Medway Liberal Democrats

Speech to Credit-Suisse in London

In July I became the new Chair of the Economic and Monetary Affairs Committee in the European Parliament.

That committee is colloquially known as ECON - so if I slip to calling it that you will know what I mean.

The committee has among its responsibilities all financial markets legislation. We also do Tax, IFRS, Competition and monetary policy.

On financial markets we are the co-legislator with the Council and for those of you who may not be steeped in the European legislative process, I thought that I would very briefly and simply explain how it fits together, and then follow this with some brief points in my mind concerning the AIFM directive.

This should leave time for questions at the end. I always like to offer that because at least then my reply should be about something that at least one of you is interested in!

The Commission drafts and proposes legislation. There is usually a significant consultation period before a draft of legislation emerges, though I'm sure some of you will know there has been controversy surrounding the duration and effectiveness of the AIFM consultation and impact assessment.

Once draft legislation is formally released by the Commission, the Council and the Parliament operate as two legislative chambers independently scrutinising and amending the Commission's text. The detailed work for the Council is done by a working party of attaches from each Member State, led by whoever is in the current Presidency. Eventually the attaches will reach an agreement that they take to higher levels of the ambassadors or ministers for agreement or sometimes for specific political points.

In the Parliament the different political groups each have a lead person on each piece of legislation - one will be the main lead and called the rapporteur, and the others are called shadow rapporteurs, and they will usually be the most active MEPs on that legislative item. However any MEP can put forward amendments and play a significant part too. As well as open discussions in committee the MEPs will meet to thrash out compromises in smaller meetings.

In the ECON Committee we usually try to reach a first reading agreement with the Council, but in theory there can be three rounds.

When aiming for a first reading agreement, the Council and the Parliament each take their deliberations to a provisionally agreed position - which for us is a vote in Committee and for the Council is known as a general approach - then meet together to try and obtain an agreement between Council and Parliament. These meetings are called trialogues and usually have present from the Council side the Presidency negotiating team and an observing team from the next in line to be President. So right now if we had a trialogue the Swedes would be there to negotiate with Spain observing.

The Parliament side negotiating team is the Chair, so me, the rapporteur and shadows. Also present in an advisory capacity is the Commission. And the idea is that we go through the texts line by line, compare amendments and see whether we can agree or draft new compromise versions. When everything is agreed, we go to take our respective final votes on the agreed texts. This is quite a dynamic process, done face to face, rather than sterile exchange of texts.

Some people have drawn a parallel between the US House and Senate amending legislation separately and then having to agree with one another. Indeed in some ways it is simpler because we can not add in lots of unrelated bits and pieces.

If we can not agree, then we vote different texts and have to attempt a second reading. There are debates about the merits of first versus second reading agreements, but in the ECON committee we have a track record of being successful at first reading. The process can be a bit opaque especially if it is done fast, but normally there are gaps of a week or so between meetings and some circulation of papers of tentative agreements.

So this is a 50 50 process of Council and Parliament. If the commission do not like the agreement then they could withdraw the proposal altogether. They do not have the right to amend - they have had their go. But in practice they usually assist in the formulation of compromises.

Realistically from start to finish a first reading agreement takes a minimum of 6 months, usually longer because of the Parliament meeting cycle and the need for translation of documents and usually some hearings or workshops.

So that is the legislative process which we will now embark upon on a whole range of reports from the AIFM directive, the reform of European supervisory architecture and further reforms (we're not sure how many yet!) to the CRD.

However, as a consequence of the financial crisis, Europe is not alone in having a slew of legislation. Some 15 bills are also out in the US. Many are on the same subjects as we have lined up. Policy made at meetings such as G20 will often end up as legislation and as there is not a global legislator we will discover that there will de differences in timing and content.

So what can we do about that? Well, we all have to do our bit to coordinate where we can. Industry does a lot in following the US and EU and making comparisons.

It is my intention that the ECON committee will also do its share as far as it can, and to that end the opening session of the first Committee meeting on 2 September was a general exchange of views about upcoming legislation with Congressmen from the US House markets subcommittee, led by Chairman Kanjorsky. This was the first time that there had been a Committee to Committee meeting in public and it was agreed that we would make serious efforts to keep in contact for detailed work with video conferencing and more frequent visits. We also had a meeting with visiting Senators in the previous week and aim to maintain contact there too.

The downside of all this is that I now have twice as much to look at.

Turning now to make a few comments about the Alternative Investment Fund Manager's Directive.

We find ourselves at the start of the process with the Alternative Investment Fund Managers Directive in the Parliament. The Commission produced a draft proposal in April this year, which was just in time for the Parliament to shut down for the European elections!

This meant that while MEPs were off campaigning for re-election, the Council were left in Brussels working on the proposal under first the Czech and now the Swedish Presidency. Consequently, they had a head start and it looks now that they should have initial drafting suggestions ready for November.

The Parliament only resumed its work schedule at the end of August and, given the nature of the beast, will only have its first draft report ready at the beginning of December. Even then, this will only reflect the work of our rapporteur Jean-Paul Gauzès and the full views of the committee will not be known until spring next year.

Throughout this process the Parliament, the Council and Commission will stay in close contact. While there has been some pressure to move quickly on this, I intend for the Parliament to take a patient, measured and deliberative approach to ensure that the problems within the AIFM directive are satisfactorily resolved.

Turning to the content, the Swedish Presidency have identified the following areas as the main issues that need addressing:

• Scope: definition, exemptions, thresholds.
• Double authorisation
• Definitions - management services, marketing and leverage.
• Capital
• Valuation
• Depositary
• Delegation
• Leverage
• Disclosure requirements
• Third countries
• Supervision

In addition to these broad topic areas, the Parliament's exchange of views this week included several thought provoking interventions. Among the points raised were:

• The AIFM Brand. Wolf Klinz discussed the issue of a brand along the lines of UCITS. Under such a system, funds would gain the 'gold-plated' AIFM brand which would be subjected to high levels of investor protection but crucially allow access to the EU passport.
• Funds outside of the brand would be allowed to continue with lower levels of investor protection but would be barred access to the passport.
• This approach could be a useful carrot to lure funds into applying the full AIFM requirements. This could be preferable to the 'Fortress Europe' and 'Prison Europe' approach in the Commission's draft directive.
• Pensions. The need for returns to compensate for the looming pension time bomb was also discussed.
• Green technology. Some MEPs raised concerns that investment in green technology could be suffocated within Europe if the directive is not changed significantly.
• CRD and Leverage. It was suggested that leverage could be dealt with in the CRD rather than the AIFM directive since funds would the exposed leverage would be with EU credit institutions.
• CRD and a level playing field. It was felt by some committee members that there was a level playing field issue since credit institutions regulated by the CRD could operate funds from their balance sheets. This would allow them exemption from the AIFM directive as they would fall under the scope of the CRD instead. This could upset the level-playing field in the fund industry to the detriment of independent funds.

One final issue which I have been pushing strongly is the overlap between the AIFM directive and other directives, most obviously UCITS and MIFID but also Transparency, Prospectus and Market Abuse among many others. I have requested that the Commission provide a comparative table to illustrate the differences between the directives in accordance the principle of 'Better Regulation' and avoid layering firms with overlapping regulation.

So this is the state of play with the AIFM directive as it stands. I am happy to take any questions you might have on the Parliamentary procedure or the content of the directive itself.

Thank you.

ENDS