Ucits managers face ‘clawback’ for underperformance

EU parliamentWhen Ucits funds lose money, managers' pay should be reduced and investors should be able to claw it back, according to a draft law of Ucits V voted on in the European Parliament yesterday.

While members of the European Parliament rejected a cap on bonuses for fund managers, they also decided that half of the variable part of a fund manager’s remuneration would be paid in the assets of their Ucits fund, and payment of at least a further 25% of this variable remuneration would be deferred. This is meant to encourage fund managers to take a long-term view.

The aim is to protect small investors from investment managers who take “excessive or unnecessary risks” with clients’ money.

The draft law clarifies who is liable for “mismanagement” of funds.

Sven Giegold, lead member of the European Parliament and of Germany’s The Greens Party, says: "Ucits managers should not bet small investors' money on high-risk financial instruments.”

Reacting to the vote, industry commentators have largely focused on what they considered the positive part of the draft law: the fact that the bonus cap of 100% of managers pay was voted down.

Alex Beidas, Linklaters employee incentives lawyer, says: “This is good news for Ucits fund managers, but will also give other sectors comfort as there has been a concern that AIFMD [Alternative Investment Fund Managers Directive] would be amended to apply the cap to hedge funds and private equity firms, and that the Shareholder Rights Directive could apply a cap to listed EU companies.”

Daniel Godfrey, the chief executive of the Investment Management Association in the UK, says the proposals drive true alignment between asset managers’ pay and the interests of clients.

He highlights the multi-year assessment for variable remuneration as a positive measure, along with the multi-year deferral, clawback, and requirements for asset managers to disclose remuneration policies and say how those policies are aligned with client outcomes.

The European Fund and Asset Management Association (Efama) issued a brief statement, quoting director general Peter de Proft, saying the association wishes the final directive to deliver a good result for end-investors in relation to the safeguarding of assets and other provisions that benefit end-investors. However, Efama declined to comment on the clawback issue.

Following the vote yesterday, the draft law will be negotiated with member states.

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