Policy Papers

Les Patrons Mangent Ici: A practical guide to better alignment in the financial services industry

As the financial services industry seeks to rebuild itself in the wake of the global financial crisis, the need to find new ways to manage risk becomes a greater part of the debate. With national governments, the European Union, and various global associations and supranational bodies all looking at additional ways to regulate the industry, this paper examines whether there is an alternative, and perhaps more effective, route to reforming the industry through the encouragement and incentivisation of behavioural change.

Better alignment of managers with their clients can reduce risk, improve performance, and rebuild trust in the financial services industry. We do not believe that this should be accomplished by additional regulation on remuneration or ownership, but rather through a process of cultural change and increased transparency. The aim of this paper is to offer practical suggestions about how investment managers can become better aligned with their clients, drawing on our experience as financial SMEs for whom this is a fundamental tenet of our businesses. We then explore how these suggestions can be applied to participants in the financial system more broadly. Finally, we offer suggestions to policymakers on how they can encourage better alignment within the financial system.

Policy Responses:

Response 1

Support and accreditation by regulators and industry stakeholders for the establishment of a ‘Code of Good Practice’ for the fund management industry.

Response 2

Deferral of income tax on remuneration fund managers are compelled to invest into their own funds, and limited deferral on voluntary co-investment in order to encourage alignment.

Response 3

Simplification of the regulations around making employees partners in financial LLPs, and encouraging employee ownership further in both companies and LLPs in line with policymakers’ efforts to increase employee ownership more broadly.