ESMA final Guidelines on sound remuneration policies under the UCITS Directive and AIFMD

The remuneration requirements in the UCITS V Directive apply from 18 March 2016. However, the Guidelines apply only from 01 January 2017 and the pay-out process rules (if and to the extent not switched off under proportionality) only apply to the first full performance period of a Manco after 01 January 2017.

Mancos should have had in place remuneration policies which are compliant with the UCITS V Directive from 18 March 2016 (except the requirements in relation to the structure of variable pay). Final remuneration policies, which include compliant UCITS V variable pay policies, must be in place by 01 January 2017.

For FCA regulated firms, the current UK rules require compliance with variable pay requirements from the beginning of the first full performance period after 18 March 2016 (see SYSC 19E Transitional Provisions). While in principle this could be revised in line with the Guidelines, allowing Mancos to postpone compliance with the structuring of variable pay until 01 January 2017, our (informal) understanding is that the FCA does not intend to do so.  

The remuneration policy will need to be available on a website when KIID, prospectus or annual report documents are updated or newly implemented after 18 March 2016 and in any event by 18 March 2017.

Position in guidelines

The concept of proportionality has been maintained, but ESMA has retreated from its clear position that proportionality principles may be applied to neutralise the pay-out process rules‎. The Guidelines provide no further clarity on how the proportionality principle should be applied, so it is the responsibility of the Manco, with any relevant guidance from local regulators, to determine the application of the remuneration rules in a proportionate manner. One interpretation of this position could, theoretically, mean that the full scope of the remuneration requirements could be dis-applied on the grounds of proportionality (the scope being no longer limited to the pay-out process rules).We do not believe this was ESMA’s intention and suggest that Mancos which are considering relying on proportionality, limit this reliance to the neutralisation of the pay-out process rules alone.

ESMA has written to the European legislators setting out its views on proportionality and calling for further clarity on this point. ESMA’s letter to the Commission, Council and EP can be found here.

ESMA’s view is that it would be inappropriate for some types of UCITS/Management companies to be subject in all circumstances to the requirements on pay-out process, namely:

• smaller fund managers (in terms of balance sheet or size of assets under management)
• fund managers with simpler internal organisation or nature of activities, or
• fund managers whose scope and complexity of activities is more limited.

Practical implication

• ManCos must determine whether to dis-apply the pay-out process rules for identified staff. The Guidelines make clear that delegates should operate proportionality on the same basis as the Manco.
• Where the pay-out process rules have been dis-applied, a ManCo should maintain a record of its approach and be ready to explain to its competent authority the basis on which these decisions have been made.
• ManCos should ensure their contractual arrangements with delegates permits flexibility for the remuneration principles to apply in their entirety.
• Employment contracts with staff, in particular identified staff, should be reviewed and, if required, amended to ensure compliance with the UCITS V Directive and the Guidelines and, notably, the pay-out process rules and bonus deferral documents may need to be amended or introduced. 

When delegating investment management functions, ManCos should ensure that (a) delegates are subject to regulatory requirements on remuneration that are equally as effective as those set out in the Guidelines; or (b) appropriate contractual arrangements are put in place to ensure no circumvention of the rules in the Guidelines (such arrangements to cover payments to identified staff at delegates).

Delegates subject to CRD IV or AIFMD are deemed to be subject to regulatory requirements which are equally as effective as the Guidelines.

ManCos

• Should confirm delegates currently have in place remuneration policies which are compliant with the UCITS V Directive (except the requirements in relation to the structure of variable pay) either by complying with their obligations under CRD IV or AIFMD or through contractual provisions with the ManCo.
• Where delegates are not able to disapply the pay-out process rules, ManCos should ensure that delegates have in place variable pay policies which are compliant with the UCITS V Directive and the Guidelines from 01 January 2017.
• For FCA regulated firms, the current UK rules require compliance with variable pay requirements from the beginning of the first full performance period after 18 March 2016, which should, in turn, be passed through to delegates.
• ManCos should consider applicable public disclosure obligations.

Delegates

• Delegates should confirm whether they are subject to CRD IV or AIFMD for the purposes of satisfying the UCITS remuneration requirements and confirm with ManCos whether a change to their investment management mandate is required to reflect this status.
• If not subject to CRD IV or AIFMD, delegates should discuss with Mancos the requirement to amend their investment management mandates.
• Delegates should discuss with Mancos the extent (if any) to which the pay-out process rules will be dis-applied for their identified staff.
• Employment contracts with identified staff should be reviewed and, if required, amended to ensure compliance with contractual obligations agreed with the Manco and bonus deferral documents may need to be amended or introduced.
• Delegates should consider applicable public disclosure obligations.