New government and EU set to clash over hedge funds

Chancellor George Osborne seen here in a file photo from April 28, 2010.

LONDON (Reuters) - Britain's new coalition government faces its first brush with the European Union next week as the bloc's finance ministers are on course to back tough new rules on hedge funds against UK wishes.

EU ambassadors have reached a deal on draft measures to force managers of hedge funds and private equity groups to register, undergo direct pan-EU supervision and abide by pay curbs, an EU diplomatic source said on Thursday.

The measure is part of a global push to learn from the financial crisis and shine a light on all corners of the financial market.

Britain and the Czech Republic were the only two members of the 27-nation bloc to oppose Wednesday's agreement which will be put to finance ministers meeting in Brussels for formal backing next Tuesday, the source added.

Britain's new Chancellor, George Osborne, is expected to attend and faces being outvoted at his first EU meeting.

EU states have a joint say with the European Parliament on the draft law and parliament's economic affairs committee is due to vote on its version on Monday.

"The main thing is to enable the EU presidency to start formal negotiations with parliament on a final deal," the diplomat said.

Britain still opposes the measure because it and the United States believe it sets the bar too high on third country funds and managers to offer their services to European investors.

Britain is Europe's main hedge fund and private equity centre and has been lobbying hard to water down the draft measure but France and Germany want tough rules.

EU financial services chief, Michel Barnier, said on Wednesday during a visit to Washington he wants a "balanced solution" to prevent the new rules from discriminating against non-EU funds.

The Cayman Islands, home to many of the world's hedge funds, told the European Parliament in a letter made public on Thursday it expects all the funds it regulates to operate on a basis of full transparency.