The UK's Financial Services Authority is trying to steal a march on the possible introduction of stricter European regulations on private equity by advocating a proportional, light-touch regime.

A discussion paper by the regulator on risks and regulations for UK private equity, published last week, has received widespread industry support but comes months before a paper is expected from the European Central Bank on buyout deals' impact on financial stability. According to the FSA paper, the potential for market abuse and conflicts of interest affecting the private equity market are highly significant. It also expressed concern about excessive leverage and where the risks of a buyout failure would fall. The FSA concluded from industry discussions that systemic risks from a private equity deal's failure were smaller than those from hedge funds, and regulatory responses should reflect this. Financial News revealed in January that the regulator was to take a close look at the industry. Last week's review was intended to influence European and other organisations, including the ECB, the regulator said. Its fears are understood to include moves to introduce private equity regulation in other jurisdictions that could force a tighter regime in the UK. Although a European Commission working group highlighted the positive impact of private equity on jobs and companies, the markets in financial instruments directive, due to be introduced next November, will require regulation of some firms, including those that give investment advice to funds without operating them. The paper said: "As they consider Mifid implementation, some regulators may consider the appropriate regulation of the industry as a whole." Javier Echarri, secretary-general of the European Private Equity and Venture Capital Association, said: "The FSA demonstrates a clear understanding of the importance of private equity to the economy, while voicing concerns about issues that arise from the rapid growth in fund sizes and the broad credit market and ready availability of money. "The FSA is pragmatic in adopting a sensible, principles-based approach. Other European regulators should follow. "The UK is the largest and most mature European private equity market, which has benefited from a light regulatory touch and from self-regulation."