MPs: ‘Regulatory stick’ needed to align fund manager pay

The Business, Innovation and Skills select committee says the government must do more to make sure Kay review proposals to end short-term incentives for fund managers come into force.

Adrian Bailey MP, chairman of the Business, Innovation and Skills select committee, said: “Professor Kay sought to bring about cultural change to improve long-termism in the equity market. We support this aim and his recommendations for bringing it about.

“The cultural change advocated by Professor Kay will not happen without a catalyst, the 12 years of inaction following the Myners review is proof enough of that.

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“It is not enough for the government to simply say it supports Kay’s recommendations and then leave it to the industry to change of its own volition. The government must set measurable, accountable targets through which reform can be driven and measured.”

The report states the Financial Conduct Authority should highlight the fact asset managers are allowed to use commissions to pay for long-term research, including long-term stewardship.

According to the MPs all major institutional investors should be encouraged by the FCA to make managers do this and should set out a minimum proportion of a firm’s commission that should be used towards such activities.

The government was told it should outline what it considers a minimum acceptable level of sign up to the stewardship code and outline what action it will take if this target is not met by the market on a voluntary basis.

The stewardship code should also be enhanced, according to the MPs, to take account of strategic issues as well as those around corporate governance.

This should include, among other things, allowing investment managers to focus on strategic issues facing companies within their policies on how they discharge their stewardship responsibilities.

The government was told it should outline its timetable for all companies to sign up to Kay’s good practice statements.

Mr Bailey said: “We agree with Professor Kay that a more expansive form of stewardship needs to be developed - one that focuses not just on questions of corporate governance, but on strategic issues too.

“With this in mind, we make specific recommendations on how the code can be enhanced and Professor Kay’s principles turned into reality.

“If stewardship is to take a more prominent role, it needs to be better resourced. It is concerning that many asset managers appear unaware that they can use commissions to pay for long-term stewardship research. The FCA must take action to remedy this.”