{{ languageVal }}
  • English
 

Industry Updates

ESMA Proposes AIFMD Alignment in Consultation on UCITS V Remuneration Rules

28 Jul 2015

Introduction

On 23 July 2015, the European Securities and Markets Authority ("ESMA") issued a consultation paper and draft guidelines (the "Consultation Paper" and "Draft Guidelines"1) in relation to the remuneration provisions of the UCITS V Directive 2.

You can access the Consultation Paper/Draft Guidelines here.

In a move that will be welcomed by the funds industry and particularly by operators of both UCITS and alternative investment funds ("AIFs"), the Draft Guidelines are broadly aligned with the ESMA Guidelines on Sound Remuneration Policies under AIFMD (the "AIFMD Guidelines").

Key aspects

Set out below is a brief overview of some key aspects of the Consultation Paper and Draft Guidelines.

(i) Proportionality

ESMA states in the Consultation Paper that, consistent with its mandate in the UCITS V Directive, its aim in developing the Draft Guidelines has been to take the AIFMD Guidelines as its starting point and depart from them only if and when necessary.

Reference is made to a consultation paper 3 issued by the European Banking Authority (the "EBA") in, the context of CRD IV 4. This EBA consultation paper considered that proportionality could not be relied upon to disapply the remuneration rules. However, in ESMA's view a different approach can be taken in a UCITS context. This is based on the mandate to align the guidelines with AIFMD and also on a precise consideration by ESMA of the key provisions in the UCITS legislation on this point. In further justifying a different approach, ESMA notes that the EBA position relates to a different sector of the financial services industry.

Accordingly, ESMA considers that there is scope to interpret the UCITS legislation so as to permit the disapplication of remuneration rules on the basis of proportionality in certain circumstances.

This relates specifically to "pay-out process" rules due to be introduced under UCITS V. These rules require that key staff receive at least 50% of their bonus in fund shares and also defer at least 40% of their bonus for a period of at least three years.

The Draft Guidelines, if finalised in current form, would enable entities (that meet certain criteria) to fully disapply these pay-out process rules on the grounds of proportionality, in a manner similar to that prescribed under the AIFMD Guidelines.

However, in the Consultation Paper, ESMA specifically asks 5 responding managers to indicate if they would have difficulties if ESMA took the contrary position, in line with the EBA, and did not permit a disapplication of the remuneration rules on the grounds of proportionality. Fund managers should therefore not consider this point to be fully closed and are urged to respond to the consultation in support of the current proposals.  

(ii) Delegation

In the Consultation Paper/Draft Guidelines, ESMA has adhered closely to the AIFMD Guidelines in relation to delegates performing investment management activities. Therefore the remuneration rules can be disapplied for such delegates that are subject to regulatory requirements on remuneration that are "equally as effective" as those under UCITS V. Otherwise the relevant remuneration rules must be applied to such delegates under contract.

Continuing from the approach outlined in the ESMA Q&A on AIFMD 6, the Draft Guidelines expressly state that entities that are subject to remuneration rules under AIFMD or CRD IV 7 will be deemed automatically to meet this "equally as effective" test.

(iii) Pro-rata application to persons with split functions

The Draft Guidelines provide for remuneration rules to apply on a pro rata basis where a person performs multiple services subject to different remuneration regimes.

(iv) Bonus in fund shares – test on a per fund basis

A significant clarification is made by ESMA regarding the requirement to pay at least 50% of variable remuneration in shares of the relevant UCITS (or equivalent instruments / instruments with equally effective incentives) where the UCITS represents more than 50% of the relevant management company's assets under management.

ESMA considers this should be assessed on an individual fund basis, rather than on the aggregate level of UCITS assets as a percentage of total assets under management. Therefore the bonus in fund shares rule will only apply to a management company if it manages a single UCITS that represents more than 50% of its total asset under management. For managers running large scale UCITS but across a diversified range of funds, this is a very positive clarification and should facilitate disapplication of one of the key pay-out process rules.

(v) Group companies

A group company provision is included in the Draft Guidelines (and will also be carried into the AIFMD Guidelines). This provides that a regulator of another entity within a group could deem other remuneration rules (for example, under CRD IV) to apply to staff of the relevant UCITS management company/AIFM as identified staff of the connected group entity.

Consultation invites feedback

ESMA invites public or confidential responses - to be received on or before 23 October 2015. Finalised guidelines are then expected to issue in Q1 2016, ahead of the transposition deadline for UCITS V (18 March 2016). It is expected the guidelines will then apply to UCITS management companies in respect of the next full financial year/remuneration period that starts after that date.

How can Maples help?


If you are considering making a response to the consultation, we would be happy to work with you and provide our input.

Separately, although the Guidelines remain in draft form, the deadline for overall UCITS V compliance is 18 March 2016.  It is therefore prudent to commence work soon on UCITS V remuneration compliance. The Irish Investment Funds Group at Maples would be pleased to assist UCITS managers and their delegates in analysing the Draft Guidelines and developing an appropriate framework of remuneration policies and procedures.

Further Information

For further information on the matters covered in this update or generally, please contact your usual Maples and Calder contact

 

1 ESMA Consultation Paper (2015/ESMA/1172): Guidelines on sound remuneration policies under the UCITS Directive and AIFMD
2 Directive 2014/91/EU
3 Consultation paper on draft guidelines on sound remuneration policies (EBA/CP/2015/03).
4 Capital Requirements Directive 2013/36/EU
5 In Question 1.a
6 ESMA Questions and Answers (ESMA/2015/1137): Application of the AIFMD 
7 Although it is noted that ESMA's AIFMD Q&A refers to CRD rather than CRD IV

Related Services

UCITS

Our team of specialist lawyers and data analysts provides a comprehensive solution that delivers the professional expertise and systems to help fulfil the requirements of the UCITS directive.

Regulatory & Compliance

Risk management and regulatory compliance have become key priorities for clients with both regulators and investors demanding greater transparency and enhanced reporting. Compliance with these obligations means ensuring a clear understanding of the ongoing requirements and often the aggregation, calculation, maintenance, reconciliation and submission of extensive data sets to various parties on a regular basis. The Maples Group has unrivalled expertise in regulatory matters, particularly in the field of anti-money laundering and counter-terrorist financing. We pride ourselves on our established relationships with regulatory bodies and have had significant involvement with the development of financial services law and policy both locally and internationally. Our ability to draw on this experience enables us to provide prompt, pertinent and clear advice that adds real value and helps our clients determine how best to maintain compliance across multiple jurisdictions.