Management companies would be well advised to clean up any regulatory issues they may have and carry out necessary internal audits to be sure to face with confidence any new legislations and/or overzealous new regulatory bodies.

Since April 2009, the European Union’s Alternative Investment Fund Managers (AIFM) Directive seeking to regulate hedge funds has been charging ahead to become law.

The process of the “Trilogue”, which consists of discussions between the European Parliament’s Committee for Economic and Monetary Affairs (Econ), the Economic Financial Affairs Council (Ecofin) and the European Commission, has now officially begun and will aim to combine the two versions of the Directive proposed on 17 and 18 May respectively by Econ and Ecofin.

We welcome this development following the publication of a number of versions. The industry will be anxious to see what the proposed final draft will contain.

Currently the two drafts differ in some areas, for example the Econ version requires non-EU based fund managers to comply with various standards in order to market their funds to EU investors, whereas Ecofin suggests that national regulations should apply. If the marketing of non-EU funds is to be restricted, we would prefer those funds comply with EU-wide standards to avoid the need to comply with a number of differing regulations of the EU states.

The most recent versions of the directive by both Econ and Ecofin include new measures concerned with remuneration, which have been taken directly from the banking directive. Our belief is that this approach should not be applied to fund managers as it will simply drive them out of the EU towards Switzerland or further to Asia.

The AIFM Directive will introduce powers and duties for a new centralised European regulatory authority called the European Securities and Markets Authority, which will start work on 1 January 2011. ESMA will be able to issue guidelines to national regulators on how to monitor conformity with the Directive, and this will push financial markets legislation to a supranational level. It will probably add a layer of interpretation which will not be welcomed by managers unless it is seamless. Whether the cost of implementing any regulations issued as a result of ESMA will be passed onto managers is yet unknown. However with the prospect of the abolition of the FSA and its potential costs, we hope this is not the case.

As compliance experts, many of our clients have expressed their concerns over future regulation and its impact on their businesses and as a result many are considering their options. We believe however that the UK is still not experiencing an exodus of managers despite the early predictions of many. Whether this will change remains to be seen after the European Parliament's vote on the directive.

This vote has now officially been postponed to September, which is not inspiring anyone with confidence. At the end of the day, uncertainty in the EU and in the UK means that managers will either delay launching new projects or expanding their businesses which is harmful to the economy and to investors.

We shall have to continue to watch this space and in the meantime management companies would be well advised to clean up any regulatory issues they may have and carry out necessary internal audits to be sure to face with confidence any new legislations and/or overzealous new regulatory bodies.