There is widespread market concern that the new remuneration rules will place EU-based credit institutions and investment firms at a competitive disadvantage. Stuart Fraser, policy chairman of the City of London Corporation, argues that “If the G20 countries based outside the EU fail to implement equivalent regimes these rules will have little impact in terms of eliminating risk-taking and will have a hugely detrimental impact upon our international competitiveness.”
The application of the remuneration rules to hedge fund managers has attracted particular criticism, especially in the City of London where 80 per cent of the EU hedge fund industry is based. This discontent has been amplified in light of the general recognition that remuneration in the hedge fund industry was not a cause of the current financial crisis. There has been some speculation that the new rules could cause hedge funds to relocate to Asia or Switzerland, where the remuneration regime may be more favourable.
Antonio Borges, chairman of the Hedge Fund Standards Board, warns that “European hostility towards hedge funds may have unintended consequences, some of them the exact opposite of what European politicians say they want.” Borges argues that there is “a risk that specific regulatory provisions and interventions could create havoc in the industry and make life very difficult for managers and investors.” This, Borges suggests, is an example of how “misguided policies can put Europe at a great disadvantage in a financial world which is more and more global.”
The true extent of the impact on the competitiveness of EU institutions may depend upon many factors, including:
- The manner in which CRD III is implemented by national authorities
- The degree of flexibility available in the application of the remuneration principles to different types of institution
- The application of the proportionality principle by national authorities
- The impact of other EU initiatives, such as the AIFM Directive
- The relative advantages and disadvantages for institutions relocating to other jurisdictions.