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February 25, 2014 4:26 pm
European policy makers have agreed final rules over pay and sanctions for Europe’s €6.3tn fund management industry, ending months of fierce negotiations between member states.
The new rules, which are set to become law in 2016, mean fund managers will be paid half of their bonuses in units of the funds they manage, in a bid to better align the interests of investment managers and investors.
Fund managers will also have to defer 40 per cent of their bonuses for at least three years, or 60 per cent if the bonus is unusually high.
This puts pay restrictions for mainstream fund managers on a par with rules for Europe’s hedge fund and private equity fund managers. Unlike European banking staff, however, senior fund managers will not be subjected to a pay cap.
The managing director of a Parisian fund company, who wanted to remain anonymous, believes London-based fund groups will be more severely affected by the new pay requirements.
He said: “In continental Europe we have very different remuneration practises compared to London, where much higher bonuses and packages are standard.
“This is more of an issue for highly paid fund managers in the UK industry compared to what we know in Frankfurt and Paris.”
The rules, which come under the Ucits V directive, also introduce stricter liability provisions for depositories to prevent a repetition of the Madoff fraud, as well as stronger sanctions for fund companies.
Fund houses that contravene the directive now face fines of at least €5m or up to 10 per cent of their annual turnover – slightly less than the 15 per cent fines imposed on financial institutions caught by the markets abuse directive.
Michel Barnier, the EU’s Internal Market Commissioner, said the agreement “will ensure that the abuses seen at the time of the Madoff scandal cannot be repeated”.
The European Parliament and Council have also agreed on new, secure channels to enable whistleblowers to report financial wrongdoing to the European Securities and Markets Authority.
Sven Giegold, the German Green politician responsible for pushing the regulation through parliament, said the deal will “deliver a tight remuneration regime to closely align investors’ and managers’ interests”.
He added: “The introduction of a procedure for secure access by whistleblowers to Esma is a significant development. This will provide a formal route for insiders to report abuses without disclosing their identity.”
One of the biggest stumbling blocks to finalising the regulation was disagreement over how fund companies can pay third parties.
Mr Giegold wanted the pay rules to apply to outsourced parties to prevent fund houses from circumventing the rules, but this was blocked by certain member states.
There was also disagreement over how bonuses should be paid, with some member states pushing for bonuses to be paid in the shares of fund management companies, as well as units of the funds managed.
This motion was defeated as “it would have rewarded fund managers to increase profits of the management company, rather than the value of the funds they manage”, Mr Giegold said.
The regulation does not include new rules on performance fees, which Mr Giegold described as “opaque and a rip-off for investors, unfairly reducing their income from funds”.
However Mr Giegold is expected to push for curbs on performance fees in the next iteration of the directive, Ucits VI, which is likely be drafted by the end of 2014.
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