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Here are my thoughts published on the FT Adviser website on the new European rules for fund manager bonuses…

Advisers Blast ‘Barmy’ EU Fund Manager Bonus Rule

Advisers have questioned new European rules that will force managers to invest at least half of any bonus payments into their funds.

Under new European fund rules known as Ucits V, which were finalised last week, fund managers must take half of any bonus payments in units of their own funds, in order to “deliver greater protection for investors”. The rules are due to come into force in 2016.

“Bizarre”

But Justin King, chartered financial planner at MFP Wealth Management, said the decision was “bizarre”.

“A manager could be running a fund that is not suitable for their personal attitude to risk,” he said. “It’s very easy at one level to say they have got to eat their own cooking, but we don’t know their personal circumstances.”

Alistair Cunningham, chartered financial planner at Wingate Financial Planning, added: “It seems rather nonsensical and I can’t see it ever influencing things. Surely companies have other risk controls in place? The idea of forcing managers to invest seems barmy to me.”

But Matthew Walne, managing director at Santorini Financial Planning, supported the concept. “If you’ve got confidence in your own ability, why wouldn’t you put your own money in your fund? If you think you’re doing a good job then buy the product yourself.”

Investment Adviser reported a year ago that German MEP Sven Giegold had introduced the idea of fund manager bonuses being paid in the form of fund units.

In addition to bonuses being invested in a manager’s fund, 40 per cent of a fund manager’s bonus must be deferred for at least three years, or 60 per cent “in the case of very high bonuses”.

New Guidelines for Bonuses Given to Staff 

The EU’s main financial regulator, the European Securities and Markets Authority, will draft guidelines for bonuses given to staff other than fund managers. This is in order to stop people avoiding the rules by outsourcing management to third parties.

Mr Giegold said: “The deal will deliver greater protection for investors, as well as taking steps to reduce reckless risk taking in the investment fund sector.

“The revised legislation includes important provisions on remuneration that will ensure the interests of investors are better reconciled with those of fund managers.”

Arlene McCarthy, Labour MEP and vice-chair of the EU’s Economic & Monetary Affairs Committee, said the remuneration policy “brings funds in line with EU bankers’ bonus rules”.

She added: “We want to ensure that responsible remuneration policies are in place across the financial sector and that there are no loopholes for risky and dangerous trading practices.”

Ucits rules govern the operation of the majority of retail funds across Europe, including UK products, and apply to more than €6.3trn (£5.2trn) worth of assets.

Key Areas of the Ucits V Rules

Depositories and securities lending

Companies that act as depositories will be more tightly regulated in a bid to reduce the likelihood of fraud in the wake of the Bernie Madoff (pictured) scandal. A “limited number” of groups will be eligible to act as depositories, holding client investments to keep them separate from fund managers. These will include credit institutions, central banks and “sufficiently capitalised and supervised authorities”. Strict limitations have also been placed on the amount of collateral required if depositaries decide to engage in stock lending.

Fines and sanctions against managers

If fund management groups break Ucits rules, national regulators can levy fines of up to €5m (£4.1m) or 10 per cent of the company’s turnover. German MEP Sven Giegold, who led the Ucits V legislation through the EU’s process, said politicians in the European Parliament wanted “higher sanctions in line with the levels set in the EU’s market abuse legislation”, but this was rejected by other parties.

The sanctions also include the ability for regulators to suspend a firm’s authorisations for fund management for any perpetrators of fraud

Whistleblowers

For the first time, any individuals who blow the whistle on malpractice in fund management will have secure channels through which to register their concerns with their local regulators and with the European Securities and Markets Authority. The Green party, which was particularly vocal in backing this law, said increased protection for whistleblowers could help the “regulatory capture of national supervisors”. It is also the first time that such provisions protecting whistleblowers have been included in any financial services legislation at a European level.

Ucits V ‘adds to compliance burden’

While politicians hailed the bonus rules as a victory for investors on a par with similar limits for banking staff, regulatory consultancy Bovill has warned that the new legislation “will add very significantly to the compliance burden” on fund managers.

Ashley Kovas, head of funds at Bovill, said that there would definitely be “a lot of relief” that European policymakers did not vote for the “nuclear option” of an explicit cap on how much can be paid to individuals as bonuses. But he added: “The bonus culture for the vast majority of fund managers is already aligned very closely to the fund’s performance, so in that sense these rules aren’t needed. However, this will add very significantly to the compliance burden being heaped on the fund management industry. The rules will be very unpopular with the fund managers they will affect, who will see this as a very big hammer to crack a very small nut.”

He said the rules could encourage fund managers to seek ways to get round them – as had been seen with banks in the wake of a bonus cap.

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