Fund managers are bracing for a wide-ranging regulatory clampdown on remuneration as politicians and regulators seek to encourage longer-term incentives across financial services.
Last week FSA chairman Lord Adair Turner spoke out on the short-term nature of some fund managers’ pay, indicating that the new regulator will be paying particular attention to this area.
Lord Turner said in an interview with Bloomberg: “[Fund manager pay] often doesn’t bear a strong relationship to the performance of the funds; they seem to exist whether or not there is outperformance. I think there are some searching questions which will be an important area for the Financial Conduct Authority to focus on.
“It is noticeable that when you look at the people that deliver superior returns over a long period of time, the Warren Buffett-style investment approach, their horizon is very long term – they are not driven by quarterly or even annual returns.”
Lord Turner’s comments came as the Group of 30, an international body of financial experts of which he is a member, published a 70-page report into longer-term investment incentives. The G30 report stated that bonuses awarded to managers of mutual funds and pension funds could be linked to performance over the course of “a minimum of three years”.
Separately, the European Securities and Markets Authority (Esma) on February 11 published remuneration guidelines for managers affected by the controversial Alternative Investment Fund Managers Directive (AIFMD) which comes into force later this year.
Niche managers – including direct property funds, private equity funds and some investment trusts – will be required to disclose the pay, benefits and performance-related bonuses of their senior staff including named fund managers.
The rules are also likely to be copied over to form part of the Ucits V directive which will affect the majority of open-ended funds in the UK and across Europe when it comes into force in 2015. In November the FSA published the first of two papers detailing how it will implement the AIFMD, including instructions for fund managers to pay their senior staff according to “multi-year” assessments of performance.
The FSA’s draft rules state: “The actual payment of performance-based components of remuneration [should be] spread over a period which takes account of the redemption policy of the [funds] and their investment risks.”
Angela Foyle, head of financial services tax at BDO, said: “If you operate in any regulated sector [managing money] one of the remuneration codes being considered will hit you. I don’t see this is going to stop, so people need to accept it.”
Neville Bramwell partner at Deloitte, added that the AIFMD’s remuneration guidelines would “increase cost and complexity” for fund managers.
Fund managers already prepared: IMA
Irving Henry (pictured), prudential specialist at the IMA, said he was “puzzled” by Lord Adair Turner’s comments last week as fund managers had been preparing for stringent remuneration rules for some time. “I have a lot of respect for Adair Turner but frankly I’m a bit puzzled by what he said,” Mr Henry said.