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Hedge funds are seeking to take advantage of Brexit and harness a global deregulation drive by calling on the UK financial watchdog to strip back reporting requirements for the sector.
Under rules inherited from the EU, Britain’s Financial Conduct Authority requires market transactions to be reported by both buy-side institutions, including hedge funds, and sell-side institutions, such as investment banks.
Hedge funds complain this is an unnecessary duplication of effort and are lobbying the FCA to make the most of no longer needing to follow EU rules by ditching the requirement for buy-side institutions to report transactions.
The sector believes the political winds have moved in its favour as the UK government is pressing regulators to slash red tape in support of the country’s stagnant economy.
Donald Trump’s push for a wave of deregulation in the US is providing extra impetus to calls for a reduction in the bureaucratic burden on the City of London.
“Reducing redundant and costly requirements on managers while preserving regulatory oversight will enhance the attractiveness of the UK as a global financial services centre,” said Bryan Corbett, chief executive of the Managed Funds Association, which represents many of the largest US hedge funds.
The MFA said it “urges the FCA to remove buy-side firms from the scope of transaction reporting, as dual-sided reporting is duplicative, costly, and inefficient”.
The FCA gave the sector hope that it was likely to cut reporting rules when it published a discussion paper in November, saying it was aiming to achieve “a streamlined transaction reporting regime, tailored to the UK, to cut costs for businesses and make our capital markets more attractive”.
The watchdog receives more than 7bn reports each year of transactions executed in British financial markets for over 20mn different reportable instruments, such as equities, futures, total return swaps and exchange traded funds.
The cost for UK financial firms of reporting such transactions is estimated at more than £500mn a year, according to a letter sent to the FCA on Friday by AIMA, a London-based hedge fund trade body.
Adam Jacobs-Dean, a managing director at AIMA, said its members “routinely single out transaction reporting as being one of the most significant compliance burdens”.
“We strongly advocate for the removal of ‘buy-side’ investment firms from the scope of transaction reporting requirements . . . on the basis that sell-side firms with whom those firms execute transactions in most cases also report those transactions,” he said.
Such a move “would neither reduce the quality of information available to the FCA nor decrease the FCA’s monitoring and oversight capabilities”, he said, adding that it would bring the UK in line with the US, which does not require buy-side firms to report transactions.
Jacobs-Dean also pushed back against the FCA’s suggestion that it could extend reporting requirements beyond firms subject to so-called MIFID II rules, by applying them to private equity and other investment firms subject to rules known as AIFMD and UCITS.
In response to Sir Keir Starmer’s call for pro-growth proposals, the FCA said in a letter to the prime minister last month that it would “review the proportionality of reporting requirements and remove redundant returns, initially expected to benefit 16,000 firms”.
The regulator, which plans to publish proposals for changing its reporting rules later this year, told the Financial Times: “We are committed to removing unnecessary reporting requirements to support growth, as we set out in our letter to the prime minister.”
