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UCITS proposals

The ABI has grave concerns with the European Parliament’s ECON text introducing a legislative requirement to set a fixed/variable remuneration ratio.

(ja) competent authorities set the appropriate ratios between the fixed and the variable component of the total remuneration and the variable component does not exceed one time the fixed component of the total remuneration;

We urge that this ratio for fixed/variable remuneration is dropped and that the final trilogue text has no reference to it, for the following reasons.

Asset managers do not pose a systemic risk

Ratios between the fixed and the variable component of the total remuneration have been previously discussed in the context of banks. While the merits of such regulation are highly questionable even in the context of banks, in the case of asset managers the arguments for imposing such a cap are even more unsubstantiated.

Asset managers do not pose a systemic risk and it is impossible to see a situation in which taxpayers’ money would have to be used. Clients’ money is held in segregated accounts. This means:

  • Any problems in the asset manager’s own business will not lead to losses for clients: their money is safe.
  • Losses incurred in a particular portfolio or fund will have no effect on other portfolios or funds and will not, of themselves, affect the viability of the asset manager (although there may be ‘knock-on’ effects on profitability, reputation, etc).

The arguments put forward in support of the introduction of a cap include the assumption that the possibility of a higher bonus determines a riskier behaviour. There is no evidence to back this assumption.

The role of shareholders should not be diminished

The introduction of legislation giving competent authorities the responsibility to set ratios between the fixed and the variable component of the total remuneration would diminish the role of shareholders and lead to less accountability.

As shareholders, we believe that pay should be linked to performance and that the remuneration policy should be set by the Remuneration Committee and overseen by shareholders. We welcome changes in the UK (coming into effect in October 2013), which will give shareholders a binding vote on the remuneration policy every three years, with a further yearly advisory vote on the implementation of the remuneration policy. This will lead to increased shareholder oversight, which will, in turn, lead to greater accountability.

Shareholders are the owners of the Company. The Board acts as their agents and are accountable to them. Recent events have shown publically what occurs when shareholders believe that there is an inappropriate link between pay and performance at listed companies. Shareholders have been driving higher standards of stewardship, including remuneration, since the financial crisis. ABI members continue to support the principle of high pay for high levels of performance, especially when it is appropriately structured to prevent short-termism, for example with claw-backs and deferrals.

Pay should be linked to performance and an increase in fixed remuneration should not be encouraged

The typical pay structure of asset managers already includes a balance between annual bonuses, deferrals and long-term incentives, aimed at ensuring the long term performance of the fund or asset manager.

As shareholders, we remain deeply concerned that any detailed requirements on fixed/variable pay ratios will have the reverse impact of that intended by MEPs and actually result in an increase in fixed remuneration for which there is no claw-back for poor performance, and no opportunity to reward strong and stable performance (or equally not reward poor performance).

The legislative setting of ratios is likely to:

  • Have the reverse impact and make asset managers less accountable/responsible for their actions.
  • Lead to management time being spent looking at ways of circumventing the cap.
  • Create a new competition between companies to offer the highest fixed remuneration incentive to recruit above its competitors. With a fixed ratio this will, of course, mean an increase in the bonus offered too.

There is already evidence available that shows the consequences of setting ratios. Following developments over the last two years towards limiting variable pay, we can already see a shift towards an increase in fixed remuneration. We believe a thorough impact assessment would have revealed this.

While this cannot be what policymakers intended, we hope MEPs and member states will take this opportunity to curb the chances of exacerbating this further.


Last updated 01/07/2016