Regulatory competition as a social fact: Constructing and contesting the threat of hedge fund managers’ relocation from Britain

ABSTRACT

Concerns about national competitiveness can undermine the prospects of enhanced financial regulation, as the threat of industry relocation makes states less willing to tighten rules. This logic seems applicable in the case of the European Alternative Investment Fund Managers Directive: in fear of managers relocating, the UK, which hosts almost the entire European alternative investment sector, successfully advocated a watering down of the proposed requirements. This paper, however, questions the origins of the – seemingly natural – British negotiation position. The empirical record confirms that the relocation threat is not a necessary fact imposed by a global logic of market forces, but a scenario constructed and contested both by the regulator and firms. The scale and imminence of the threat posed to the UK's competitiveness depends on the use and function of competing narratives about hedge fund managers’ relocation and these narratives inform the behaviour of both hedge fund managers and their regulator. The British authorities hence not only influence the degree of regulatory competition through acts of liberalisation, but also through their influence on dominant narratives. This means that regulatory competition is a social, not a brute fact, and that the associated power relationship between state and market actors is discursively produced.

KEYWORDS:

• Regulatory competition
• hedge funds
• industry mobility
• power
• discourse
• social facts

Notes

1. The term fund manager can denote both the management firm or the individual who primarily takes investment decisions on behalf of the management firm.

2. One of the most contentious issues, for example, involved the introduction of a central ‘European passport’, which would enable non-European fund managers or managers managing non-European funds to market their products to European investors. Originally, the Commission argued that managers would only be granted the passport if their home countries had regulation in place ‘equivalent’ to host-country regulations, in order not only to ensure adequate investor protection and financial stability but also to decrease tax and regulatory arbitrage through the use of offshore funds. The UK authorities successfully negotiated to replace this onerous requirement with lighter requirements, which even the Cayman Islands, where most funds are located, can easily fulfil (Johnson, 2010). Other requirements that were relaxed to reach a compromise include exemptions from the AIFMD, leverage caps, minimum level of capital reserves and some remuneration provisions (SOMOS, 2010).

3. I provide textual evidence to illustrate my analytical findings. It will be indicated if quotes stem from observation notes or verbatim transcripts of speeches during events but not all event details can be provided for anonymity reasons. Quotes without any specific reference stem from interview transcripts.

4. I owe this argument to Kimberly Chong.

Additional information

Notes on contributors

Barbara Sennholz-Weinhardt

Barbara Sennholz-Weinhardt is PhD Student at the School of Public Policy, University College London, UK. Her research explores the social dynamics of regulatory interaction and ideational accounts of financial regulation.