European fund managers can heave a sigh of relief. On Wednesday, the European Parliament rejected the plan of Sven Giegold, a German representative, to place strict limits on bonus payments and to outlaw some performance fees.
Legislators are right to butt out. Fund management firms are private, self-sustaining enterprises. Unlike banks, they don’t need state-financed rescues when they fail. They should be left to agree on pay schemes with their customers.
Much of Mr. Giegold’s thinking, however, is valid. Carelessly constructed bonus schemes may encourage senseless risk taking. And mediocre fund managers can receive supercharged pay packages simply for riding market upswings.
Fund management houses complain that bonus caps force up salaries and reduce flexibility. But greater pay certainty might be a good thing, aligning the interests of managers and clients. After all, this industry is supposed to offer good service and keep a long-term perspective. Rewards for short-term performane tend to discourage paying attention to the clients, and to penalize cautious managers, who may have served clients well by reducing the risk of losses.
Wednesday’s vote may not be the last word. The regulations for “UCITS†funds, which can be sold over the whole European Union, might be changed to include some Giegoldian limits. Fund managers for 6.3 trillion euros of assets may well be obliged to award bonuses based on multiyear performance statistics and to defer payments to ease possible clawbacks for performance that subsequently proved illusory.
If fund management houses want to keep most of their pay freedom, they should embrace reform. Some of the best operators have already started. Laggards may find that clients, if not European lawmakers, will make them play catch-up.
Robert Cole is assistant editor at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
