First bankers, now managers of UCITS funds are in the firing line for the European Union assault on bonuses.
As widely reported in the financial press this week, the European Parliament’s Economic and Monetary Affairs Committee (ECON) voted today in favour of German Green Party MEP Sven Giegold’s proposal to cap bonuses for asset management staff at a 1:1 ratio with their annual salary (the “Giegold Proposal”).
The Giegold Proposal, which has taken the asset management industry by surprise, was included as part of ECON’s final consideration of UCITS V, which also seeks to bring the rules relating to depositories and custody of assets in line with those already adopted with regard to the Alternative Investment Fund Managers Directive (AIFMD).
The revised UCITS V text is not yet available and, accordingly, this OnPoint is based on press coverage, European Parliament Press Releases and discussions with industry bodies.
Proposals on Remuneration
Before the Giegold Proposal, the UCITS V proposals on remuneration mirrored those contained in the AIFMD, which in turn are based on similar provisions contained in the Capital Requirements Directive III (CRD III). For more detail on the AIFMD remuneration provisions, please refer to our forthcoming OnPoint - ESMA Guidelines on sound remuneration policies under the AIFMD.
As reported in the press, the Giegold proposals go further than this and seek to replicate the recently approved limitations on bankers bonuses.
The rule passed by ECON provides that the variable component of a fund manager’s remuneration should not exceed the fixed component of the fund manager’s total remuneration.
The requirement that at least 50% of the variable payment should consist of payment in units in the UCITS and that at least 40% (and in some cases 60%) be deferred, remains from the text proposed by the Commission.
ECON also voted in favour of a proposal that will seek to impose “high penalties” for funds that charge performance fees and fail to outperform their benchmark. Further details on this proposal are not available.
The ECON vote is but one part of the road to approval of an EU Directive. The vote at 22 in favour and 16 against was surprisingly close and the matter will now go forward to the full Parliament for consideration in May. We would expect that intense lobbying on this issue will take place between now and May, particularly from the jurisdictions that have large asset management industries such as Ireland, the UK and Luxembourg.
It is likely that these issues will lead to delayed implementation of the Directive beyond the forecast timeline of the late 2014/early 2015.
Implications for US Managers
Asset managers on both sides of the Atlantic have voiced major concerns over these proposals pointing to the fact that they will lead to increased fixed costs and to managers outside the EU shunning Europe and thereby reducing investor choice and competition.
The proposals will only apply to EU managers and it may be that the proposals will be extended to apply to delegates of EU self-managed UCITS or UCITS managers that are located outside the EU as is currently being proposed under the AIFMD.
If this was to occur, the questions that we have asked with regard to implementation of this approach under AIFMD stand to be repeated.
Will the FSA or other competent authorities implement any such guideline? If so, what regulatory remuneration requirements will be considered “equally as effective”? Will only remuneration derived from the delegated activities count for these purposes? If so, how should the entity to which activities are delegated approach the task of apportioning total remuneration between delegated activities and other activities?
For US managers, remuneration requirements may be coming down the track pursuant to Section 956 of the Dodd-Frank Act. See our DechertOnPoint, "Incentive Compensation Under the Regulatory Spotlight" (PDF). It remains to be seen if rules of remuneration will actually be implemented in the US and, if so, whether they will meet the “equally as effective” test.
In addition, the requirement that variable remuneration should consist of units in the UCITS may be neither feasible or practicable owing to restriction on ownership of UCITS by US persons.
It is hard to give a definitive view on whether the Giegold proposals will survive the lengthy legislative process that European legislation is required to undergo. Mr Giegold states that “it has never happened that a key vote in ECON was changed in plenary session” and it remains likely that the proposals will survive the parliamentary process.
If this occurs, we then have a situation where the original Commission proposal has been amended by Parliament and this will lead to a conciliation “trialogue” process between the three EU institutions – the Commission, Parliament and Council of Ministers.
It is here that member states such as the UK, Germany, Ireland and Luxembourg will be expected to play a key role in challenging the Giegold proposals.