats at the meeting in Brussels also proved divisive.

Under one plan, a country could block any fund holding a European licence from operating in its territory by not signing up to the agreement granting them the permit.

“Britain believes this would be an opt out,” said one diplomat. “It allows the member states to pick and choose.”

With the European Parliament planning to vote through its version of the hedge-fund law in November, further delays could trigger a drawn-out procedure to reconcile the positions of European countries and elected lawmakers in Brussels.

“If there is no agreement now, it is going to last for another two years,” said one diplomat.

(By John O’Donnell and Julien Toyer. Editing by Hugh Lawson)