Brussels is exploring whether to restrict the possibility for hedge funds to be managed from overseas financial centres such as the City of London, reviving an idea that UK asset managers see as an existential threat.
The European Commission included questions on a possible tightening of the rules governing hedge funds in a consultation paper published on Thursday, picking up on suggestions earlier this year from the bloc’s top market regulator that “delegation” of fund management should be more clearly limited in response to Brexit.
A practice at the heart of global investment management, delegation allows managers to base and sell funds in the EU, while outsourcing investment decisions to financial centres such as the UK, which will become a so-called third country at the end of the Brexit transition period.
Existing EU rules say that delegation should be for clear business reasons and not undermine the effectiveness of supervision by national regulators, but do not set prescriptive limits.
The consultation document asks if the bloc should go further, for example by setting “quantitative” limits on delegation or establishing a list of “core or critical functions” that should be performed in the EU.
“What is concerning is that the EU is using Brexit as an excuse for changing international norms,” said one UK fund management executive. The person added that the push to tighten the delegation rules was a politically motivated manoeuvre aimed at forcing investment groups to shift portfolio manager jobs — the sector’s most “high-profile, profitable functions” — to continental Europe.
The commission document also asks whether action is needed to clamp down on “letterbox entities” — shell companies that take orders from foreign delegates — and whether different rules are needed depending on delegates’ location in order to safeguard investor protection.
While Brussels insists it is not prejudging the conclusions of the review, the idea of restricting delegation fits with broader themes of onshoring and centralising oversight that have come to the fore in EU financial services policy since the 2016 Brexit vote.
As the EU has grappled with the implications of the City leaving the bloc’s regulatory purview, Brussels has toughened its assessments of whether non-EU financial services firms should be granted key market access rights. The EU has also legislated to allow it to force critical market infrastructure to move into the bloc to serve European customers.
The UK is the second-largest portfolio management centre in the world, managing £8.5tn in assets, according to trade body the Investment Association. Of this sum, about £2.1tn is managed on a delegated basis on behalf of EU-based investors.
The commission consultation paper only covers hedge funds and other “alternative investment” vehicles such as private equity funds because it is the start of a planned review of a 2011 law, known as the Alternative Investment Fund Managers Directive (AIFMD), that regulates the sector.
But the EU’s markets regulator already called in August for “further legal clarifications on the maximum extent of delegation” for both this industry and for retail investment funds, which are governed by a different regulatory framework known as Ucits.
Those proposals spooked international asset managers, who fear an overhaul would lead to fragmentation and severe disruption to their operating models.
Should the commission decide to press ahead, it will relaunch a policy battle that has already played out once since the Brexit vote. In 2017, Brussels pushed to toughen enforcement of existing constraints on delegation.
Despite the enthusiasm of some EU governments, including France, the 2017 plan was eventually beaten back by other member states, with the criticisms led by Luxembourg, whose large fund industry is closely interlinked with London.
The commission’s consultation paper also questions the use of national placement regimes that allow fund managers based in non-EU territories, such as Jersey, Guernsey and the Cayman Islands, to serve clients in individual EU countries, asking whether they “create an uneven playing field” between EU and non-EU fund managers.
There are concerns in Brussels that fund managers may be deliberately choosing that approach because of a lighter regulatory and supervisory burden compared with setting up shop in Europe and complying with the AIFMD.
Europe’s AstraZeneca stockpile mounts as citizens snub jab
After battling with AstraZeneca over shipment delays, and even casting doubt over its Covid-19 jab’s efficacy, EU countries are seeing stocks of the company’s shots pile up — unused.
As of Friday, France had administered 16 per cent of the 1.1m doses of the two-injection vaccine it received since the first delivery in early February, according to health ministry data. As of Thursday, Germany had given a little over one-fifth of the 1.45 million doses, about the same proportion as Italy, which has received over 1m doses. Spain has used just under a third of a total of 808,000 doses as of Friday.
The situation has prompted several European leaders to talk up the Oxford/AstraZeneca vaccine in recent days, with one French health ministry official even calling for a “collective rehabilitation campaign” to improve its reputation.
German chancellor Angela Merkel acknowledged that there was “an acceptance problem with the AstraZeneca vaccine at the moment” that was slowing the jab’s rollout. In an interview with Frankfurter Allgemeine newspaper on Thursday, she urged people to keep an open mind about it: “All the authorities tell us that we can trust this vaccine.”
The tone is a change from only weeks ago when European politicians were engaged in an acrimonious battle with AstraZeneca over its deliveries and when French president Emmanuel Macron suggested the vaccine was “quasi-ineffective” on older individuals. Now that they have doses, however, EU governments face a sceptical public, in addition to logistical challenges and restrictions of their own devising.
Health experts have warned that the continent’s already sluggish rollout could be further hampered if uptake of the Anglo-Swedish company’s vaccine is not improved. The EU had inoculated only 6.82 per 100 people by Friday, compared with 28.6 in the UK, 20.4 in the US, and 91 in Israel, according to Our World in Data.
Chief among the reasons for the lower acceptance of the Oxford/AstraZeneca vaccine was a policy choice made by many countries to restrict its use for older people until more data on its efficacy became available. In France, that meant the shot is being offered only to people aged between 50 and 64 with comorbidities and healthcare workers, while Spain has advised it not be used on those older than 55 years old. Germany and Italy are offering the jab to everyone younger than 65.
Health experts say negative headlines have damaged the vaccine’s reputation, bolstering the perception that it is a lesser option to BioNTech/Pfizer and Moderna jabs, which both rely on so-called mRNA technology and boast higher protection rates. A study suggesting the AstraZeneca vaccine was less effective against the variant that has emerged in South Africa caused healthcare workers’ unions in several European countries to demand that their members get the mRNA-based vaccines instead.
The Oxford/AstraZeneca jab showed efficacy of between 62 and 70 per cent in clinical trials last year. That compares with more than 90 per cent effectiveness for the BioNTech/Pfizer and Moderna jabs. But all of them offer nearly full protection against hospitalisation and deaths.
“I don’t have anything against the AstraZeneca vaccine,” said Jérôme Marty, who heads a French doctors’ union. “But healthcare workers are often exposed to high viral loads in the hospital so they need the most effective vaccines that we have.”
In France, which has for years had the world’s highest vaccine hesitancy, there were reports of hospital workers missing shifts and suffering strong side effects such as fever and muscle pain after being inoculated with the Oxford/AstraZeneca vaccine. It is often younger people who experience such side effects with the AstraZeneca shot since their immune systems mount a stronger response than older people, health experts say.
Weeks after the French president’s dismissive comments on the jab, France’s top vaccine adviser Dr Alain Fischer has been extolling its virtues on television, social media and webinars for hospital staff.
“For reasons that I find profoundly unfair, this vaccine has gotten relatively bad press in France,” the paediatric immunologist told the press on Thursday. “It is effective. It is safe. It should be used without a second thought and without delay.”
Fischer also referred to the results of a new study from Scotland, which has not yet been peer-reviewed, showing the Oxford/AstraZeneca shot lowered the chance of hospitalisation from four to six weeks after vaccination by 94 per cent after one shot. “If confirmed, these results would be excellent news”, he said, and could lead France to expand the usage to those aged over 65. Logistical problems in France have also meant doctors only started inoculating patients this week.
Spain is reviewing new data continuously to decide whether to change age restrictions on the jab. Health ministry official Silvia Calzón said on Thursday: “We are waiting for there to be more evidence so that we can make a decision with all the guarantees.”
Even Macron has become a convert. “In view of the latest scientific studies, the efficacy of the AstraZeneca vaccine has been proven,” he said after a virtual gathering of EU leaders. “If that’s the vaccine that’s offered to me, I will take it, of course.”
This story has been amended to use health ministry data on the French vaccination campaign rather than data compiled by the website Covidtracker.fr.
French Greens given a grilling over meat-free school lunches
Grégory Doucet, mayor of Lyon, said he had no inkling that the school lunches served up in the French city this week would put him at the centre of a political storm.
But the decision by the environmentalist mayor that children should be offered just a single lunch option — one without meat — prompted immediate denunciations from French government ministers, and protests by farmers who responded by releasing herds of cows outside city hall.
The ruling — which Doucet said he took for a limited period to avoid long queues for multiple menus that would bunch pupils close together during the Covid-19 pandemic — has set carnivores against vegetarians, town against country, and right against left.
“It touches a lot of topics deeply rooted in French political culture,” said Vincent Martigny, politics professor at the University of Nice. “Everybody knows we should be eating less meat, but we’re still a very traditional food culture in France, quite conservative. If you don’t eat meat and drink wine, you’re not very French.”
Doucet and his Europe Ecologie-Les Verts (EELV) , which took Lyon from the centre-right in local elections last year, say the row has more to do with June’s regional elections and the presidential and legislative polls due in 2021.
“They’re targeting the ecologists because we’re the biggest threat,” Doucet told the Financial Times.
Even so, a mini-campaign by some ministers in President Emmanuel Macron’s government to curry favour with conservative voters and paint the Greens as crazed ideologues quickly spun out of control and exposed divisions in the cabinet.
Gérald Darmanin, the hardline interior minister, denounced the Lyon Greens for what he called a “moralistic, elitist policy” to deprive working-class students of meat. Julien Denormandie, who holds the agriculture portfolio, leapt to the defence of farmers, calling the decision “shameful” and saying: “Let’s stop putting ideology on our children’s plates!”
Environment minister Barbara Pompili, however, said she was sorry to hear a “prehistoric debate” full of clichés about the supposed nutritional inadequacies of vegetarian food. Macron eventually had to tell them to stop disagreeing in public as he called for an end to the “idiotic” argument.
The school meals controversy is the latest manifestation of a long-running debate in France and abroad over the environmental sustainability of meat consumption by an increasingly wealthy and numerous world population, given the land taken up by cattle and their greenhouse gas emissions.
Doucet, a “flexitarian” who said he tried to limit his intake of meat and fish, has campaigned to reduce consumption of animal protein and provide more vegetarian meals in schools, but he said his immediate priority was to ensure the meat served comes from local farmers.
He also pointed out that Gérard Collomb, his centre-right predecessor as mayor, had made exactly the same decision for a single, no-meat menu acceptable to the largest number of school pupils during an early phase of the pandemic — and there had been no political backlash.
“When we took the decision, we didn’t think for one minute it would lead to a political polemic,” Doucet said.
Somewhat later than neighbouring countries such as the UK, France is in any case gradually coming to accept vegetarianism. The Michelin Guide this year for the first time awarded one of its prized stars of approval to a French vegan restaurant called ONA — for Origine Non Animale.
“People used to be treated as the village idiot if they were vegetarian,” said Jean-Pierre Poulain, a sociologist specialising in food at the University of Toulouse. “That’s no longer the case.”
The change was slow in coming, said Poulain, but as in other urbanised societies, French city dwellers anthropomorphised pets, idealised wild animals and no longer automatically accepted the legitimacy of killing animals to eat them.
As mayor of Lyon, Doucet has also found himself at the heart of another contemporary debate — this time a particularly French one — about the role of schools and other state institutions in shaping the values and ideals of the nation’s youngest citizens.
Macron and his ministers, who are currently promoting legislation designed to curb Islamist “separatist” ideology and lifestyles, are demanding strict adherence to French secular values. As such they are reluctant to see the state’s prerogatives usurped by local governments with their own priorities.
Conservatives have already fulminated about the Green mayor of Bordeaux rejecting a public Christmas fir because he did not want to celebrate around a “dead tree”. Other Green civic leaders have refused to host the Tour de France cycle race in their towns because of the carbon footprint of all the accompanying motor vehicles.
On the right, the loss of meat as a choice for school meals is sometimes portrayed as another step towards the forced dismantling of the French way of life, but politicians wary of pointless conflicts are more phlegmatic about the affair.
“I don’t think the children of Lyon are going to die of anaemia in the days ahead, but I also don’t think this will do much to reduce greenhouse gases,” Roland Lescure, an MP with Macron’s governing La République en Marche! party, was quoted as saying in Le Parisien.
“Everyone is playing politics,” he added, “including the mayor of Lyon.”
ECB signals rising concern about eurozone bond market sell-off
The European Central Bank has indicated it will increase the pace of its emergency bond purchases to counter the recent sell-off in eurozone sovereign debt markets if borrowing costs for governments, companies and households continue to rise.
Philip Lane, chief economist of the ECB, said on Thursday that the central bank was “closely monitoring the evolution of longer-term nominal bond yields” and its asset purchases “will be conducted to preserve favourable financing conditions over the pandemic period”.
The ECB has pledged to ensure financial conditions encourage investment and spending, helping the eurozone economy to make a swift recovery and lifting inflation towards the central bank objective of just below 2 per cent.
To achieve this, Lane signalled that it would rely on its pandemic emergency purchase programme, under which it plans to spend up to €1.85tn on buying bonds by March 2022. There is just under €1tn of that amount left to spend.
“We will purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation,” he said.
Eurozone government bonds fell to their lowest levels for almost six months this week, and while Lane’s comments caused a brief rally on Thursday afternoon, prices then resumed their downward path.
Bond yields move inversely to prices, so the sell-off is pushing up the cost of borrowing for governments, which must sell vast amounts of extra debt this year to cover the cost of the coronavirus pandemic and its consequences.
Germany’s 10-year bond yield has risen to its highest level since last March, while the French equivalent returned to a positive yield for the first time since June and Italian sovereign yields hit their highest level since November.
ECB president Christine Lagarde said in a speech on Monday that policymakers were “closely monitoring” the rises.
Isabel Schnabel, another ECB executive board member, said in an interview with Latvian news agency Leta published on Thursday: “A too-abrupt increase in real interest rates on the back of improving global growth prospects could jeopardise the economic recovery.”
Lane gave more detail of how the ECB defines “favourable” financing conditions, saying it would track the availability and cost of bank lending and market-based funding — in particular, the risk-free overnight index swap curve and the GDP-weighted eurozone sovereign bond yield curve, which have both risen in recent days.
He warned of the need to avoid “a mutually-reinforcing adverse loop” in which banks interpret lower borrowing demand as a negative signal about the economy and companies interpret a tightening of bank lending conditions as a worrying sign about the outlook.
Eurozone bank lending to the private sector grew by just under €12bn in January, down 75 per cent from the average monthly loan growth last year according to data published on Thursday.
Much of the slowdown was because of a sharp fall in net lending to insurers and pension funds. Lending to non-financial companies also retreated slightly, while lending to households still grew but at its slowest rate since last April.
Krishna Guha, vice-president at Evercore ISI, said “ECB jawboning” was “having little effect” and “the next step — in our view presaged by Lane — is for the ECB to dial up the pace of its [bond] purchases”.
Last week the ECB spent a net €17.3bn on its emergency bond purchase programme, up slightly from the previous week but still well below the levels of last April, during the previous sell-off in government bond markets.
Frederik Ducrozet, strategist at Pictet Wealth Management, said the ECB was likely to wait until it was clear the bond market sell-off was a lasting shift before increasing its emergency bond buying above €20bn per week. But he said that “will bring the risk of disappointment [for investors] — because you have to walk the walk as well as talk the talk as a central bank”.
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