Draft UCITS V Directive: Proposed Bonus Cap for Fund Managers Rejected
On 3 July 2013, the European Parliament at a plenary session voted on the text of the draft UCITS V directive (the "UCITS V Directive"). A proposal introduced at an earlier stage to cap fund manager bonuses to 100% of fixed salary was rejected. The agreed compromise proposal provides that bonuses should correspond to fund performance so as to reflect reduced bonus levels when the fund has "subdued or negative financial performance". A provision has also been introduced giving power to EU Member State competent authorities to scrutinise bonus levels of UCITS management companies to ensure consistency with the principles of sound and effective risk management and appropriate levels of risk taking.
This outcome on a very contentious issue is sure to be welcomed by the UCITS industry as it demonstrates that there is political support within the EU legislature for more measured regulation of financial services.
In another welcome development, proposals were also rejected for performance fees to be permitted only for UCITS that marketed exclusively to MiFID professional investors (as defined in Directive 2004/39/EC).
Key remuneration rules that remain in place in the draft UCITS V Directive are as follows:
- UCITS management companies must put in place a remuneration policy and details of this must be provided to investors in the UCITS, as well as the relevant EU Member State competent authority;
- At least 50% of any variable remuneration must consist of units of the UCITS; and
- At least 25% of the variable remuneration must be deferred, over a period of at least three to five years (unless the life cycle of the relevant UCITS is shorter).
The remuneration provisions apply to specified categories of staff including fund managers, other persons who take investment decisions that affect the risk position of the fund or persons with the power to exercise influence over staff, senior managers, risk takers and persons in control functions. Of note, the provisions do not specifically apply to delegate entities appointed by the UCITS management company to carry out investment management activities. However, the European Securities and Markets Authority ("ESMA") guidelines that will support the draft UCITS V Directive may recommend that delegates be subject to corresponding requirements (similar to ESMA's approach in the context of their AIFMD Guidelines on Remuneration (ESMA/2013/201)).
The draft UCITS V Directive also introduces a new requirement for UCITS management companies to disclose details of remuneration policies in the key investor information document.
Notwithstanding the result of the European Parliament's vote, the draft UCITS V Directive has yet to become law. The European Parliament and the European Council will start the final round of negotiations of the final text of the draft UCITS V Directive and the issue continues to be a watching brief. Maples will continue to monitor the situation and provide further updates as appropriate.
Please see the link below to our previous client update entitled Draft UCITS V Directive: Assessment of Key elements and to obtain a blackline version of the draft UCITS V Directive highlighting the latest European amendments, please contact your usual Maples and Calder contact.