Strict rules on pay that will have extensive consequences for alternative investment houses are hidden in a recent EU consultation paper, said experts from PricewaterhouseCoopers in a statement.  

PwC, the UK-based accountancy firm, said that rules from the European Securities and Markets Authority include sweeping changes to pay in the asset management industry.

The Alternative Investment Fund Managers Directive remuneration regulations will come into force in the summer of 2013.

The rules will affect alternative investment firms including many private equity houses and hedge funds, PwC said. In the UK, it will mean heavier restrictions for those already caught by the requirements from the  Financial Services Authority in the country.

“Many thought they’d escaped the brunt of banking pay regulations, but they’re coming back to bite,” Tim Wright, reward director at PwC, said in a statement.

The rules aim to align pay more closely with risk and restrict the cash element of bonuses by enforcing at least half to be paid in shares or equivalent instruments. What is more, up to 60 per cent of variable pay must also be deferred for between three and five years. Firms must also disclose total pay for the financial year and specify the senior management and other key personnel. 

“Disclosure goes against the grain of the asset management industry, with information on pay seen as highly market sensitive,” Wright commented. “Moreover, given the small size of many firms, disclosure in this sector becomes much more personal. If the total pay disclosure covers just two employees, you’re as good as naming them.”

No more leniency

In the UK, many asset managers caught under the UK FSA rules have fallen into the most leniently treated group, Tier 4, while others escaped entirely. Most alternative investment fund managers will now face far tougher restrictions, PwC thinks.

The rules are in line with those introduced to other financial services firms in Europe via the Capital Requirements Directive.

“The rules could arguably put EU regulated firms at a disadvantage not just for recruitment and retention of workers, who tend to be internationally mobile, but for investment opportunities,” said Wright.

The rules could even hit some firms outside Europe: “The Directive is not only aimed at funds based in Europe but those marketed in Europe, which may lead some firms outside the EU to rethink targeting investors here,” said Wright. “A US asset manager, for instance, would need to weigh up whether the UK market is worth deferring a sizeable part of their pay for.”