FSA publishes update on regulation of hedge funds

Marketing of Hedge Funds to Retail Customer

Commenting on the feedback received covering the marketing of hedge funds to retail customers, Gay Huey Evans, Director of Markets and Exchanges said:

"Generally, the feedback we received did not indicate a great desire on the part of hedge funds or investment advisers to provide or sell hedge funds as retail products. Nor was there evidence of significant demand from retail investors."

"However, we will be keeping the regulatory status of presently unregulated schemes under review and will be discussing with market participants and other interested parties the possibility of allowing a broader range of funds to be brought into the regime for retail investment products. The ongoing Listing Review and forthcoming review of Collective Investment Schemes may have implications for Hedge Funds."

Regulation of Hedge Fund Managers

The FSA regulates hedge fund managers in the UK but does not regulate the funds themselves. Respondents to the Discussion Paper did not think there was a need to make changes to the current regulatory regime. The FSA will nevertheless undertake some thematic work on the adequacy of systems and controls in hedge fund managers.

Gay Huey Evans commented:

"We do not and cannot regulate the hedge funds themselves or set standards for them to achieve. However, all firms based in London, including the hedge fund managers, must take reasonable care to maintain systems and controls appropriate to their business. Hedge fund managers should be properly qualified and controlled when undertaking investment activities for their client fund. Any hedge fund manager in breach of these standards would be in breach of the rules."

Notes for editors

1. The FSA published DP16 in August 2002. We received 40 responses. The DP covered the marketing and selling of hedge fund products to retail investors, the regulation of hedge fund managers and financial crime issues.

2. Respondents to the Discussion Paper (DP16) commented on two major issues, whether the rules governing the marketing of hedge funds to retail customers should be relaxed, and whether the supervisory regime for hedge fund managers should be changed.

3. Under the existing regime, hedge fund products may not be marketed and sold to retail consumers except in certain circumstances some financial advisers are authorised to recommend hedge fund products. Individuals who invest in hedge funds tend to be higher net worth individuals.

4. The FSA published Discussion Paper 17 on Short Selling in October. Short Selling is a separate matter to hedge fund regulation, though many hedge fund managers are short sellers. We will publish a Feedback Statement on DP17 in late Spring.

5. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the appropriate degree of protection of consumers; and fighting financial crime.

6. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.