U.K. money managers are hopeful that new European Union legislation limiting executive bonuses and how they're paid will not be applied to them. But they're still uneasy about how the final rules could affect them.
That's because the rules coming from the legislation would affect money managers, but enforcement would be left to each EU country's regulators.
The legislation, included in an update of the EU's Capital Requirements Directive, is expected to be approved in its current form by the EU Council of Ministers in October. Changes would take effect Jan. 1. Experts believe that bonus rules in the forthcoming Alternative Investment Fund Managers Directive, which targets hedge funds, private equity and other alternatives managers, will closely follow those created in the Capital Requirements Directive.
Alwine Jones, adviser, regulation, at the London-based Investment Management Association, said industry groups like hers won a key battle when a “proportionality clause” was included in the text of the legislation. That clause allows local regulators to decide whether the same rules on bonuses need to be applied to all types of financial businesses, and leaves open the possibility that banks might face tighter remuneration rules than money managers.
“That's the line we've been arguing for,” Ms. Jones said.
Managers and industry groups have been expecting remuneration regulation for some time now. Joseph McDevitt, London-based managing director and head of PIMCO Europe, pointed out that as “the regulatory pendulum swings back away from ‘light touch,' ” as it was before the crisis, it takes time to work out the best solutions. “You don't just flip a switch and find new regulation,” he said.
Still, the current legislation, which is designed primarily for banks, has managers' hearts beating stronger. Investment banks can work around rules by lowering bonuses and making employers defer most of a bonus into years ahead by raising base salaries. Money managers can't do that without raising fees passed on to investors, said Roger Miners, managing director and head of business development and client service at equities specialist RCM (UK) Ltd. in London.
“There is a clear difference between the investment banking business and the asset management business,” Mr. Miners said. “As asset managers, we seek to align ourselves as closely as possible with clients and already incentivize in order to provide performance for clients over the long term.”
New remuneration rules are expected to be part of EU regulations aimed at alternative money managers and mutual fund managers, too. The rules are expected to be coordinated, but in the meantime “the whole thing has (created) quite a lot of confusion about what (types of managers) are within and out of the scope” of the current directive aimed at banks, the IMA's Ms. Jones said.
However, she and money managers interviewed believe the U.K.'s Financial Services Authority understands the differences between banks and money managers, and will use the “proportionality clause” to apply appropriate bonus rules to managers.
“We're not at all complacent about” the EU legislation, but “our view is that there is enough understanding about the differences (between banks and managers) and enough flexibility in the (wording of the legislation) for regulators to apply this theme of proportionality,” Mr. McDevitt said.
While experts are fairly confident that the FSA will not impose the same bonus restrictions on managers as it may on banks, they're not so sure about the rest of Europe. “It's one of these areas where there may be differences in regulations (country to country),” Ms. Jones said.