By Huw Jones
LONDON, July 14 (Reuters) - Britain was "gaining traction" in persuading its EU partners to rein in a draft law regulating hedge funds but the industry should also get its customers out on the campaign trail, a government minister said on Tuesday.
The European Union's executive European Commission has proposed a law to force managers of hedge funds, private equity groups and other alternative funds to register and disclose information to regulators, such as levels of leverage.
It is part of wider, global efforts to shine a spotlight on all parts of the financial market to improve transparency and spot risks more quickly.
Although Britain thinks parts of the draft law go beyond what is required to make the sector safer, other EU heavyweights like France want it toughened up.
Treasury Minister Paul Myners said the draft law offered many benefits, such as creating a single market in alternative investments that Britain could exploit as the bloc's biggest financial centre.
Hedge funds posed potential risks to the wider financial system that also needed monitoring, he added.
But parts of the draft law were too simplistic, ill thought out with elements such as a cap on leverage a step too far and would push the industry outside the EU to Geneva, Singapore or the Middle East if unchanged, Myners added.
"It would drive hedge funds out of Europe," Paul Myners, told a committee of lawmakers from the upper House of Lords.
Disclosure requirements on private equity were overly burdensome and demands on non-EU based hedge fund managers could be considered "protectionist".
"I am confident that the directive will be significantly improved. The arguments we are putting forward are being taken into account in Brussels. We are gaining traction," Myners said.
UK finance ministry officials were visiting 12 EU capitals to end "prejudices" against the industry and win support for key changes.
"Hedge funds and private equity groups should be working hard in getting their customers lobbying Europe on the value they get out of alternative investing," Myners said.
The draft law is one of many legislative measures the EU is adopting as a response to the financial crisis.
It will need approval from the European Parliament and EU governments to come into force and Britain faces a stiff challenge to win over key heavyweight EU states.
Parties on the left in the EU assembly are already saying the draft law has more holes than a "Swiss cheese" and needs beefing up to regulate the hedge funds themselves, most of which are based in the Cayman Islands.
French Economy Minister Christine Lagarde has said France will not allow the draft EU rules to be adopted unless they are toughened up.
German Finance Mininster, Peer Steinbrueck, has accused Britain of pandering to the City of London by hindering efforts to reform global financial markets.
The bulk of hedge fund managers in the world's $1.3 trillion hedge fund industry are based in London and New York, giving little incentive for other EU states to pull out the stops to back Britain, lawmakers said.
"The right directive for Europe will be the right directive for the UK," Myners said.
(Reporting by Huw Jones, editing by Stephen Nisbet)