The MEPs have passed the EU's amended directive (2009/65/EC) on the co-ordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities as regards depositary functions, remuneration policies and sanctions. The legislation, known as UCITS V, is designed to protect investors from sharp practice and was passed by a majority of 607 to 28. One more stage in its passage remains.

In a direct reference to the Bernie Madoff scandal, Michel Barnier of the European Commission (the nearest thing the governmental club has to an executive branch) announced yesterday: “Consumers were shocked by the extent of the Madoff fraud, how inadequately their assets were protected, and how differently their compensation claims were handled in the various member-states. The amended directive will address those problems.”

The UCITS V remuneration laws are effectively converging with those that govern hedge fund managers under the Alternative Investment Fund Managers Directive. The broad reform of pay and bonus awards for investment firms, which also includes the latest version of the EU's Capital Requirements Directive or CRD IV, ultimately stems from the same resolution of the Group of 20 industrial nations in 2009 to make the financial services industry less risky.

The UCITS V remuneration provisions are contained in the new articles 14a and 14b of the amended text. Of particular note are the following stipulations from the text.

• Management companies must establish remuneration policies and practices that are consistent with and promote sound and effective risk management and do not encourage risk-taking which is inconsistent with the risk profiles, rules or instruments of incorporation of the UCITS they manage.

• Such policies and practices shall apply to those categories of staff including senior management, risk-takers, control functions and employees remunerated in the same bracket as senior management.

• The fledgling European Securities and Markets Authority or ESMA is to publish further guidelines about the categories of staff to whom the policies and practices should apply. The guidelines should, as far as possible, be aligned with those for the AIFMD.

• Fixed and variable components of total remuneration must be "appropriately balanced."

• At least 50% of a manager’s variable pay should be paid in the assets of the UCITS, unless the management of UCITS accounts for less than half of the total portfolio under management.

• At least 40% of variable remuneration must be deferred for at least 3 years.

• Wherever the variable share of remuneration is particularly high, at least 60% of this share must be deferred.

• Firms that are significant in size and in the reach of their activities will have to set up remuneration committees.

Some of these restrictions may appear onerous, though it is worth remembering that earlier drafts of the text would have imposed a bonus cap of 100% of fixed pay on UCITS fund managers. The European Parliament eventually rejected this in 2013, to the relief of many.

Next steps

The Council of the European Union, which contains ministers from all EU countries, is expected to approve the adoption of UCITS V in the next few weeks. It is not known whether those national politicians will accept the amendments wholesale or amend them further. The finished rules are not expected to be imposed on all EU countries before the end of 2015 at the earliest.

* Jonathan Wedgbury and Jerome Lussan are partners at Laven Partners. They can be reached on +44 207 838 0010.