The Financial Times recently reported that compensation costs per employee at global investment banks fell by 25% between 2006 and 2014. ¹ If this trend continues asset managers will be paid more than investment bankers by next year.  ²This analysis follows the first bonus round since the EU introduced a cap on bankers' bonuses which limits them to no more than 100% of pay - or 200% with shareholder approval - and we might expect further changes as bonuses remain high on the European and domestic political agendas.

In the UK, ahead of what promises to be a closely fought general election, the issue is already proving incendiary, not least because this bonus round comes after several large banks paid billions

to UK and US regulators to settle allegations of manipulation of foreign exchange rates.  In Europe, the EU is ramping up the pressure on bank bonuses. The European Banking Authority, which now supervises Europe's banks, published amended guidance on 4 March 2015, which requires the UK

and other member states to apply the rules on bonuses paid from 2016 or explain why not.  If the

EBA believes an explanation to be inadequate it may "name and shame" the local regulator.  In addition, the EU can take the offending member state to the European Court of Justice.  While remuneration is trending downwards, the tidal wave of regulation is showing no signs of subsiding.

Without commenting on the necessity and propriety of the level of regulation banks face, I wonder if the bonus cap is just another blow to bankers contributing to making banking an increasingly less attractive career option.  There is nothing new about bankers leaving banks to become science teachers or join charities, especially following the financial crisis of 2008, but there are other options.  We have recently advised a string of clients who have left their positions at some of Europe's largest private and investment banks on how to set up fund management and portfolio management firms and we are expecting this trend to continue.

Bankers deciding to set up their own fund or portfolio management firm will need to apply for FCA authorisation to perform the relevant "investment activities".  Though not difficult, this will take time.  These investment activities include: arranging investment deals in investments; advising on

investments; dealing in investments; safeguarding and administering investments; managing investments; and operating or winding up a collective investment scheme. As part of your application, you will normally need to prepare a regulatory business plan and a compliance manual.  The FCA will decide whether it is satisfied that your firm can meet and continue to meet the minimum standards (called Threshold Conditions), and that the persons running the firm are fit and

proper.  The FCA is required to process an application for authorisation within 6 months and you should expect to wait that long.  This time delay could have an impact on client retention. 

There is way forward through these complexities.  For some of our clients the best option was to enter into a tripartite agreement with an umbrella manager and their clients.  Umbrella managers are third party firms already authorised by the FCA to perform the "investment activities" and we work with a number of these.  In this arrangement, the umbrella manager satisfies the relevant regulatory requirements and your firm is appointed as strategic investment adviser.  Umbrella management has a number of key advantages. 

First, the umbrella manager rather than your firm will be responsible for complying with the FCA rules and, in particular, categorising the client and assessing the  suitability of the product for the client pursuant to COBS 9. 

Second, the umbrella manager is under a contractual obligation to manage the fund or portfolio in accordance with your investment advice.  It is not the role of the umbrella manager to become embroiled with investment decisions except to confirm that a proposed investment is not in breach of the investment policy, guidelines and restrictions contained in the tripartite agreement.   Therefore, you stay in control. 

Thirdly, your firm, as the strategic adviser, will receive any management and/or performance fees from your clients directly.  In return for its services, your firm will pay the umbrella manager a monthly fee.  The size of that fee depends on a number of factors, including the term of the agreement and the risk perceived by the umbrella manager. 

Finally, the agreement provides for your firm to replace the umbrella manager once it has obtained FCA approval.  At this point the umbrella manager's services are no longer required. 

Alternatively, if you do not mind sharing a portion of your fees with another firm, you can dispense with the FCA application and retain the services of the umbrella manager long-­‐term.  This way you can avoid navigating the FCA rules entirely.

¹FT Article "Asset managers' pay set to beat investment bankers" http://www.ft.com/cms/s/0/37cce456-­‐b507-­‐11e4-­‐b186-­‐00144feab7de.html#axzz3RukKloHk dated 15 February 2015.

²FT Article "Asset managers' pay set to beat investment bankers" http://www.ft.com/cms/s/0/37cce456-­‐b507-­‐11e4-­‐b186-­‐00144feab7de.html#axzz3RukKloHk dated 15 February 2015.

Contact:

Jessica Knowles-­‐Mofford, Solicitor, RW Blears LLP

125 Old Broad Street, London, EC2N 1AR

e:  [email protected]

w: www.blears.com

tel: 020 3192 5573