Small investors to be shielded against reckless risk taking by investment funds
16 Apr 2014 04:41 PM
Small investors will be
better protected against investment funds that take excessive or unnecessary
risks with their money, under rules approved by Parliament on Tuesday. These
rules clarify who is liable for mismanagement of funds and tailor fund
managers' remuneration rules to encourage them to take reasonable risks and
a long-run view.
Undertakings for collective
investments in transferable securities (UCITS), which gather assets from small
investors and pool them to buy bonds, shares or other financial products
currently manage, around 85% of the European investment fund sector's
assets (European Commission figures).
Depositary
To clarify who is responsible
for small investors' funds, the agreed rules will require UCITS fund
or UCITS fund manager to appoint a single independent "depositary"
(credit institution or authorised legal entity with sufficient own funds), to
oversee investor payments to the fund and act as a custodian of its assets. No
management company should act as both a management company and
depositary.
Depositaries will be required
not to act without authorisation and will have to keep investors' money
clearly separate from their own assets. They will be barred from investing
these funds on their own account. Depositaries will also be deemed liable for
any loss of assets, even if they delegate custody of them to a third
party.
Pay
Fund managers will be required
not to take investment risks beyond what is accepted by their UCITS investors.
At least half of the variable part of their remuneration will be paid in the
assets of their UCITS, unless the management of UCITS accounts for less than
half of the total portfolio.
Payment of at least 40% of
variable remuneration will be deferred for at least 3 years. Where the variable
share of remuneration is particularly high, at least 60% of this share is to be
deferred, to encourage managers to take a long-run view.
The European Securities and
Markets Authority (ESMA) should prepare guidelines on to whom in the company
the pay policy applies.
Penalties and whistle
blowers
EU member states will have to
provide in their laws for harmonised administrative penalties for funds that
fail to comply with organisational, risk management, and other requirements.
Member states may decide not to lay down rules for administrative penalties
where the breaches are subject to penalties at national level but they will
have to inform the European Commission of the relevant criminal law
provisions.
Administrative penalties will
include issuing a public statement identifying the person responsible and the
nature of the breach,suspending authorisation and temporarily or permanently
banning the perpetrators from fund management.
Companies may be also fined up
to 10% of their annual turnover or €5 million. Individuals may be fined up
to €5 million. Alternatively, individuals and companies may be fined up to
twice the amount of profits made, even if that exceeds the €5 million or
10%.
Parliament inserted a provision
requiring member states and ESMA to establish effective and reliable mechanisms
to encourage reporting of potential or actual breaches to competent
authorities, including secure communication channels for whistle
blowers.
Next
steps
The new rules still need to be
officially endorsed by the member states, which will have 18 months to put them
into effect.