23 Sep 2010
The Financial Services Authority has signalled that it intends to steer clear of an overly rigid approach to overseeing the remuneration of asset managers, including hedge funds. The move is in response to the Capital Rights Directive which Brussels has brought in to regulate pay across the financial services sector.
News of the approach came in a speech by Dan Waters, the FSA’s asset management sector leader to the Alternative Investment Management Association Annual Conference in London. He said that the FSA is aware of the substantial differences between the banking and asset management sectors as well as the fact that remuneration measures were originally proposed to deal with banking bonuses.
“We do not propose a rigid approach to those elements of the CRD remuneration principles that are relevant in the design of remuneration structures for asset managers,” Waters said. “Instead we have proposed that some elements of the code remuneration are applied proportionately and in some cases on a comply or explain basis.”
Among these elements are the nature of remuneration payment, deferral of performance related remuneration, such as bonuses, and performance adjustment of those awards. Though the Capital Rights Directive proposes a hard requirement to defer at least 40% of variable remuneration over at least a three year period, it also allows national regulators a degree of flexibility in supervising different types of institutions.
“We are concerned that in the case of asset managers, such a hard-edged requirement does not reflect the specificities of different types of funds, for instance those where the investment period of the fund is greater than or less than three years,” Waters said. He added: “It is because of that fundamental difference from the banking model that asset managers are not supervised or proposed to be supervised in a manner that assumes they would ever be bailed out.”
Waters also took issue with the argument that proprietary traders might quit investment banks to form hedge funds in order to seize on a ‘regulatory arbitrage’ opportunity. On this reasoning, the traders would simply transfer their excessive risk-taking to another part of the financial system.
“The premise that proprietary traders can simply leave investment banks and carry out unbridled risk-taking in hedge funds if we do not treat asset managers like banks seems flawed,” Waters said. “In fact, the far greater risk – and it is a real one – is that misguided European regulation of hedge funds drives them out of Europe, depriving European regulators of both the information we now have about their activities in European markets and the regulatory power to curb abuses, while these funds continue to invest in European markets.”
Instead, Waters said that the UK, the EU and the Alternative Investment Fund Manager Directive all recognise that regulators must gather direct information about the trading and market footprint of hedge funds. Combined with knowledge of leverage and counterparty exposures, he added that regulators will be better equipped to tackle abuse and systemic risk in markets.
To read the full text of Waters' speech please click here.
News of the approach came in a speech by Dan Waters, the FSA’s asset management sector leader to the Alternative Investment Management Association Annual Conference in London. He said that the FSA is aware of the substantial differences between the banking and asset management sectors as well as the fact that remuneration measures were originally proposed to deal with banking bonuses.
“We do not propose a rigid approach to those elements of the CRD remuneration principles that are relevant in the design of remuneration structures for asset managers,” Waters said. “Instead we have proposed that some elements of the code remuneration are applied proportionately and in some cases on a comply or explain basis.”
Among these elements are the nature of remuneration payment, deferral of performance related remuneration, such as bonuses, and performance adjustment of those awards. Though the Capital Rights Directive proposes a hard requirement to defer at least 40% of variable remuneration over at least a three year period, it also allows national regulators a degree of flexibility in supervising different types of institutions.
“We are concerned that in the case of asset managers, such a hard-edged requirement does not reflect the specificities of different types of funds, for instance those where the investment period of the fund is greater than or less than three years,” Waters said. He added: “It is because of that fundamental difference from the banking model that asset managers are not supervised or proposed to be supervised in a manner that assumes they would ever be bailed out.”
Waters also took issue with the argument that proprietary traders might quit investment banks to form hedge funds in order to seize on a ‘regulatory arbitrage’ opportunity. On this reasoning, the traders would simply transfer their excessive risk-taking to another part of the financial system.
“The premise that proprietary traders can simply leave investment banks and carry out unbridled risk-taking in hedge funds if we do not treat asset managers like banks seems flawed,” Waters said. “In fact, the far greater risk – and it is a real one – is that misguided European regulation of hedge funds drives them out of Europe, depriving European regulators of both the information we now have about their activities in European markets and the regulatory power to curb abuses, while these funds continue to invest in European markets.”
Instead, Waters said that the UK, the EU and the Alternative Investment Fund Manager Directive all recognise that regulators must gather direct information about the trading and market footprint of hedge funds. Combined with knowledge of leverage and counterparty exposures, he added that regulators will be better equipped to tackle abuse and systemic risk in markets.
To read the full text of Waters' speech please click here.
