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European Parliament blocks proposals to cap fund manager bonuses

Out-Law News | 04 Jul 2013 | 5:22 pm | 2 min. read

The European Parliament has narrowly voted against proposals to cap bonuses paid to fund managers at 100% of annual salary.

The proposed cap, which was adopted by the Parliament's Economic and Monetary Affairs Committee (ECON) in March, would have limited bonuses issued to managers of Undertakings for Collective Investment in Transferable Securities (UCITS) and required half of the bonus amount to be paid in the form of units in the assets being managed.

Incentives expert Matthew Findley of Pinsent Masons, the law firm behind Out-Law.com, said that the vote would be a "huge relief" to the EU's asset management industry. The cap would have formed part of a new UCITS Directive, and was influenced by the new cap on bankers' bonuses due to come into force at the start of next year.

"The removal of the bonus cap from UCITS V will be a huge relief to the asset management industry, which unexpectedly found itself in the sights of EU regulators," Findley said. "It is also of potential significance within financial services more widely as it means that there is little chance of a bonus cap being imposed on hedge funds and private equity firms through the Alternative Investment Fund Managers Directive (AIFMD)."

"More generally, the vote could mark the stemming of the tide in terms of EU-driven pay legislation. Concerns have been expressed that the momentum being built up in financial services could lead to the EU looking to impose pay caps more widely through its proposed 'say on pay' legislation, known as the Shareholder Rights Directive. If that was intended, it must now be doubtful whether there would be sufficient political will to table such a proposal," he said.

UCITS are widely used by European retail investors and manage almost €6.8 trillion in assets, according to Commission figures. The changes to the current UCITS rules, originally proposed by the European Commission in July 2012, are intended to prevent fund managers financially benefitting from "excessive risk-taking" with customers' investments, and will introduce precise definitions of the tasks and liabilities of all depositaries acting on behalf of a fund.

Although the European Parliament has voted to remove the bonus cap from the latest version of the new directive, the new regime would still allow fund managers' variable remuneration to be cut or clawed back if a UCITS loses money. The draft must now be agreed in three-way talks between the Parliament, EU member states and the European Commission.

The bonus cap was opposed by ECON chair Sharon Bowles, who had driven the introduction of the cap on bankers' bonuses to 100% of salary or 200% with shareholder approval. Speaking to Financial News after the vote, she said that there were important differences between banking and fund management, which should be reflected in the respective regulatory regimes.

"I have always maintained that banks have a monopoly on liquidity and lending, both of which are ultimately provided at public expense," she said. "For this reason I do not think it is appropriate to roll out the same bonus cap across all financial services legislation. However, we should all know how managers are being paid so that there are not wrong incentives."