David Prosser: EU plans risk driving away hedge funds

Outlook Lord Myners didn't waste any time yesterday. Less than 24 hours after former Man Group boss Stanley Fink had called for the Government to defend London's status as one of the world's primary centres for the hedge fund industry, the minister for the City went on the attack. He accused the European Union, which is consulting on a draft directive on hedge fund regulation, of "making political capital" with a crackdown on the sector that is "bordering on a weak form of protectionism".

Lord Myners is right, though it is a shame he has taken so long to go public with these criticisms. The directive as it stands is a thinly disguised – and badly informed – attack on the hedge fund industry, of which most European Union countries have little knowledge or experience. Its primary effect would not be to produce an industry that is more open and better policed, but to create an environment in which non-EU domiciled hedge fund groups would find it almost impossible to operate inside the EU. Those global groups would expect their home nations to provide them with similar regulatory ammunition, preventing European hedge fund firms from operating elsewhere, particularly the US.

We say European, but what we mean, of course, is British. For London has the only substantial hedge fund industry in the European Union. For now, at least. If the hedge fund directive passes as planned, that industry is likely to migrate elsewhere – Geneva is pretty nice at this time of year by all accounts. Any hedge fund left in London, if the EU gets its way, would find itself barred from doing business in the US and elsewhere.

Maybe we want those shady hedge funds drummed out of town. After all, wasn't it those dodgy Mayfair types who caused the financial crisis, selling short the shares of banks with perfectly stable finances?

That might be what some in the banking sector would like you to think, but it's not the reality. Even after the incident which prompted the most questions about hedge fund behaviour – the collapse of HBOS shares after malicious rumours hit the market – regulators did not uncover any evidence of hedge fund wrongdoing. Many months later, there is still no evidence that the hedge fund sector – already saddled with new disclosure rules in London – broke any rules during the crisis, or played a significant part in causing it.

Let's hope that Lord Myners can prevail in his battle to have the draft directive turned into a piece of legislation that represents real regulatory reform rather than just spiteful policymaking. If not, his bosses at the Treasury, and their successors, can expect to wave goodbye to extra income tax from hedge fund bosses, many of whom are already complaining about the increases announced in the Budget.