Europe’s Bonus Clampdown Hits Two-Thirds of Fund ManagersKevin Crowley, Ambereen Choudhury and Jesse Westbrook
The European Parliament’s vote to cap bonuses in the asset-management industry could affect two-thirds of senior fund managers in the U.K., U.S. funds in Europe and hedge funds open to small investors.
Bonuses should not exceed base salaries for managers of mutual funds regulated by the European Union, known as UCITS, European lawmakers in the economic and monetary affairs committee voted yesterday. The rules would cover 5 trillion euros ($6.5 trillion) of assets in UCITS, which include funds managed outside Europe and some linked to hedge-fund strategies such as John Paulson’s New York-based Paulson & Co. and Och-Ziff Capital Management Group LLC.
“If the final rules are even close to what has been agreed today, then this will fundamentally change the way asset managers are paid,” said Jon Terry, a partner at PricewaterhouseCoopers LLC. Asset managers “are now facing the toughest pay rules across the whole of the financial-services sector.”
Flushed with the success of overhauling bank-capital rules that banned bankers’ bonuses of more than twice fixed pay, European policy makers are pressing for tougher rules on fund managers to eliminate what German lawmaker Sven Giegold called the industry’s “gambler mentality.” Fund managers will respond by increasing fixed salaries, moving overseas and pulling products from Europe if they can’t dilute the rules, industry lobby groups said.
Managers’ “base salary will increase, they will relocate to another country or move completely away from any type of EU bank or fund manager,” said Hakan Enver, operations director for financial services at recruiter Morgan McKinley. “Financial-services organizations may also become more savvy in the way they remunerate their high-earning employees.”
The committee’s proposal sets the stage for a vote by the full European Parliament before negotiations with national diplomats can start. The pay curbs are in addition to proposals made by Michel Barnier, the EU’s financial-services chief, last year to strengthen regulation of UCITS funds, which are allowed to be sold within the 27-nation trading bloc.
“I would favor something more tailored rather than applying a cap across all financial-services legislation -- especially when you consider that UCITS do not benefit from the same implicit taxpayer guarantee or monopoly on liquidity and intermediation that banks do,” said Sharon Bowles, chairwoman of the committee and a Liberal Democrat from the U.K. “I think there will be scope to make adjustments.”
About two-thirds of senior employees who make investment decisions affecting the risk position of a fund receive total pay of more than twice their salary, PwC said.
Cash bonuses and deferred pay are “many multiples” of what European fund managers make in salaries, said Stephen Cahill, head of compensation and benefits for Deloitte LLP in London. “The culture that has been built up for many years is a bonus culture, and it gives companies flexibility to manage costs so when times are good they can pay a lot and when times are bad they pay less.”
The rules would apply to any employee working for a European fund-management firm and managers of funds sold in Europe, the London-based Investment Management Association said. Although hedge funds are mostly regulated by the Alternative Investment Fund Managers Directive, which isn’t affected, those that sell UCITS products would have to abide by the regulations, according to the European Fund and Asset Management Association.
A spokesman for New York-based Och-Ziff declined to comment on the proposal, while Armel Leslie, a Paulson & Co. spokesman, didn’t respond to messages seeking comment.
About 5 percent of the hedge-fund industry’s $2.3 trillion is structured within UCITS, which stands for Undertakings for Collective Investment in Transferrable Securities, according to Hedge Fund Intelligence, a London-based data provider. The biggest UCITS using a hedge-fund strategy is a $1.8 billion product sold by Deutsche Bank AG tied to investments made by Winton Capital Management LLC.
This complicated structure for UCITS is common, making it difficult to determine whose pay may be affected by a potential EU bonus cap. Spokesmen for London-based Winton and Deutsche Bank declined to comment.
Dominic Tonner, a London spokesman for the hedge-fund lobby group Alternative Investment Management Association, declined to comment on the implications of the EU vote. A spokesman for the U.K. Treasury also declined to comment.
“We are very disappointed with the vote,” said Jarkko Syyrila, deputy director general of Brussels-based EFAMA. “We feel this is very unfair. The rules are even tougher than for banks. There is no level playing field.”
Yesterday’s committee vote was a draft negotiating position, which will be sent to the full European Parliament where it will be voted on again and can be amended. Once that has happened, Giegold, the Parliament’s lead lawmaker on the proposal, and a team from the body’s economic and monetary affairs committee, will start talks with governments on implementing the final version. After they thrash out a deal, it will be confirmed by the Parliament and ministers before being sent to individual parliaments for implementation.
“There’s a better chance of getting this diluted because Parliament is more divided on fund manager pay than it is on the issue of bankers’ pay,” said Irving Henry, prudential specialist at the London-based IMA, which represents U.K. fund managers. “Banks are seen as far more political and toxic.”
One reason why the Parliament has been so tough on fund managers is they are concerned banks could bypass their own rules by moving risk-taking employees and traders into their asset-management divisions, Henry said. “They need a victory at least on the banking framework before they can ease up elsewhere,” he said.
The “vote would ensure greater protection for investors and help reduce excessively risky speculation,” Giegold, 43, said in an e-mailed statement yesterday. “The rules as voted would be an important step toward ending the gambler mentality in the investment fund sector.”
Giegold is a founder of the German branch of ATTAC, which was set up in France in 1998 and seeks to have financial markets and global trade regulated and tax havens closed. The organization last year invaded a meeting of the European Parliament’s economic and monetary affairs committee, which deals with financial regulation.
One way of achieving Giegold’s goal of aligning the interests of investors and fund managers is to increase disclosure of compensation in the industry, according to Christopher Traulsen of Chicago-based Morningstar Inc., which tracks mutual funds.
“Regulators need to step up and require accurate disclosure of the names, tenures and prior experience of the individuals responsible for managing the fund and the structure of their incentive pay,” he said in an e-mail. “We believe this would achieve many of the sought-after benefits without imposing an actual cap on the level of incentive pay.”