The ECON Committee of the European Parliament has voted to introduce changes to the European Commission’s proposals for Ucits V that could bring fund manager “variable remuneration” (bonuses to you and me) under regulatory control.
The stated purpose of such controls was to reduce the probability of fund managers taking excessive risk. The main talking point was a proposal to put a limit on fund manager bonuses of 100% of fixed remuneration (salaries to you and me).
The process now heads to a vote in the European Parliament, or even a sequence of votes (think of the equivalent of first and second readings in the UK). Representatives of the European Parliament, the European Commission and the Council of Ministers then get together in a process called trilogue to consider all views and to come up with a text on which they can all agree.
Naturally, this is a high-profile issue. For the IMA, how we address this issue is the same as for any issue. We try to work out how we can achieve an outcome that is in the best long-term interests of our clients.
Raising standards
In this case, the IMA’s position is that we absolutely agree with the proposition that managers’ variable remuneration should be aligned to the long-term interest of their clients and that bonuses should not be paid for market performance or even failure.
So how can regulations be framed in a way that is most likely to deliver improvements in alignment by driving the standards of the average up towards the standards of the best?
Our response to the European Parliament contains many detailed measures, but the most significant three are:
- Bonuses should be assessed over multi-year periods – you should not be paid just for what you achieved over one year, but over a number of years.
- Bonuses should be deferred over multi-year periods – so your 2013 bonus would only be paid in part in 2013 with the balance being paid in 2014 and 2015 or even longer. This makes clawback easier if things go badly wrong subsequently.
- Managers should be required to disclose their remuneration policies by job type (the CFO will be different to a portfolio manager) and to explain why they believe their remuneration policies are aligned to long-term client outcomes. These explanations would be subject to review, challenge and requirement to change by national regulators.
These measures, which have real bite and are completely focused on client interests are the best way of driving improved standards.
The wrong path
The current proposals, while they may sound attractive, would actually act to weaken alignment.
Think of it like this. If these rules are introduced, even if salaries do not increase as a result, the proportion of total pay that a fund manager gets for turning up every day will increase and the proportion of total pay that they get for adding value will reduce. Net result? Weakening of alignment.
Furthermore, the argument that this is necessary to curb risk taking is not sound because Ucits funds, by definition, control risk in a transparent way with boundaries set by the rules and the prospectus of each fund.
There is plenty that can be done to constantly improve average standards and that is not work that the industry should just accept, but it is work that we should actively embrace irrespective of regulatory threat.
Asset management has the potential to be a genuine force for good in society. If we get it right, we will play a very important and positive role in helping people face the future with greater confidence and in contributing to better economic growth through the efficient allocation of capital.
The way the industry is responding to this issue is an example of client focus and maturity and it needs to be applied to everything we do.
What do you think? Let us know in the box below…
