Europe's fund managers are facing a ban on bonuses that exceed salary as the European parliament pushes for the extension of its severe pay clampdown on bankers to the wider financial sector.
In a political development that shows how the bankers' bonus cap could snowball through the world of finance, the parliament's main parties support inserting the curbs into a year-old reform proposal for Ucits funds – a popular investment product that can be sold across EU borders – which have net assets of €6.4 trillion.
The parliament's draft negotiating position, seen by the Financial Times, would enforce a maximum 1:1 ratio of bonus to salary 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.
All the main political blocs are expected to back the cap in a formal vote on Thursday – signalling that EU lawmakers see the bonus cap as a template for prudent remuneration policy, which will be applied to asset managers, hedge funds and shadow banking when the legislative opportunity arises.
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If agreed, the Ucits overhaul will be a shock to the fund management sector, which until now has largely enjoyed free rein to set managers' pay without having to disclose the details to the public. EU member states must also approve the proposal for it to become law.
The emergence of another Brussels pay crackdown will also alarm British ministers, who lost their battle to head off the bonus cap initiative and will be loath to see its principles imposed across an even bigger swath of the City of London.
Sven Giegold, the German Green 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."
So far only the UK Conservatives have spoken against the measure in private meetings.
Syed Kamall, the British Conservative MEP 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," he said.
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While most EU ministers put up little resistance to the bonus cap for bankers – which in Europe will primarily hit those based in London – applying it to fund managers may prove more politically divisive. France, Luxembourg and Ireland are big hubs for Ucits funds.
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The vote comes as the parliament and EU member states this week finalize the technical details of the bankers' bonus cap. Britain is pushing for some tweaks to how the cap is applied but looks unlikely to win an exemption for bank offshoots outside the EU.
The Ucits reforms – which were primarily intended to improve rules on the responsibilities of custodians in the wake of the 2008 Madoff fraud – are the first test of whether a bonus cap will be a model enforced across the financial sector.
Existing restrictions on banking sector pay – such as bonus deferrals and clawbacks – were gradually being rolled out in other financial directives, including in the rules agreed in 2010 for hedge funds and private equity groups.
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Fund managers bristle over pay curbs designed to reduce bank risk being bluntly imposed on sectors that are not reliant on a taxpayer safety net.
Its provisions apply to fund managers and any staff contracted by the fund to take significant investment decisions. Alongside the restrictions on variable pay, the law would require unprecedented levels of disclosure on remuneration from funds.
Jon Terry, a partner at PwC's reward practice, said 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."