Recently agreed European bonus-cap rules may encourage fund managers in Asia to redomicile their Ucits funds as Hong Kong vehicles.
European authorities agreed in late February that managers running Ucits funds will have 50% of their bonuses payable in shares of the fund(s) they manage. In addition, 40% of the bonus will have to be deferred for at least three years.
Jack Wang, head of the institutional client group at Hong Kong-based CSOP Asset Management, argues that this move could hurt the Ucits structure. “As long as you deliver performance you should get compensated, rather than [the regulator applying an] artificial cap for everyone,” he says. “Everyone’s performance is different.”
Managers in Hong Kong are already warming to the idea of Hong Kong-domiciled funds, with a view to being able to sell them into mainland China in future under the planned mutual recognition agreement. The proposed EU rules could further boost that momentum.
Although the text of the rules has been agreed, it is awaiting a vote by the European Parliament, which is scheduled to happen by May. If the proposal is approved, EU member states will have 18 months to implement it.
However, Jacques Elvinger, a partner at Luxembourg law firm Elvinger, Hoss & Prussen, says the agreed directive will still leave some flexibility that could soften the blow for non-EU-based fund managers.
A note published on March 10 by US law firm Kaye Scholer says last-minute amendments to the rules state that the bonus rules should apply to “any third parties to whom functions have been delegated”, including non-EU-based investment advisers to Ucits funds.
However, this rule is only mentioned as a ‘recital’ – a reference that accompanies the text rather than an integral part of the directive, notes Elvinger. This allows the European Securities Markets Authority (Esma) some flexibility in its interpretation.
Moreover, bonus rules in place since July under the Alternative Investment Fund Managers Directive (AIFMD), on which Ucits V bases its bonus rules, have not seemingly raised any problems, says Elvinger. This suggests the Ucits bonus proposals may not be so troublesome, he adds.
Elvinger says he gets the impression his firm’s Asian clients do not have legally imposed limitations on bonuses. “That is the reason why they are asking us to explain to them what the impact would be.”
Meanwhile, Elvinger has been advising US clients tapping European money under AIFMD to prepare evidence to show that their fund’s internal remuneration rules do not circumvent rules under Esma guidelines.
One Hong Kong-based senior executive at a big European fund house says bonus deferral and fund performance-linked bonus are already practised in his company.
Asked whether a bonus rule if applied in Asia would negatively affect fund performance, he says: “I am actually wondering why this could be the case. Is it simply because you do not have your own money in the fund [so you can be a more] aggressive gambler? I don’t know…”