EU Targets Fund Manager Pay After Clinching Banker CurbsJim Brunsden
Fund managers are facing a push by European Parliament lawmakers to limit their bonuses, hours after Britain failed to water down planned EU banker-pay rules that are set to take effect from 2015.
The assembly’s economic and monetary affairs committee voted in favor of a ban on managers of EU regulated mutual funds, known as UCITS, from receiving bonuses larger than their fixed pay.
“Today’s vote would ensure greater protection for investors and help reduce excessively risky speculation,” Sven Giegold, the legislator leading work on the draft measures in the assembly, said in an e-mailed statement. “The rules as voted today would be an important step towards ending the gambler mentality in the investment fund sector.”
The move comes as European Parliament lawmakers and Ireland, which holds the rotating presidency of the EU, confirmed a compromise deal overhauling bank capital and liquidity rules for the 27-nation EU. That law will ban banker bonuses that are more than twice fixed pay, with scope for as much as a quarter of the bonus to be valued at a discount if payment is deferred for at least five years.
In calling for tougher fund-manager rules, lawmakers set the stage for a vote by the full parliament before negotiations with national diplomats can start. Funds that meet EU investor-protection and oversight rules can be labeled as UCITS, and gain the right to operate throughout the 27-nation bloc.
Michel Barnier, the EU’s financial services chief, made proposals last year to toughen regulation of the funds. Lawmakers are seeking to add the pay curbs to Barnier’s plans.
If adopted, the pay rules would also apply to employees outside the EU, Giegold said in an e-mail.
The banker bonus restrictions, which beef-up rules that are already the toughest in the world, will “significantly reduce remuneration,” said Philippe Lamberts, one of the assembly’s lead lawmakers in the negotiations. “It will be impossible to match the excesses of yesterday with a structure that is much more constraining.”
The draft bank law sets out the EU’s approach to applying international capital and liquidity rules known as Basel III, drawn up following the collapse of Lehman Brothers Holdings Inc. While yesterday’s accord paves the way for the EU to start phasing in the Basel law by next January, it comes too late to limit 2014 bonus awards.
“The concession on timing will be welcomed” by lenders, Alex Beidas, employee-incentives specialist at law firm Linklaters LLP, said by e-mail. “But the banks had been hoping that further compromises would have been achieved.”
The City of London “is resilient and has faced down many challenges in its history,” said John Purcell, chief executive officer of Purcell & Co., a London executive-search firm.
“These disgraceful beggar-thy-neighbor plans driven by jealousy and cowardice could ironically founder on European law,” he said.
The Federation of European Employers, which represents corporate recruiters, has said the bonus curbs would go beyond the powers given to the European Union by the bloc’s treaties.
Talks on the bank rules had dragged on for a year and a half before the Irish presidency and lawmakers negotiated the bonus agreement. The parliament had insisted that the legislation include restraints on pay to curb excessive awards and irresponsible behavior, and initially called for a ban on awards that exceed fixed pay. Yesterday’s deal cemented a tentative accord from last month that attracted criticism from Britain.
The bonus rules would apply to EU banks, including overseas units. They would also apply to EU-based units of banks from beyond the bloc’s borders.
“Hopefully we’ve seen the end of ridiculous pay packages,” Barnier said in an e-mailed statement.
The European Banking Authority will work out the details of the discounting method, under yesterday’s deal. The amount of discount that is granted will depend in part of how long payment of that part of the bonus award is deferred. The discounting would only apply to securities that could be written down in a crisis.
The bonus restrictions faced opposition from the U.K. Chancellor of the Exchequer George Osborne, who said that the plan could drive up fixed salaries at banks and damage the competitiveness of the nation’s financial services industry.
Since the law won’t take effect before January 2014, it would be impossible to limit bonuses based on 2013 performance, said Vicky Ford, a fellow Tory, who sits in the EU Parliament.
The deal, which must be formally ratified by governments and the EU parliament, means that the bloc is close to settling how it should apply the Basel pact.
Both the EU and the U.S. missed a January 2013 deadline to begin phasing in the Basel III rules, which are scheduled to fully apply from 2019.
Barnier has called for the EU to begin applying Basel III from next year, to correspond with plans in the U.S.
The Basel III package more than triples the core reserves that lenders must hold against insolvency, compared with previous Basel standards.
The Basel Committee on Banking Supervision, which brings together regulators from 27 nations including the U.S, U.K. and China, warned last year that the EU implementation plans may not be fully in line with Basel III.
The EU plans must still be voted on by the parliament, and formally approved by national governments, before they can take effect.
UCITS, or Undertakings for Collective Investment in Transferable Securities, had more than 6 trillion euros ($7.8 trillion) under management as at April 2012, according to the European Commission.
Today’s parliament vote to limit the pay of UCITS managers is a mistake, Syed Kamall, a U.K. lawmaker in the assembly, said.
“It is vital that member states resist this hugely damaging initiative which will be bad for investors and for transparency,” Kamall said in an e-mail. “It is a wholly inappropriate initiative and legally unsound.”