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European Parliament to extend bonus pay clampdown

Applying bonus caps to fund managers may prove more politically divisive.

The European Parliament is considering extending its bonus pay clampdown on bankers to include asset managers, hedge funds and shadow banking.

The parliament’s main parties are supporting calls to include the bonus caps into a year-old reform proposal for undertakings for collective investment in transferable securities (Ucits) funds that have net assets of €6.4tn.

According to the Financial Times, the parliament’s draft negotiating position would enforce a maximum 1:1 bonus to salary ratio and requires up to 60 per cent of the variable element to be deferred and largely paid in units of the fund the manager runs.

The Ucits reforms were primarily aimed to improve rules on the responsibilities of custodians in the emergence of the Madoff fraud in 2008. The restructuring of Ucits, if approved by EU member states, will be a shock to the fund management sector as the law would require unprecedented levels of disclosure on remuneration from funds apart from restriction on variable pay.

Sven Giegold, the German Greens party member who is leading negotiations for the parliament, told the Financial Times: “The bonus cap for the banks should be extended to Ucits. It is very hard to argue against. This will ensure a level playing field with the banking industry and reduce systemic risk by avoiding the bonus cap on banks from being circumvented.”

Syed Kamall, a British Conservative Party politician involved in the talks, described the bonus cap as politically attractive but wholly inappropriate. “This move appears to be more motivated by a dislike of high salaries rather than mitigating systemic risk,” Kamall said.

Jon Terry, a partner at PwC’s reward practice, told the FT that the rules would make a dramatic difference to how groups operate and pay fund managers. “The penny hasn’t dropped yet. But Ucits V is a game-changer for the asset management industry.”

The parliament and EU member states will finalise the technical details of the bankers’ bonus cap this week.