European plans to impose draconian restrictions on hedge funds will need “major surgery” to avoid damaging the City and the $1.3 trillion global industry, Lord Myners said yesterday.

The City Minister unleashed a scathing attack on a draft European Union policy directive, which was launched last month to widespread critical hostility.

He said that the draft directive — which would force hedge fund managers and their funds to register with national regulators and produce regular reports and trading disclosures — was ill-considered. He added that they needed further consultation.

“It is clear to us all that the draft directive is flawed. This was perhaps inevitable, given the inadequate process by which it was developed, driven by political concerns,” Lord Myners told a breakfast meeting of hedge fund executives.

In a sideswipe at France and Germany, which have driven the clampdown, Lord Myners said: “It is perhaps easy for other European countries to make political capital out of demanding intrusive regulation of an industry of which they have little or no direct experience.”

About one fifth of the hedge fund industry’s $1.3 trillion of assets is managed in Europe, with 80 per cent of that business taking place in the UK.

The EU launched its proposals as part of its efforts to prevent another banking crisis. However, if introduced in its present form, it is feared that hedge funds would leave London in favour of lighter-touch regimes, such as those in Geneva and Dublin.

Lord Myners said that Britain operated an effective regime for regulating hedge funds and would oppose some of the more restrictive proposals.

Robert Jenkins, chairman of the Investment Management Association, launched a vitriolic attack on Peer Steinbrück, the German Finance Minister, accusing him of double standards over the issue yesterday. Mr Steinbrück expected Britain to support Germany in its efforts to promote the German car industry, yet he had abandoned Britain in its efforts to protect the UK’s hedge fund industry, Mr Jenkins said.

He added: “Alas, Mr Steinbrück and a number of continental comrades seem determined to shoot a key part of the money management industry in the back and themselves in the foot.”

Peter Montagnon, director of investment affairs at the Association of British Insurers, a trade body for fund managers, told a House of Lords sub-committee yesterday that the European proposals were “not fit for purpose”. Speaking on behalf of investors in hedge funds, Mr Montagnon said that the directive would restrict choice and impose onerous compliance costs on funds.

“What we don’t want is transparency put in the way of these funds that reduces the choice of professional investors or imposes a cost that ultimately will be borne by their clients,” Mr Montagnon said.

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