FCA hits out at transparency of fund manager incentives

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The FCA has criticised the way firms assess pay incentives for their fund managers, suggesting that the majority of models in the market could potentially worsen outcomes for clients.

The FCA understands fund managers are normally assessed on performance relative to peers or benchmarks over various time periods, as well as how closely managers comply with mandates and risk budgets.

In its interim report on the Asset Management Market Study, published today, the FCA said for “several firms” it was unclear over what time period the performance was being measured and questioned the fairness of rewarding managers for the company’s success in terms of revenues or profits.

In August, research carried out by Fund Strategy’s sister title Money Marketing revealed a lack of transparency about how fund managers are paid, and whether incentives match up with client interests.

Several fund groups have taken steps to move to more “investor-friendly” pay structures but a lack of clarity prevailed on whether fund performance is the real driver behind pay.

Results collected by the regulator show one firm looked at performance over a one-year period and four firms looked at performance between a one-to-three year period. However, only around 30 per cent of firms looked over longer and multiple time periods to base their bonuses upon.

The FCA study suggests fund managers should look at periods of longer than three years.

In addition, only one asset manager had a clawback mechanism to penalise underperformance of its active managers.

Money Marketing found managers’ pay at Aviva Investors is subject to penalties and clawback.

The FCA found 17 firms consider risk management or complying with mandates as factors which influence performance assessment, while five explicitly using the number of compliance breaches as a negative factor. At two firms, risk management was explicitly related to performance, the FCA says.

Money Marketing’s research revealed similar criteria based on risk management is taken into account by Fidelity International and Columbia Threadneedle.