Cicero Monthly Briefer

Cicero is the UK’s number one financial services public policy consultancy.

Long before the financial crisis, we were warned about the systemic risks and excessive debt of hedge and private equity funds. Today’s financial crisis may not have been caused by hedge and private equity funds—but the crisis revealed the huge interdependence of all the players in the financial market and showed the high vulnerability of companies with heavy debts due to leveraged buy-outs.

Earlier this month I presented my proposals to promote greater financial stability, ensure more transparency, prevent conflicts of interest, and reduce excessive debt.

Instead of 27 different sets of national rules, I propose one single European framework that will boost the financial market, jobs and economic growth.

I believe the time is right for these alternative funds to enter the single market. Away with complying with 27 different sets of national regulation, and in with one European framework that sets basic standards of financial stability and transparency, including the avoidance of excessive debt and conflict of interest.

The potential benefits for investment companies, investors and the economy are obvious and substantial. But what might the European regulatory framework look like? That’s the subject of a report I am presenting to the European Parliament.

Step one is a ‘single entry point’ in to a single European financial market with a European Union framework for transparency, registration and authorisation for managers of hedge and private equity funds; and a public register for complex, structured credit products.

Step two is reducing the danger of extreme risk taking and excessive debt by introducing new ‘capital requirements’—like those that already apply to mutual funds, banks and insurance companies.

Step three is ensuring the viability of our private companies through action against capital depletion.

Step four would be beneficial to the whole single financial market above and beyond private equity and hedge funds: the creation of a European Union Public Credit Rating Agency, an independent, conflict of interest free credit rating agency to introduce much-needed competition into the credit rating industry.

Finally, a completed single market in financial services would require a European Financial Supervisor covering all financial sectors to increase co-operation between national supervisory bodies and to oversee cross-border and European-wide activities.

These are the most essential elements of what would be needed for a major expansion of the single market in financial services. The prize would be a bigger, healthier, better-functioning financial market. It would be a radical step but one that could strike a note of confidence in these times of crisis.

I am not alone in wanting reform. In a joint letter to European Commission President José Manuel Barroso, published in Le Monde last month, eight former Prime Ministers, two former European Commission Presidents and six former Finance/Economics Ministers stated:

“There is a need to revise the regulatory frameworks for investment vehicles. The use of financial instruments (like CDOs) has to be regulated. All financial institutions should be required, like banks, to hold minimum reserves, and the level of leverage should not be unconstrained.”

This may not be a popular message among hedge and private equity fund managers, but they must understand one thing: a real friend is one who tells the truth. I am pro-market and I want to give global markets a healthy future. But the social and economic impact of the global financial market has to be addressed. The alternative is to do nothing and watch millions of workers and families turn against globalisation. We must discuss reform or we face a very bleak future.

Poul Nyrup Rasmussen is a Member of the European Parliament for Denmark and the President of the Party of European Socialists,

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