Directive 2014/91/EU (the "UCITS V") is due to come into effect on 18 March, 2016 and will amend Directive 2009/65/EC (the "UCITS Directive"). Amongst other matters, it sets down rules which a UCITS Management Company must comply with when establishing and applying a remuneration policy for certain categories of its staff. UCITS V also provides that the European Securities and Markets Authority ("ESMA") shall issue guidelines addressed to competent authorities or financial market participants concerning the application of the remuneration principles set out in UCITS V, which is what ESMA is now consulting on.
On 23 July, 2015, ESMA issued a consultation paper (the "Consultation Paper") with respect to on proposed Guidelines on sound remuneration policies under the UCITS V Directive and AIFMD (the "Guidelines").
This Consultation Paper is designed to assist in the development of the Guidelines and details ESMA's formal proposals in this respect. In addition, it proposes a specific and focused revision of the Guidelines on sound remuneration policies under the AIFMD (ESMA/2013/232) ("AIFMD Remuneration Guidelines"), which were published on 3 July 2013.
The Guidelines are designed to ensure the coordinated and consistent application of the remuneration provisions within the EU and provide guidance on issues such as proportionality, governance of remuneration, requirements on risk alignment and disclosure.
Once the Guidelines are approved, they will apply to UCITS management companies and national competent authorities.
The Key Elements of the Guidelines
The key elements outlined in the Guidelines and the Consultation Paper include:
Article 14(b)(i) of the UCITS Directive provides that: "When establishing and applying the remuneration policy referred in Article 14(a), management companies shall comply with the following principles in a way and to the extent that is appropriate to their size, internal organisation and the nature, scope and complexity of their activities ....".
Remuneration rules have already been introduced by European legislators under the Directive 2013/36/EU ("CRD IV") and under AIFMD and, quite recently, the financial industry has seen that the European Banking Association ("EBA") suggested that when applying the principle of proportionality to a particular CRD IV remuneration principle, the principle itself cannot be disapplied. The EBA viewpoint differed from what was considered to apply under AIFMD which was that, where one could benefit from the application of the proportionality principle, certain of the remuneration results could be dis-applied entirely. As set out in the Consultation Paper, ESMA is suggesting that one could look at UCITS V provisions in a different way to how the EBA is looking at the CRD IV provisions and that one could consider that the application of proportionality could lead a UCITS to dis-apply certain of the remuneration principles in its entirety. In other words, this would be an approach to proportionality which is in line with the AIFMD Remuneration Guidelines and would allow for the disapplication of certain requirements on exceptional basis taking into account specific facts.
(ii) Management companies as part of a group
The Guidelines clarify that in a group context, non-UCITS sectoral prudential supervisors of group entities may deem certain staff of the UCITS management company which is part of that group to be identified staff for the purpose of their sectoral remuneration rules.
(iii) Definition of performance fees
The Guidelines set out a common definition of performance fees based on the 2004 IOSCO Final report on elements of international regulatory standards on fees and expenses of investment funds. It is important to note that the 'performance fees' being discussed by ESMA in the Guidelines are those which are "payments made directly by the management company or the UCITS itself for the benefit of identified staff". It does not capture or apply to performance fees that are paid by a UCITS to a UCITS management company itself, although it must be noted that if a UCITS pays a performance fee to a UCITS management company and that is to benefit the identified staff of the UCITS management company, then the principles and rules would apply to that performance fee.
(iv) Application of different sectoral rules
The Guidelines includes proposals on how different rules, such as those set out in the AIFMD and in CRD IV, should apply where employees or other categories of personnel perform services subject to different sectoral remuneration principles.
(v) Application of the rules to delegates
The Guidelines set out proposals to prevent management companies circumventing the remuneration rules through the delegation of activities to external service providers.
(vi) Payment in instruments
The Guidelines provides guidance on how to comply with the rules on the payment of variable remuneration in instruments under the UCITS Directive.
Revisions to the AIFMD Remuneration Guidelines
The Consultation Paper also proposes a revision of the AIFMD Remuneration Guidelines. The purpose of the revision is to clarify that in a group context, non-AIFM sectoral prudential supervisors of group entities may be permitted to deem certain staff of an AIFM in that group to be identified staff for the purpose of their sectoral remuneration rules.
The period for feedback on the Consultation Paper and the Guidelines will close on 23 October, 2015. Thereafter, ESMA will consider any feedback which has been received with respect to the Consultation Paper and the Guidelines and has indicated that it will aim to finalise and publish the UCITS Remuneration Guidelines and a final report by Q1 2016 ahead of the transposition deadline for UCITS V, being 18 March 2016.
The final report is expected to also include the revision of the AIFMD Remuneration Guidelines as proposed in the consultation paper.
We recommend that UCITS management companies pay attention to these Guidelines and take the opportunity to participate in the consultation process, either directly via the ESMA website or through relevant industry representative bodies or their external advisors.
Closing date for submissions on the Consultation Paper: 23 October, 2015
Anticipated date for issuing of Final Report on Guidelines: Q1 2016
Date of transposition of UCITS V: 18 March, 2016
Responses to the Consultation Paper can be submitted via the ESMA website using the relevant response form.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.