The best ideas are always the most simple so the phrase goes. This should be the mantra being used by the policymakers, regulators and advisers that are mulling over the future regulatory and supervisory structure of Europes financial markets. Unfortunately, early warning signs would indicate that the decision-makers are going down a route of politically motivated complexity in search of some easy scapegoats.
This is no better illustrated than the intense scrutiny and recommendations being made for Europes hedge fund community. The current proposals from the EC do not impose direct authorization or regulatory requirements on the funds themselves, but it is certainly a possibility that is being actively considered. And it is certainly the route that the Socialist MEPs are advocating, having already accused the Commission of no more than window dressing on the current draft proposals for the Directive on Alternative Investment Fund Managers.
Its not that I am against greater control and oversight of hedge fund activity. It is firstly, that regulation should never be borne out of the need to score political wins or to appease political faction. Secondly, it is that for supervision and regulation to be effective, it should be kept simple. This point refers more specifically to de Larosieres recent report which proposes that when it comes to supervision, distinctions should be made between investment funds and hedge funds.
Why, I ask? Surely there should be a common set of rules that govern the operation of all investment funds, irrespective of the funds classification. For example, the current UCITS regulations are a highly suitable foundation for hedge funds. Adoption of the same rules by all market participants for all types of funds will ensure that investors interests are protected through the implementation of best practices.
A good starting point would surely be the adoption of a harmonized set of operational practices by all funds regardless of what category they fall into. It would certainly maximize the chances of preventing operational risk from spiraling into systemic risk one of the key issues behind the credit crisis. This is a rare case of where one size should fit all.