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Tuesday, 28 June 2016

Make the cap fit

EU bonus-cap vote puts fund managers in hot seat

European fund managers can heave a sigh of relief. On Wednesday the European Parliament rejected the plan of Sven Giegold, the German MEP, to place strict limits on bonus payments and to outlaw some performance fees.

Legislators are right to butt out. Fund management houses are private, self-sustaining enterprises. Unlike banks, they don’t need state-funded rescues when they fail. They should be left to agree on pay schemes with their customers.

Much of Giegold’s thinking, however, is valid. Carelessly constructed bonus schemes may encourage senseless risk taking. And mediocre fund managers can get super-charged pay packages simply for riding market upswings.

Fund management houses complain that bonus caps force up salaries and reduce flexibility. But greater pay certainty might be a good thing, aligning the interests of managers and clients. After all, this industry is supposed to offer good service and keep a long-term perspective. Rewards for short-term performance tend to discourage paying attention to the clients, and to penalise cautious managers, who may have served clients well by reducing the risk of losses.

Wednesday’s vote may not be the last word. The regulations for so-called “UCITS” funds, which can be sold over the whole EU, might be changed to include some Giegoldian limits. Fund managers for 6.3 trillion euros of assets may well be obliged to award bonuses based on multi-year performance statistics, and to defer payments to ease possible clawbacks for performance that subsequently proved illusory.

If fund management houses want to keep most of their pay freedom, they should embrace reform. Some of the best operators have already started. Laggards may find that clients, if not European lawmakers, will make them play catch-up.

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The European parliament has voted down proposals championed by Sven Giegold, the German MEP, which would have imposed strict limits on the bonuses payable to managers of 6.3 trillion euros worth of UCITS-registered investment funds. It also rejected proposals to outlaw the practice of paying performance-related fees to fund management houses that beat pre-set benchmarks.

Sven Giegold said on July 3: “Today is a black day for investor protection in Europe. Conservative and Liberal MEPs voted down rules reducing excessively risky speculation by investment fund managers … Crucially, MEPs have voted against capping bonuses for fund managers and employees with an influence on investment decisions to a maximum equivalent to the fixed remuneration … This provision would have complemented the recently adopted EU rules capping bankers’ bonuses, ensuring these rules cannot be circumvented and providing for a level playing field.”

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