In the eternal struggle between consistency and rectitude, consistency usually wins. Would you rather be consistent or right? When “both” is not an option, everyone says that they go for “right”, but what they do is go for consistent, even when that means consistently wrong.
No surprise then to see the European Commission produce a Remuneration Code in UCITS V which is the spitting image of the AIFMD version. Consistent? Yes. Right? No. And this time even less right than in AIFMD. What is the problem? It lies deeply embedded in the principle expressed in the words, “companies shall comply with the following principles in a way and to the extent that is appropriate to their size, internal organisation and the nature, scope and complexity of their activities…”. This is the famous proportionality provision, which is intended to allow latitude to regulators and firms to adopt the Remuneration Code in a way that fits with their systemic risk profile.
In these days of ever closer harmonisation, proportionality is one of the great saviours of sanity. Without the concept, European regulation would be even more expensive to bear and even further away from passing any sort of cost-benefit scrutiny. Although Brussels may not always enjoy the way that directives are transposed into national regulation, it is the judicious exercise of proportionality that has so far prevented the industry from voting with its feet.
Unfortunately, both for the industry here and for the regulators over the Channel, proportionality has its limitations. Once the directive contains reference to bonus deferral and to payment in shares, proportionality cannot completely wish them away. In theory, whoever finds himself at the high end of the risk scale has to comply with the whole gamut. Put that into the context of UCITS and you get some odd effects. The UCITS manager who delegates the portfolio management to a MiFID firm is potentially Tier 1; the MiFID firm, on the other hand, is almost certainly Tier 4 and exempt from the nasty bits of the Code. The drafting may be consistent; the outcome is not.