Ucit bonuses / Brit Group / LBIE
The European Parliament, bogeyman of libertarian City folk, is at it again. The legislature wants Ucit managers to take half their bonuses in units of the funds they run. This is like forcing Heston Blumenthal to eat his own snail porridge instead of the Big Mac he’d probably prefer. The phrase "cruel and unusual punishment" would hardly cover it. Fund managers are not being singled out. The Ucits V Directive queasily elides the statutory framework for European open-ended funds with remuneration as part of a broader post-crisis rejig of the pay of financial folk. The most glaring difficulty is that a US fund manager who manages a Ucit is prohibited from holding shares in it personally. Could he or she be recompensed with some other European export, such as currywurst or Johnny Hallyday CDs? We may never find out. A posse of EU states will contest the directive’s extraterritoriality. Invidious to lecture others for throwing their weight about overseas when you are doing it yourself. Ucits managers with EU passports would still receive bonuses partly composed of their own fund’s shares. Bad news for any F&C manager who secretly believes his rival at Schroders is doing a better job. But cometh the pay regulation, cometh the distorted behaviour. The response of banks to rules that set a maximum ratio of bonus to salary, but not a maximum amount, is to redefine bonus. Thus HSBC’s chief executive Stuart Gulliver will receive a "fixed pay allowance" more than double his base salary. City lawyers are even now Cat-scanning Ucits V for loopholes. If penalties for Ucits rule evasion are too intimidating, investment groups may simply frame new funds in rival formats. A pity, since Ucits have been a big international success. More so than currywurst or Johnny Hallyday, anyway. Reinvented Richard Grannies assert that if you cannot say anything nice, you should say nothing at all. The wisdom of this is apparent in Richard Ward’s reinvention as chairman of Lloyd’s insurer Brit Group, which has just announced plans to float at a mooted valuation of about £1bn. Back in 2010, Mr Ward, who was chief executive of Lloyd’s of London, let down controversy-hungry hacks by welcoming investment from private equity investors. The occasion was the buyout of Brit for £888m by CVC and Apollo. He could hardly have fronted Brit later had he told the barbarians to quit cluttering up his gate. Instead, he has his very own horned helmet to wear as he brings the specialist underwriter to market. Apollo and CVC are expected to retain some of their shares after the float. That should semi-mollify public market investors who accuse private equity firms – poor, wronged butterflies – of timely round-tripping. Brit might be deemed to illustrate the technique. CVC and Apollo bought the business for £888m when insurers were trading at a discount to asset value. Having restructured and taken dividends of £550m, they should be able to list at a premium of 1.5 times net assets. As Brit chair, Mr Ward, who previously toiled under the beady oversight of John Nelson, can now complain to the Lloyd’s chairman about the decor and membership charges should he wish. Ignoring Granny, Mr Nelson will doubtless continue thundering against passive underwriting of the kind practised by Warren Buffett’s Berkshire Hathaway via Aon. Mr Ward should be grateful. Such piggybacking poses a particular threat to Lloyd’s specialists such as Brit. The largesse of Lomas Company morticians specialise in telling creditors how few pence in the pound they will receive. So Tony Lomas, lead administrator at PwC to Lehman Brothers International Europe, must have relished uttering the words: "Anyone who is owed anything will get everything." No ordinary collapse, no ordinary administration. The smash of LBIE, the UK-based subsidiary of the US investment bank, was emblematic of the European end of the 2008 financial crisis. What a fuss over nothing. Mr Lomas has returned £21bn in cash and shares deposited with LBIE and expects payouts of other claims to hit £14bn, leaving him with £5bn or more to cover interest. LBIE ran out of cash, not capital. Investors and regulators should thus scrutinise banks’ liquidity safeguards as closely as the capital ratios they currently obsess over. A weird introduction to finance, meanwhile, for younger staff among the 500 Lehmanites retained by Mr Lomas to help sort out the mess. After five years, many have worked for him for longer than they served Dick Fuld.