UK's FSA says hedge fund oversight is adequate

BRUSSELS, April 8 (Reuters) - The current system of indirect oversight of hedge funds is appropriate and the sector is not the culprit behind the current market crisis, a senior British market regulator said on Tuesday.

"Hedge funds are neither catalysts or drivers of current market turmoil," Dan Waters, director of retail policy at the UK Financial Services Authority, told the European Parliament.

"The indirect approach of supervision to hedge funds is the appropriate and cost effective one," Waters said.

Hedge funds are currently supervised indirectly through the prime brokers, typically big investment banks, that provide them with capital.

"We have seen significant tightening of the terms prime brokers now offer hedge funds. This is a robust reaction to managing their own risks," Waters said.

"We see this behaviour as consistent to our efforts to mitigate risk as regards financial stability," he added.

The blame for the current market turmoil lay with the "astonishingly inadequate mortgage lending practices" in the United States, he said. (Reporting by Huw Jones; Editing by Dale Hudson)