Final guidelines on the remuneration requirements of Europe’s Ucits V directive were released on March 31, but an issue of great concern to investment firms remains unresolved: will managers of Ucits funds globally be subject to a bonus cap? 

The issue centres around a “disruptive and unfortunate interpretation of a very important principle in European law”, said Dan Waters, London-based managing director of asset management industry trade body ICI Global, referring to ‘proportionality’. 

This principle means that regulation is imposed in accordance with the size and complexity of a business. The understanding had been that smaller, less complex firms do not have to comply with the same level of rules as larger ones. 

The European Securities and Markets Authority (Esma) issued its proposed Ucits V guidelines in March based on this approach to the concept and following the approach taken for the Alternative Investment Fund Managers Directive (AIFMD), which does not impose a bonus cap.

However, the European Banking Authority (EBA) has thrown a spanner in the works. 

Asset management firms owned by banks fall under the scope of the EBA’s Capital Requirements Directive IV (CRD). Originally the principle of ‘proportionality’ meant smaller banks likely would not face baseline requirements as stringent as those for big groups such as BNP Paribas or Deutsche Bank. 

Yet in its proposed guidelines the EBA turned the notion of proportionality on its head based on an opinion from the European Commission’s Legal Service, noted Waters. The latter has concluded that the definition of proportionality in fact means the opposite of what has long been understood across Europe. Now, according to the EBA, if one jurisdiction wants to put in place tighter restrictions for certain players, it can do so, but it cannot impose less stringent ones or permit lesser requirements. 

In the UK, the Prudential Regulation Authority and the Financial Conduct Authority rejected this approach, indicating they would dis-apply the rules in some cases. ICI Global believes that will happen in other major European jurisdictions that also consider EBA’s interpretation of proportionality to be wrong. Moreover, ICI said it has had very strong legal advice, from some of the most experienced lawyers in Europe, arguing that the Commission’s interpretation of proportionality is incorrect.

“This prescriptive, intrusive and inappropriate approach to fund manager remuneration will clash with regulatory approaches all across the globe,” said Waters. 

He said it was highly unlikely that regulators in Hong Kong or Singapore, for example, would adopt such prescriptive requirements for managers of Ucits funds or local funds in their jurisdictions. 

The review of the CRD IV remuneration requirements will finish this summer, and the Commission will make conclusions, noted Waters. Moreover, when Esma published its March guidance, it wrote a letter to the Commission laying out its arguments in favour of the long-established view of proportionality and asking the EC to clarify.

Many feel a desirable outcome would be for the EC to clarify that if a firm is already subject to sectoral legislation, such as Ucits and AIFMD, proportionality can mean that certain requirements, including the CRD IV bonus cap, may be neutralised or disapplied.

Waters added that the bonus cap issue was another example of ICI Global’s biggest current concerns: the inappropriate regulation or threat of regulation of fund managers by central banks and bank regulators. A clear example of this were the proposals to designate some asset managers as globally systemically important financial institutions and then to subject them to banking-like regulation, which ultimately were put aside.