Micha Lindenstrauss 311.
(photo credit: Ariel Jerozolimski )
The Finance Ministry’s capital market, savings and insurance department has failed to regulate and properly supervise the bonuses allocated to fund managers and prevent conflicts of interests, which in turn could harm the public’s savings, according to the State Comptroller’s Report published Tuesday.
“The Treasury’s capital market division has failed to examine the connection between competition in the capital market, remuneration packages offered by financial institutions and the risk level taken by their fund managers,” the report said. “Certain remuneration packages are likely to lead to a conflict of interest between the personal interests of fund managers and the public’s savings interests they are managing. There is an essential need to protect the long-term interests of the saving public from risky activities by institutional bodies.”
The Bachar reform led to the removal of provident and mutual trust funds from the management of banking corporations and their transfer to the management of private financial institutions and fund-management companies. At the end of 2008, pension and insurance houses were managing NIS 574 billion in public savings.
“Following the implementation of the Bachar reform, which introduced structural changes of the capital market, a continued process of tackling additional problems was required,” the report said. “The issue of compensation paid to fund managers, however, has only come to the surface with the outbreak of the global financial crisis, which is not an excuse for the fact that the Treasury’s capital market division has not dealt with the issue beforehand.”
The report said the Treasury has not collected information and data on compensation packages received by fund managers in a systematic manner to examine whether the provision of bonuses is encouraging risk-taking in the management of savings, although its capital market division is entitled to request disclosure. The Treasury does not have any specific examples of employee contracts that were signed with fund managers working in financial institutions, the report said.
“Although the Finance Ministry’s capital market, insurance and savings commissioner has published guidelines for the industry in June 2009, they were found to be too general in determining principles for the behavior of financial institutions,” the report said. “The guidelines leave room for much interpretation, while the impact has not been supervised.”
The Finance Ministry’s capital market division has not examined the possibility that the guidelines might have led to the approval of higher compensation packages, which ultimately could translate into higher management fees paid by the public, the report said. In principle, the guidelines are intended to ensure that fund managers’ compensation take into account risk and long-term performance rather than the “inappropriate” salary agreements that led to the global financial crisis, the report said.
“The protection of the interests of the saving public is important,
while the effectiveness of the guidelines to achieve this target
remains doubtful,” the report said. “Therefore, a higher level of
supervision by the Treasury’s capital market division is needed for the
implementation of guidelines, as well as the indirect impact of the
activities of financial bodies and the management fees they are
charging the public.”
The report urged the Treasury’s capital market division to start
collecting data in a systematic way and to examine the connection
between compensation arrangements of fund managers working in
institutional bodies and the risks they are taking at the expense of
the saving public.
“The necessary measures need to be identified as soon as possible to
avert damaging effects the compensation arrangements might have on the
activities taken by institutional bodies, which in turn could have a
damaging effect on the savings of the public,” the report said.