Calls for more boardroom oversight instead of EU pay cap – The Wealthnet

Investment managers SCM Private has called on the EU to adopt the US model of independent boards to ensure that investment management pay remains proportionate.

Posted By: True and Fair, 5:42 pm

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SCM argues that a cap simply prescribing and limiting fund managers pay misses the point as the relationship between fund management companies and their business of investing funds which it says is different to banks and their business of making loans.

SCM says that constituted independent boards rather than prescribed rules on fund manager pay are a better solution.

The regulation of senior executives’ pay and remuneration packages is a matter for each fund management company and its shareholders who have voting powers; these powers should be more actively exercised, an SCM spokesman said.

Imposing limits on executive pay within the fund management business may well structurally increase the financial risk of fund management companies given the likely effect of increasing their overall fixed costs, without any direct benefits for fund investors.

Since 1940 the US mutual fund industry has ensured that every fund has a strong board of independent directors who have been given key tasks enshrined in law. This was further tightened in 2004 by the requirement to have an independent Chairmen and a board constituted by at least 75 percent independent directors, ensuring ‘that a fund must be managed on behalf of its investors rather than on behalf of the adviser or other affiliated persons of the fund’.

Fundamental to this is the avoidance of conflicts of interest that are detrimental to the fund, according to SCM.

Gina Miller, founding partner of SCM Private and spearhead of the True and Fair Campaign said: “The returns that consumers get from funds are closer related to the fund manager fees rather than the remuneration of the fund managers, which is not paid by the fund. Increasing independent supervision of the fund with at least 75 percent independent directors would effectively tackle the problem. Independent directors would look after the interests of the fund’s investors and serve as “independent watchdogs” on the management of the fund.

“If the Commission’s goal is to protect and improve the outcomes for ordinary investors within European mutual funds, then simply prescribing and limiting fund managers’ pay misses the point, and we urge MEPs to re-think their position. Our greatest concern is that this cap may actually leave underlying fund investors worse off. For example, since fund management companies are effectively already significantly geared to market movements, by forcing a higher level of fixed rather than variable remuneration of fund managers, this may well lead to more companies failing in any market downturn, which cannot be in the best interest of investors.”