BONUS: Persuasive Clawback for Asset Manager

UK fund managers probably won’t get much sleep as the Financial Conduct Authority (FCA) considers measures that would order money managers to pay back bonuses. Initial reports from the FCA indicate that asset management staff working at select financial firms would be forced to pay back cash bonuses received years in the past. The factors that could trigger these clawback payments include the following:

  • Proof of misconduct.
  • Risky management failures.
  • Heavy financial losses.

This clawback scheme has been proposed by the Bank of England and would target bonuses that have been paid within the past six years. These initial clawback demands would mostly target managers working at banks. The purpose of these clawbacks is to act as both a punishment and incentive to reduce misconduct in the financial sector.

A secondary but larger clawback scheme would target hedge fund groups which manage £5.2 trillion of UK assets.
This action follows a recent statement by FCA that it would increase its regulatory review of Britain’s largest hedge funds. At present, 20 UK hedge funds manage 82 percent of all hedge fund money in the UK. The FCA justified its increased oversight role as a means to prevent a collapse of the country’s financial system. The purpose of the increased oversight is to identify and mitigate possible systemic risks. The monitoring will target derivative leverage and exposure.

The City watchdog is waiting for preliminary data from BofE’s Financial Policy Committee before taking concrete action. Although it’s speculative at this point, the threat of clawbacks by the FCA against managers at hedge fund firms is likely the result of initial findings by BofE. Two UK consultancy firms, PwC and Hay Group, have lined up behind FCA, stating that clawbacks would be an effective manoeuvre to combat bad behaviour and unnecessary risk-taking by the asset management industry.

Initial analysis suggests that a goodly number of managers could get hammered by the clawback scheme. The FCA is likely laying the groundwork to compel the return of bonuses. In 2013, the FCA collected £20 million in fines from 57 managers for insider-trading and abuses within the financial market. Both charges, although broad in scope, could act as triggers to initiate clawbacks.

The clawback scheme is being set up across Europe and the U.S. The Dutch adopted clawback rules in January. The European Commission has introduced clawback measures although they haven’t been implemented yet. The U.S. is crafting similar rules under the US Securities and Exchange Commission.  In the meantime, asset managers will find their dreams troubled by bonus pounds leaving their pocketbooks.

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