Published: 31st July 2015

An article in Regulatory Roundup 59 on UCITS V drew attention to the introduction of the concept of remuneration policies for UCITS management companies, with ESMA being charged with drawing up guidelines on the application of such UCITS remuneration obligations which were to “be aligned to the extent possible” with those under the AIFMD. The article also contained links to both UCITS IV and UCITS V – ‘Article 14b’ in the latter contains the UCITS remuneration principles.

ESMA has now published a consultation paper (2015/ESMA/1172) on remuneration guidelines relating to UCITS V.

The principle of proportionality is maintained in that ‘on an exceptional basis’ some of the requirements might be disapplied if this is reconcilable with the risk profile of the management company – although see section 7 for the details.

The requirements that might be disapplied are the need to have a Remuneration Committee and the ‘pay-out process rules’ which includes the concepts of:

  • the need to have at least 50% of variable remuneration in units of the UCITS concerned;
  • the need for the instruments to be subject to an appropriate retention policy;
  • deferral of 40% to 60% of variable remuneration over a minimum period of three years; and
  • performance adjustment.

The equivalent AIFMD ‘pay-out process rules’ (and which can also be disapplied on the grounds of proportionality) can be found in SYSC 19B.1.17 to SYSC 19B.1.20.

This is in contrast to the recent EBA views on proportionality in the context of CRD IV firms in which it was proposed that there was no scope for disapplication of any of the CRD IV remuneration principles – see Regulatory Roundup 65 for further information.

Interestingly, and although separate Directives, in arriving at its views on the application of (UCITS) proportionality, ESMA took into account the EBA’s reading of the CRD IV remuneration provisions.  Notwithstanding those views, ESMA was of the opinion that an alternative legal reading of the equivalent provisions of the UCITS V Directive could be envisaged with the acceptance of the possibility of the disapplication of some of the remuneration principles.

Firms with mixed business models will be aware that those that are subject to both the AIFMD Remuneration Code (SYSC 19B) and the BIPRU Remuneration Code (SYSC 19C) are not required to demonstrate compliance with the latter provided they are compliant with the former (SYSC 19C.1.1A) – unfortunately no similar provision applies to those firms that find themselves subject to the (CRD IV) IFPRU Remuneration Code. In its Remuneration Guidelines paper ESMA considers how different sectoral remuneration principles (CRD IV, AIFMD and UCITS Directive) could be applied.  It proposes that firms have the choice of either applying remuneration regimes on a pro rata basis based on objective principles or simply applying those principles which are “deemed more effective for achieving the outcomes of discouraging excessive risk taking and aligning the interest of the relevant individuals with those of the investors in the funds they manage”.

The paper also proposes some changes to the AIFMD Guidelines (ESMA/2013/232) for AIFMs that are part of a group (page 105).

Elsewhere Annex I contains a useful comparison table of UCITS V vs. AIFMD texts on remuneration.

Comments are invited by 23 October 2015.

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