EU May Adjust Fund-Manager Pay Rule to Mirror Banker Curb

EU May Adjust Fund-Manager Pay Rules to Mirror Curbs on Bankers
A businessman passes the offices of the Prague Stock Exchange, center, in the financial district of Prague, Czech Republic. Photographer: Bartek Sadowski/Bloomberg

The European Parliament may ease a planned ban on fund-manager bonuses that top fixed pay if investors get to vote on the larger awards, bringing the rules closer into line with ones approved today by national ambassadors on how much bankers can be compensated.

The parliament’s economic and monetary affairs committee approved a ban last week on fund-manager bonuses higher than salaries as well as curbs on performance fees in a 22-16 vote. Legislators plan talks on the draft rules for managers of so-called UCITS funds ahead of a vote by the full assembly in May, said Sven Giegold, the lawmaker leading work on the standards.

If the fund industry came up with a clear solution to ensure investors got a vote on pay, “I would welcome that,” Giegold said in an interview. “I would be very happy to include that in the legislation. It would be a boost for shareholder democracy.”

The draft rules for fund managers go beyond planned EU curbs on banker pay that won approval from national representatives today despite U.K. opposition. Those measures allow bonuses of as much as twice a banker’s fixed pay if shareholders agree. The financial industry has warned that both sets of plans could drive up fixed costs and harm European competitiveness.

“This move to limit the bonuses of fund managers is deeply damaging, as it will lead rewards to be less connected to performance,” said Philip Booth, professor at London’s Cass Business School. “EU lawmakers simply do not understand the financial and economic implications of the measures that they are proposing. It is difficult to predict the damage that this will cause as, no doubt, a lot of money will be spent on trying to ensure that these pay curbs are circumvented.”

U.K. Dissent

Under the rules for bankers, bonuses higher than fixed pay would need approval by two-thirds of shareholders taking part in the vote, with this threshold rising to 75 percent if fewer than half of shareholders are present.

“We’ve made clear that we cannot support this agreement,” a U.K. diplomat said in an e-mailed statement. The plans will lead to “increases in fixed pay for bankers, making it more difficult for banks to retain capital in a downturn.” The U.K. lacks the power to block the measures, which are scheduled to apply to bonuses starting in 2015.

Giegold said he could support a similar two-to-one pay rule for UCITS if a practical solution could be found for how to organize a vote by fund owners on the awards.

“Nobody has explained me so far how to organize a shareholder conference of a UCIT,” he said.

Minimum Standards

UCITS, or Undertakings for Collective Investment in Transferable Securities, had more than 6 trillion euros ($7.7 trillion) under management as of April 2012, according to the European Commission. The funds are regulated at EU level and have the right to operate throughout the 27-nation bloc if they meet minimum oversight and investor-protection standards.

“Misuse of performance fees has to end,” Giegold said. “There’s so much talk about cultural change in financial industry, but when it comes to limiting structures of risk taking and greed people are saying that’s the end of the market economy. I don’t agree, I really don’t.”

The European Commission is skeptical of the benefits of the draft fund-manager-pay rules, because it hasn’t seen evidence that pay structures in the industry are leading to excessive risk taking, according to an EU official. Also, the failure of a UCITS fund doesn’t present the same threat to financial stability as the failure of a large bank, the official said.

‘Gradual Erosion’

The commission declined to comment on the draft pay rules.

Mark Boleat, policy chairman at the City of London Corporation, the British financial district’s local government, said that there is a “real risk” the U.K. finance industry could be at a disadvantage to centers outside the EU.

“It is unlikely that we will see dramatic examples of business moving away from London, but there could be a gradual erosion as new investment moves elsewhere,” he said.

Like the bank-bonus curbs, the UCITS rules would have to be approved by the parliament and by the Council of Ministers, which represents national governments in the EU. The council has yet to take a position on the UCITS measures.

There must be a “level playing field” to prevent banks using UCITS structures to evade tougher pay rules, Giegold said.

The rules for bank pay are part of broader draft law that would also set tougher capital and liquidity terms for lenders. Today’s endorsement by ambassadors clears the way for the rules to be voted on by parliament and signed off by ministers.

Last week’s vote by the assembly’s economic and monetary affairs committee was part of the parliament’s work to prepare its negotiation position on the UCITS measures. Sharon Bowles, chairwoman of the committee, said the precise form of the bonus curbs is still up for debate.

“The political signal is clear - the parliament wants something on remuneration,” Bowles said last week. “We have a bit of time to see if we can revisit it to make it more tailored to investment firms,” she said.

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