Focus on bankers' bonuses influencing reforms to other financial services, says expert

Matthew Findley, a share plans and remuneration expert with Pinsent Masons, the law firm behind Out-Law.com, was commenting as the European Parliament's Economic and Monetary Affairs Committee (ECON) published its proposed revisions to the draft Undertakings for Collective Investment in Transferrable Securities (UCITS) Directive (UCITS V).

The new draft (34-page / 326KB PDF), voted through by ECON in March, includes provisions to restrict investment fund managers' pay and bonuses. If approved, annual bonuses will be restricted to the level of fund managers' salaries. In addition, half of the bonus amount would have to take the form of units in the assets being managed. A debate on the proposals will take place in the European Parliament next week.

Findley said that companies would be "concerned" by the pay provisions in the new draft, which follow the approval by the European Parliament of a cap on bankers' bonuses last month. Once formally approved by EU member states, the cap could take effect from as early as 1 January next year. However, Findley pointed out that the rules for banks were more flexible than those being proposed for fund managers, as bankers may be awarded up to double their salaries if approved by bank shareholders under the new rules.

"The industry is likely to find this difficult to accept given that the rationale behind the cap on 'bankers' bonuses' was in large part based on protecting against systemic risk to the financial system and the implicit taxpayer guarantee that banks would not be allowed to fail, which is seemingly irrelevant in this context," Findley said.

"The proposed new rules demonstrate how the focus on bank pay is seeping into other parts of financial services. Companies will be concerned by this for many reasons, including the possible increase in fixed pay that a cap could bring. Such an increase would be undesirable not only because of its obvious cost implications, but also because it would have the perverse effect of de-linking pay and performance," he said.

According to the new text, remuneration should not be "primarily controlled" by managers. Those involved in setting and implementing the policy should be "independent" and "have expertise in risk management and remuneration". In addition, the revised text expressly includes a role for employees in the executive remuneration policy of a fund.

"This would be a major change in practice, and certainly without precedent in the UK in terms of any regulation governing remuneration," said Christopher Mordue, an employment law expert with Pinsent Masons. He pointed out that the new Capital Requirements Directive (CRD IV), which will implement the new rules on bankers' bonuses, "allows member states discretion to adopt an equivalent provision but does not require it".

"The UK Government backed away from the idea of requiring employee representation on remuneration committees when developing its proposals on executive pay reform," he said. "UCITS V looks as if it will break new ground in this area and the concern will be that this innovation is picked up more widely as the EU legislation around remuneration practices develops."

Changes to the current UCITS rules were originally proposed by the European Commission in July 2012. The new rules 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. UCITS are widely used by European retail investors and manage almost €6.3 trillion in assets, according to Commission figures.

Following a vote in March, ECON called on the introduction of a bonus cap to "help strengthen investor protection and reduce risky speculation". Its amendments would also make depositaries, which hold UCITS assets for safekeeping and ensure that their transactions comply with all applicable laws, liable to UCITS and their asset holders for any loss of their assets, even if the assets were held in custody by a third party. Depositaries would also be bound to act independently and solely in the interest of asset holders, rather than being able to trade in UCITS assets on their own account.

Financial services expert Monica Gogna of Pinsent Masons said that ECON was "upping the stakes on investor protection" through its suggested amendments. However, she questioned whether the increased regulatory burden on depositaries was proportionate.

"The proposal for further consultation to raise the level of compensation for retail investors on the failure of depositaries and sub-custodians, and a review of the impact on common product-related costs and expenses for all retail investment products, is a sign that the regulators and EU Parliament are not yet tired of introducing new regulatory initiatives," she said. "The question remains as to how the regulators and EU Parliament expect the industry to continue to grow whilst continually increasing the regulatory burden."