UK hedge funds to be hit by EU capital requirements directive

UK hedge funds will be affected by the European Union’s capital requirements directive (CRD3), the UK Financial Services Authority (FSA) has confirmed.

The FSA now plans to update its Remuneration Code to take on board the new requirements. CRD3 will come into force on January 1, 2011 and the FSA has urged companies to prepare for the code's introduction.

This EU legislation, according to the FSA's consultation paper, will force hedge funds and other financial institutions including all asset managers and Ucits investment companies to limit bonuses as well as adopt other requirements.

Under the regulations at least 40% of a bonus must be deferred over three years. If a bonus exceeds £500,000, at least 60% of that must be deferred.

These changes should not come as a surprise to hedge funds as the EU's alternative investment fund managers (AIFM) directive is also proposing rules on how fund managers and their staff are paid.

CRD3 also stipulated at least 50% of "any variable remuneration components must be in shares, share-linked instruments or other equivalent non-cash instruments" of the company. This could be particularly tricky for fund managers.

Hedge funds must also ensure remuneration policies do not encourage excessive risk taking, although this is not defined.

The FSA's consultation period on its proposed code will last until October 8. A policy statement will be issued in November.