The European Securities and Markets Authority (ESMA) has issued final guidelines on sound remuneration practices for Undertakings for Collective Investment in Transferable Securities (UCITS) management companies and Alternative Investment Fund (AIF) managers. They align the requirements under the UCITS Directive and Alternative Investment Fund Managers Directive (AIFMD), but senior management and portfolio managers in investment firms may also be subject to different remuneration requirements under the Capital Requirements Directive (CRD IV) and the revised Markets in Financial Instruments Directive (MiFID II). These differences are increased in practice by the guidelines issued by the EBA, especially as regards the application of the principle of proportionality. ESMA has written to the Commission seeking legal clarification (if necessary by legislative amendment), citing the very different nature of fund management to banking business. In the meantime, fund managers within banking groups must ensure that their remuneration policies for affected staff navigate the differing requirements.
ESMA’s final guidelines cover both the new UCITS V requirements and the existing AIFMD requirements and in so doing bring them into close alignment. This has been broadly welcomed by the industry. Senior management and portfolio managers might be subject to not only the UCITS V and AIFMD requirements but also those under CRD IV and MiFID II, all four being slightly different. This makes it difficult for firms to craft sound remuneration policies for affected staff. Reducing the number of differences is therefore sensible.
However, unlike the draft UCITS V guidelines, the final ones are silent on whether the application of the principle of proportionality can result, or not, in the dis-application of certain of the remuneration principles. It therefore neither allows nor prohibits this. Instead, ESMA has written to the Commission seeking legal clarification (if necessary by legislative amendment), citing the very different nature of fund management to banking business.
Examples given in the letter include the position of small and non-complex fund managers (which would otherwise bear a disproportionate administrative burden), staff with small amounts of variable remuneration (making the multi-year spreading requirements difficult to operate). It refers to the rules on deferral and payments in instruments and the application of the full requirements to delegates and to UCITS-only managers is also questioned.
Otherwise, changes from the draft to the final guidelines include a few modifications to wording in response to feedback received.
The date of application of the guidelines to UCITS managers and of the amendments for AIF managers is 1 January 2017, although the UCITS V provisions were applicable from 18 March 2016.