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Comment: The devil's still in the details

The G20 summit has reached its conclusion with a united front, after a last-minute squabble with China about whether Hong Kong and Macau should be classified as tax havens, and it's now official: regulation and oversight will be extended to 'systemically important' hedge funds.

This is a conclusion that probably could have been guessed at several months ago. But what remains obscure, however, is how this aspiration will be translated into reality around the world.

In fact, it seems all but inevitable that regulation and oversight will be extended to pretty much all of the industry, notably to US managers that up to now have had the liberty to decide whether or not to register with the Securities and Exchange Commission.

What the industry would now settle for is a system, ideally uniform across the globe, which - modelled on the Financial Services Authority's existing regime for UK-based managers - would focus on oversight of the fund promoter and/or investment manager and would not seek to regulate individual funds, apart perhaps from a handful of 'systemically important' ones.

But the G20 statement brings no further insight as to whether this model is likely to be adopted by the world's economic powers, or whether they will try to regulate fund by fund, no matter where they happen to be established, and with what degree of intrusiveness, restriction and public disclosure. Upon this question hangs, in all likelihood, whether the industry will survive in anything resembling its present form.

The second question for the alternative fund industry is what will become of the practice of using what it calls tax-neutral jurisdictions, and what the G20 countries classify as 'tax havens' or 'financial centres' (depending on whether they are small Caribbean islands or members of the Organisation for Economic Co-operation and Development and/or the European Union) as fund domiciles.

The OECD, of course, has spent the last decade trying to chivvy into line jurisdictions deemed to retain harmful tax practices, eventually finishing up with a list consisting of just Andorra, Liechtenstein and Monaco.

These three renegades having quickly promised to fall into line over the past few weeks, it now appears that the OECD, to which the job of pursuing countries and territories unco-operative in the exchange of tax information has been delegated, has compiled an initial 'black list' containing such unlikely financial hubs as Costa Rica, the Philippines and Uruguay, as well as the better-known Malaysian island of Labuan.

Does this mean that centres such as Jersey, Guernsey and the Isle of Man, which are said by the OECD to have "substantially implemented the internationally agreed tax standard", get a clean bill of health from the G20? Are the Cayman Islands, British Virgin Islands and Bermuda set to receive a conditional seal of approval, having committed to the standard but not yet substantially implemented it? That doesn't seem like the outcome Nicolas Sarkozy was expecting from the summit.

In a sense, the gathering of G20 heads of state and government was the easy part. Now it will be down to finance ministers and their officials, along with an alphabet soup of international groups including the new Financial Stability Board, the IMF, OECD and FATF, to put details on what these grand ambitions - along with so many others set out in the leaders' statement - will actually mean in practice. Good luck to them - but even more to the financial industry sectors whose future depends on the outcome.

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