The European Securities and Markets Authority ("ESMA") published its final guidelines on sound remuneration policies under the UCITS Directive and AIFMD (the "Guidelines") on March 31, 2016 accompanied by a letter to the European Commission, the European Parliament and the Council of the European Union dated March 30, 2016 on the proportionality principle and remuneration rules in the financial sector (the "Letter").
The principle of proportionality is very important as it gives the necessary flexibility with respect to the rather rigid rules on variable remuneration in cases where such rules do not seem appropriate. End of last year the European Banking Authority ("EBA") criticised the huge diversity of national rules regarding the application of proportionality, including the waiving of requirements, which in EBA's view has led to an uneven playing field between institutions across the EU and hence in the opinion of EBA legislative action should be taken in order to clarify and ensure that the CRD remuneration requirements are applied consistently across the EU.
In light of those discussions ESMA's publication regarding the remuneration guidelines for UCITS managers and AIFMs was expected with interest.
The outcome can be summarized as follows:
- ESMA remained neutral on the interpretation of proportionality and so the existing guidelines on sound remuneration policies under the AIFMD (ESMA/2013/232) dated July 3, 2013 ("AIFMD Remuneration Guidelines") remain unchanged with respect to the proportionality.
- In its Letter to the EU institutions ESMA helpfully underlines and recognizes that asset managers should be treated differently from banks and that the neutralisation of certain of the principles on variable remuneration should remain possible on a case by case basis.
- However, in line with the EBA position, ESMA suggests that legislative changes could help clarify and ensure a consistent application of the remuneration requirements across Europe.
- Finally, unrelated to the proportionality principle, it is worthwhile noting one helpful statement where the Guidelines now clarify that the remuneration rules under the AIFMD (and NOT under CRD IV) apply also in the context of providing the "ancillary services" under Article6 (4) of the AIFMD (i.e. the MiFID services such as individual portfolio management, investment advice etc.).
We have summarized hereafter in more detail ESMA's explanations in the Letter regarding the – in practice very important – proportionality principle.
1. Application of proportionality principle
In the Letter ESMA highlights that a key element of the UCITS Remuneration Guidelines and the AIFMD Remuneration Guidelines relates to the proportionality and, in particular, whether proportionality can lead to a situation in which specific requirements on the pay-out-process (i.e. the requirements on variable remuneration in instruments, retention, deferral and ex-post incorporation of risk for variable remuneration) may not have to be applied.
Relating to the application of the proportionality principle and in particular to the pay-out-process ESMA clarifies that it considers the following scenarios should remain possible under the UCITS Remuneration Guidelines and the AIFMD Remuneration Guidelines in certain situations:
- the disapplication of requirements on the pay-out-process; and
- the application of lower thresholds whenever minimum quantitative thresholds are set for the pay-out requirements (e.g. the requirement to defer at least 40% of variable remuneration).
2. Fund managers subject to proportionality principle
In order to achieve an effective alignment of interests between the fund managers' staff and the Investors, ESMA states the following cases where fund managers should not be subject to the requirements on the pay-out process:
- 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.
Further, ESMA considers that the remuneration requirements should not apply to:
- relatively small amounts of variable remuneration; and
- certain staff when this would not result in an effective alignment of interests between the staff and the investors in the funds managed by the staff.
3. Call for legislative changes
ESMA suggests legislative changes in the relevant asset management legislation to provide for more clarity and a more consistent application of the remuneration requirements. It remains to be seen if and to what extent the European legislator will reply to this call. It is, however, not expected that such changes will come in the near future.
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