Financial Services Authority Chairman Adair Turner defended new bonus rules that have drawn concern from money managers, saying they focus on ensuring pay and performance are aligned and protecting the financial system.
The Alternative Investment Management Association, whose members include hedge-fund firms such as London-based Fauchier Partners and Man Group Plc, said this week it would meet with the FSA to discuss its concerns about the rules. The FSA in July proposed expanding to 2,500 from 27 the number of firms covered by compensation rules, requiring banks, building societies and hedge funds to comply with European Union legislation.
“We do not believe that hedge funds were a primary driver of the last financial crisis,” Turner told the FSA’s asset management conference in London today, “but we think it’s important to realize hedge funds could mutate and develop into things that are systemically important.” He added regulators had to recognize when a fund or bank became systemically important and respond accordingly.
Regulators worldwide have been scrutinizing executive compensation after it was blamed for excessive risk-taking that contributed to the worst financial crisis since World War II. EU governments agreed in June that directors of banks that received public money must justify their bonuses and lenders must report how many workers earn more than 1 million euros ($1.3 million).
European and FSA bonus rules “are designed to align employees remuneration with the risks they take with the firm’s capital,” Turner said. “The concern we had was that there were categories of people taking risks, getting very large bonuses before it was clear they had made long-term profits or had simply looked good at the end of one year and left a trail of toxicity for people to deal with in subsequent years.”
The FSA has invited comment on the proposals by Oct. 8 and said it will make a statement in November. The rules take effect Jan. 1.
“There are circumstances in which remuneration in the asset-management industry could raise legitimate concerns,” Turner said. “I do think it’s appropriate for regulators to worry about potential conflicts of interests in the remuneration structure for fund managers.”
Turner said new securities regulators being created by the EU shouldn’t assume direct oversight of U.K. firms.
“We are clear the fundamental process of supervision has to occur where the expertise is, with the national authorities,” Turner said.