Lex is a premium daily commentary service from the Financial Times. It helps readers make better investment decisions by highlighting key emerging risks and opportunities.
First a cap on bankers' bonuses. Next, a cap on fund managers' bonuses? European parliamentarians have the bit between their teeth. A committee-level vote this week endorsed a proposal limiting bonuses to no more than fixed pay for anyone involved in managing the €6-trillion ($8-trillion) pool of so-called "UCITS" funds. (These are Europe's most regulated, retail-oriented mutual funds, such as unit trusts). In addition, at least half that bonus element may have to be paid in units of the fund (or funds) concerned, while a quarter (or more) would need to be deferred.
True, support for this was not overwhelming and wording may get revised in upcoming negotiations. But it is still worth considering what the objective is here. Justification for banker constraints is that excessive bonus incentives encourage levels of risk taking which may be systemically dangerous. When it comes to fund managers, the issue is investor protection.
An estimated 23 million European households are invested in UCITS funds, so this is no small matter. But, while high bonus incentives can, indeed, spur the quest for risky, short-term returns, this is not necessarily the case. Moreover, investors select UCITS funds from a large, competitive pool, and nearly a third of fund holdings come from direct retail investment. So, with proper information, individuals ought to be able to decide for themselves whether high bonuses are something they value, bearing in mind a fund's record and so on. They do, of course, need that data.
But proposals in the same legislation for more fulsome, regular information on what remuneration is being paid may turn out to be more useful than the rather crude suggested caps, which risk simply pushing fixed pay higher.
Where the parliamentarians' draft looks much more promising is on performance fees. These are levied directly on funds in addition to "base" fees, but can be structured so that they are laughably easy to achieve. Such fees also tend to reward on the upside, but fail to penalize for underperformance. Moves to address those issues, and provide much more disclosure in both prospectuses and fund reports about how such fees work, are truly the investor's friend.