EU rejects US criticism over hedge fund curbs

(BRUSSELS) - European officials on Thursday defended planned new EU legislation regulating high-end financial services from "protectionist" charges, amid anger from US Treasury chief Timothy Geithner.

Michel Barnier, European Commission financial services overlord received a letter from Geithner "regarding plans to regulate speculative funds and alternative funds," commission spokesman Amadeu Altafaj told journalists.

A report in the Financial Times said Geithner's letter warned against planned curbs on hedge and private equity funds that are held outside the EU, even if managers operate on its territory.

Altafaj said the legislation that will go before EU finance ministers for their approval on Tuesday consists of regulation that would "reinforce transparency and the responsibilities of key actors in these markets.

"What we are doing, we are doing because there are clear G20 guidelines," he underlined, referring to the Group of 20 of leading world economies, which has emerged as a key decision-making body in recent months.

In the letter, Geithner said the draft European Union directive would impose tighter restrictions on investment funds, saying proposed new rules might damage US hedge funds, private equity groups and banks by curbing their ability to do business with Europe, the paper said.

However, a European source insisted that the plans are "not a question of protectionism" and that they do not "discriminate on the grounds of product nationality."

Barnier will travel to the US in the "coming weeks" to underline that message, according to the commission spokesman.

The sticking-point concerns access to the EU single market for fund managers based in Europe but whose money is held outside the EU, say in the Cayman Islands or other tax havens.

Opponents say it will hasten the flight of top funds from London, where between 70 percent and 80 percent of Europe's high-end financial services sector are found, to Switzerland or elsewhere outside the EU.

EU finance ministers are expected to agree on a "general approach" following heated talks between ambassadors on Thursday, after which the proposed law changes go to the European parliament and then back to the 27 EU member states to be signed off for national implementation.

While one diplomatic source said there are "several questions up in the air... particularly with Britain," another said London recognises it will have no option but to bow out while voicing its disapproval.

"That's the way the system works," said the second diplomat, with the qualified majority voting arithmetic heavily stacked against Downing Street.

France, Germany and Spain have decided which way they want to go with the legislation, and Britain will have no alternative but to try and water it down in parliament or delay meeting European obligations.