Hedge fund expert: Bermuda gets regulation balance right

By added on 21/11/2013

The head of a hedge funds watchdog yesterday said Bermuda had hit the right balance on business regulation, reports the Royal Gazette.

Dame Amelia Fawcett, chairman of the London-based Hedge Fund Standards Board (HFSB), said a global move towards tough regulations might not always be the best way of policing high finance — and that too many rules could end up damaging the sector and slowing the recovery from the global recession.

But Dame Amelia added: “Bermuda is getting it right. It’s not that it’s a light-touch environment — it’s sensible.”

And she added: “If people don’t think you’re doing a good job, you hear about it.”

Dame Amelia said that the G20 group of the world’s biggest economies had already warned some Asian nations that they need to improve their financial regulation.

But she added: “I don’t think that’s the case for Bermuda.”

Dame Amelia was speaking after she made the keynote speech at the Bermuda Monetary Authority Regulatory Forum, held at the Hamilton Princess yesterday.

She told delegates that fragmentation in markets and capital flows was a major challenge for the world economy.

Dame Amelia said, however: “But it also opens new opportunities for jurisdictions, which become the lynchpin between different markets and enable capital to flow freely.

“I believe a key success factor to becoming that lynchpin is a user-centric approach to regulation.

“For Bermuda, as for so many jurisdictions, the cost of doing business, the talent pool, the ease with which business can be created, are essential.”

Dame Amelia added: “While many see the wave of new regulations, along with the tectonic shifts underway in the financial system, as a threat to existing business models, they can also be viewed as an opportunity for innovation, for new players to emerge and for new business models.

“They also can be a an opportunity for jurisdictions catering for this and becoming the lynchpin for global capital flows in a more fragmented world of finance.”

Dame Amelia said that standards hammered out between investors and hedge fund managers — as with the HFSB — could be more effective than hard-line regulations imposed from outside.

Dame Amelia added: “The standards process is an example only of getting the people who have a stake getting together. If you want people in a business to do something, you give them a stake in it.

“Investors are one of the most powerful enforcement agents — if they think a hedge fund isn’t doing what it should be, they could go to the regulator.....or they could redeem and take their money away.”

She said: “What’s interesting is the number of times investors have said to regulators don’t do this — you’re doing it in our name and it will cause confusion, increase costs, or whatever the issue is.”

But she warned that the current trend towards more regulation globally was unlikely to slow in the immediate future.

“The past few years has been a harbinger of what we might have,” Dame Amelia said. “I don’t see any reason right now why we would have less regulation.”

And she added that it was as much the quality of the regulation — and potential unintended consequences — as the amount which caused concern.

She said: “It’s less the quantity — it’s the quality. Are these regulations fit for purpose?”

Dame Amelia added: “It’s a bit of a British horses for courses thing — there are some areas where regulations work, but we are regulating an entire industry for bad actors, which may not be appropriate.

“The regulators don’t know what the investors know — they never could. This business is fast-moving and you need to keep on top of them.”

Earlier, she told a packed auditorium at the Fairmont Hamilton Princess that the global financial crisis and the last five years had been “unprecedented in recent memory” and caused “tectonic shifts in the nature of financial services firms and markets”.

She said Morgan Stanley bank executive Timothy Adams had written to the International Monetary Fund (IMF) warning of the “financial Balkanisation” and the “risk of fragmentation in a global economy”.

He added that there was also “incoherence and complexity” in regulation, with “extraterritorial oversight of some national measures”.

Dame Amelia, a former managing director for Europe for Morgan Stanley, said: “This ‘fracturing’ is due to ring-fencing, subsidiarisation and differing national approaches to financial regulation.”

And she told the forum: “There is an important question in all of this and that is whether the pendulum has swung too far in the opposite direction from the recklessness — and it was recklessness — of the last 20 years to overly complex regulation, sometimes with unforeseeable, unintended consequences and the growing concern about whether we’re regulating for problems of the past and in doing so potentially missing the problems of the future.”