Opinion: The FSA is no friend of anyone starting a hedge fund

Candia Peterson, a former European head of Japanese equities sales for ABN Amro, had plans to set up a hedge fund in the UK. Along the way she sought regulatory approval from the Financial Services Authority. It was an experience she did not enjoy:

It appears to me that the Financial Services Authority has but a single raison d'être; to make it as difficult as possible to start a business under its auspices and preferably to prevent it happening at all.

Setting up any business can be expensive. Not only do you have to forgo any income for a lengthy period time, you also have outgoings, be they rent, computers or service providers, all of which eat into your hard-earned savings.

However, when setting up a business - in my case a hedge fund - that needs to be regulated by the mighty FSA, your expenses start entering the stratosphere.

First, there is the application for regulatory approval. The do-it-yourself route is not to be recommended as the pitfalls are many. My two partners and I employed a specialist lawyer who does nothing else.

He was a wonderful man and made the filling out of dozens of forms - enough to burst a three-inch lever-arch file - relatively easy. At a price of course.

Then financial projections had to be audited by an accountant - another specialist with specialist fees attached. All of this before the entry fee and the annual membership fee, which run into high four figures.

The irony about the financial projections is that you have to 'project' initial funds under management. However you are not, upon pain of deportation, death and being banned from ever working in financial services again, to market to potential investors before being regulated.

If you promise not to tell, I will let on that we did very surreptitiously begin our marketing well before we were regulated - there was no other way to tell if it was worth spending the money and proceeding with the application.

Based on your financial projections, in turn based on a schedule of funds under management for the first two years of operation (guesswork rather than marketing-informed) and various cost projections, you come up with a set of figures telling you how much money you are likely to make at the end of years one and two.

Based on this amount, the FSA will then tell how much 'regulatory capital' you will have to lodge. This is essentially paid-up share capital that must be recorded as sitting in a bank doing nothing.

If you plan to lose money, you have to lodge more and if you plan to make money but fail to meet your projections at the end of the first period, you have to up the capital.

In other words, the weaker your business, the more expensive it is to keep it going. Regulatory capital, in our case, was set at a little over 100,000 (another great big hole in those savings!).

Ostensibly to protect the little man, the second irony is that the better you do, the more funds you have under management, and the more little man clients that might need helping, the less capital you have to put up.

Enough about money. Then there was the little matter of threshold competence. You might think - as indeed I did - that with 17 years' experience as a stockbroker, regulated by the then SFA and transferring that regulation from job to job on more than one occasion without difficulty, I might be able to transfer it straight into another regulatory body, IMRO; particularly as both the SFA and IMRO were merging into the same single organisation, the FSA.

Wrong! Wrong on every count. Despite the fact that I was able to get the heads of compliance at two of my previous employers to vouch for my untainted record and general good behaviour in matters of regulatory significance, they wouldn't budge.

Why? Because I wasn't actually employed on the transfer date of SFA/IMRO into the FSA, that red letter day known in the industry as N2, 1st December 2001.

Quite right I wasn't employed on that date, I was busy filling in reams of forms for my FSA application. I actually left my previous employment to set up the hedge fund on the 17th October though my official notice period ran on for three months after that date.

Technically, I argued, I was still employed on the 1st December. Ah, but I wasn't physically there. Seventeen years of regulation, less than six weeks of physically not being sat at a trading room desk and, guess what, I had to take an exam.

The IMC exam is no great intellectual challenge and I'm sure that those of you of a less sympathetic bent would argue that after so long in the industry, I ought to know most of its contents.

The problem is that the exam is little other than facts - things like the settlement period for UK gilts or the threshold levels for the various bands of income tax, the basis points commission on a transaction in the French stock market or the formula for calculating the monetary value of a price move in a future.

I didn't know any of this and, frankly couldn't have cared less as none of it had any bearing on what I wanted to do, which was to buy and sell Japanese equities, about which I knew everything of this nature I needed to know.

My nice contact at the FSA, who had clearly never worked at the coal face as it were, was in the unsympathetic camp. 'Life can be tough,' he said when quashing my final remonstration.

I passed the exam. I took four weeks out from setting up my business and (shhh) marketing the fund. I studied, I learnt, I regurgitated and I passed.

All very unnecessary. All facts have now left my short-term memory, few have been committed to my long-term memory and the only thing I have to show for it is a nice certificate with which to decorate the wall of my downstairs loo.

Before they will approve you, the FSA comes to see you for an inspection. A trio turned up to see us; Mr Unsympathetic, a colleague to take notes and the big white chief.

This is when you get the third degree on money laundering, or rather not money laundering, and where you are told in no uncertain terms exactly where you stand if you transgress.

That ordeal over, then comes the point of regulation. This was the final dilemma, as the whole process had taken so long we were starting to run out of cash. Deposit of capital was looming and our (shhh) marketing of the firm to potential investors was not going well.

From the day of being given a verbal assurance that we had received regulation, we had 10 working days to deliver proof that our regulatory capital was lodged. Miss the deadline and you have to start the whole process from scratch.

Once the capital is lodged, and should you decide not to proceed with the business (as ultimately we did), you don't get it back until the company is finally wound up at Companies House. The whole process can take some time (particularly as the FSA reserves the right to take up to six months to process your resignation).

We decided after heartfelt deliberation to go ahead with the regulation. We emptied our piggy banks and put up the capital.

Our efforts to persuade investors to put money into our firm had so far been unsuccessful. But we still had two or three good leads left, and we felt that if we abandoned our plans now after so much hard work we would all regret it.

In the event, those leads came to nothing and the long winding-up process began.

Our creditors, mainly our legal and accounting team and our information service providers were, to a man, wonderful in accommodating our position and reducing their expectations of what they were likely to get paid. We shall always be grateful to them for their help.

Guess who made us pay the full year's membership fee for about two weeks of membership?

candiapeterson@hotmail.com