European Union: ESMA Publishes Consultation On UCITS Remuneration Guidelines

The European Securities and Markets Authority ("ESMA") has published on 23 July 2015 a consultation on guidelines on sound remuneration policies under the UCITS Directive and AIFMD (the "UCITS Consultation").

The consultation has been keenly awaited by UCITS managers seeking clarification on aspects of the remuneration requirements to be introduced under the directive amending the UCITS Directive ("UCITS V") and, in particular, the application of the principle of proportionality. 

In publishing the UCITS Consultation, ESMA has largely followed the approach taken in its February 2013 guidance on remuneration in the context of the Alternative Investment Fund Managers Directive ("AIFMD").  This is to be welcomed by industry, as there had been concerns that ESMA might follow the lead of the European Banking Authority ("EBA") which recently outlined a more restrictive application of the principle of proportionality in its March 2015 consultation on remuneration provisions for entities subject to the fourth Capital Requirements Directive ("CRD IV").

We have set out a summary of the proposals below and will provide further detailed analysis in due course in the UCITS section of our website.


UCITS V introduces, for the first time, a requirement that UCITS management companies establish and apply remuneration policies and practices meeting prescribed conditions.  In order to promote a consistent application of remuneration requirements across member states, ESMA has been requested to issue guidelines on the application of these remuneration principles.  

This follows the approach taken by the EU co-legislators in the context of equivalent provisions in AIFMD and in outlining its working methodology, ESMA has noted the obligation under Recital 9 of UCITS V that its guidelines should "where appropriate, be aligned to the extent possible with those for funds regulated under [the AIFMD]".  

Accordingly, ESMA has decided to take its Guidelines on Sound Remuneration Policies under the AIFMD (the "AIFMD Guidelines") as a starting point and to depart from them only if and when strictly necessary.


One of the main areas of focus for ESMA in the UCITS Consultation has been the principle of proportionality, which permits UCITS management companies to disapply certain aspects of the remuneration principles where justified.  

This principle, which is a consistent feature of EU legislation, is set out in Article 14b of UCITS V which provides that, when establishing and applying remuneration policies, management companies shall comply with the relevant remuneration principles "in a way and to an extent that is appropriate to their size, internal organisation, and the nature, scope and complexity of their activities".  On the basis of similar wording within the AIFMD, AIFMs have been permitted by member states to have regard to such factors as assets under management, the ratio between fixed and variable remuneration, de minimis thresholds for variable compensation and the complexity of investment strategy in determining whether it is appropriate to disapply certain remuneration requirements.  The principle has typically been applied to remove the requirements in respect of the payment of variable remuneration (the "pay out rules"), including retention requirements and deferral and clawback provisions, together with the requirement that a portion of variable remuneration be paid in units of the relevant fund under management.  Annex II of the UCITS Consultation sets out details of some of the quantitative thresholds currently permitted by member states in order to disapply remuneration requirements under the AIFMD Guidelines.

In advance of the publication of the UCITS Consultation, there had been concern that ESMA might take a more restrictive approach in the context of UCITS V.  This was on the basis that Article 14a(4) of UCITS V requires ESMA, in preparing its UCITS remuneration guidelines, to cooperate closely with the EBA in order to ensure consistency with requirements developed for other financial services sectors, in particular credit institutions and investment firms.  The EBA considered the principle of proportionality in a March 2015 consultation on remuneration policies under CRD IV. As part of that consultation it had outlined a narrower interpretation of the principle of proportionality, stating that "the preliminary assessment of the EBA is that a full waiver of the application of even a limited set of remuneration principles for smaller and non-complex institutions would not be in line with CRD."  The final EBA position is to be determined, with the March 2015 consultation closing on 4 June 2015 and final EBA guidance yet to issue. 

In the UCITS Consultation, ESMA has considered the text of Article 14b regarding proportionality and concluded that the co-legislators envisaged the possibility that some of the remuneration guidelines could be disapplied in full (thereby diverging from the EBA view and retaining the flexibility offered under the AIFMD regime).  In doing so, it has also had regard to the provisions in Recital 9 relating to alignment between the UCITS and AIFMD regimes and determined to follow the approach adopted in the AIFMD Guidance.  ESMA has requested fact-based evidence from management companies to support its view regarding the application of proportionality and information on the potential benefits of its proposed approach in terms of impact on costs.

We welcome ESMA's proposed approach to proportionality and the intention to draw a distinction between the approach under CRD IV. We note that it accords with a recent statement made by ESMA's Chair, Steven Maijoor when he stated:

"Non-banks are non-banks because they are not banks! While we can draw on the important experience that banking authorities have collected in the past years on macro prudential regulation, we need to fully take into account that asset management is a sector in its own right, with a specific business model and risk profile ... It logically follows that the policy responses we develop must be tailor-made to the specific risk profile of the asset management sector."

Application of Different Sectoral Rules to Identified Staff

One of the challenges that has been identified in applying remuneration rules is that industry participants may fall under a number of different regimes.  For example, entities within a financial services group, and their staff, could be subject to the UCITS Directive, AIFMD, CRD IV and MiFID, all of which would have a slightly different approach to remuneration.  

Part of ESMA's mandate under UCITS V in drafting its guidance is to consider the application of different sectoral rules.  The UCITS Consultation clarifies that in a group context, non-UCITS sectoral prudential supervisors of group entities may deem certain staff of a UCITS management company which is part of the group to be "identified staff" for the purpose their sectoral remuneration rules.  ESMA also proposes a similar amendment be made to the AIFMD Guidelines to clarify this point.  This is to ensure that national competent authorities can comply with their obligations under CRD IV to ensure the application of the CRD IV remuneration rules to institutions at group, parent and subsidiary levels.

ESMA has proposed two alternative solutions that could be followed in situations where some personnel in management companies perform activities covered by different sectoral legislation.  In such situations, ESMA suggests that it should be possible to opt for paying the personnel either:

  • by applying the remuneration principles in the sectoral legislation on a pro rata basis based on objective criteria such as time spent on each service (for example, where 70% of an employee's time is concerned with the business of an investment firm and 30% is concerned with the management of UCITS, 70% of the employee's salary would be subject to the CRD IV remuneration rules and 30% would be subject to the UCITS remuneration rules); or
  • by applying the sectoral remuneration principles which are deemed more effective for achieving the outcomes of discouraging excessive risk taking and aligning the interests of the relevant individuals with those of the investors in the funds they manage.

We believe ESMA's proposed approach to the application of different sectoral remuneration rules to be practical and we welcome the additional flexibility afforded to those who have voluntarily determined to apply a single regime across their group (provided always that the principles applied are effective in discouraging risk taking and aligning interests with investors).  

Application to Delegates

The UCITS Consultation proposes that the UCITS remuneration rules will be extended to delegates, adopting an approach consistent with that applicable under the AIFMD.  ESMA's reasoning is that management companies should not circumvent the remuneration rules through the delegation of the activities to external service providers. Therefore, when delegating investment management activities in circumstances where the remuneration rules would otherwise be circumvented, management companies should ensure that:

  • entities to which investment management activities have been delegated are subject to regulatory requirements on remuneration that are equally as effective as those under UCITS V; or
  • appropriate contractual arrangements are put in place with entities to which investment management activities have been delegated.

ESMA states that it sees merit in recognising equivalence between the AIFMD, CRD IV and UCITS remuneration rules.  One point of note is that it does not explicitly mention the CRD III provisions which are currently applied by many MiFID entities and which have been recognised as equivalent by a number of member states in the context of AIFMD.  It would be worthwhile to seek confirmation in the final UCITS remuneration guidelines that it remains appropriate to regard CRD III as equivalent.  Furthermore, ESMA does not offer an opinion as to the equivalence of the rules applicable in other jurisdictions or how the individual rules would be applied in the context of a delegation arrangement.  For example, there have been recent proposals in the US to introduce provisions in relation to variable compensation (including deferral and claw-back provisions) under the Dodd-Frank Wall Street Reform and Consumer Protection Act.  However, it remains to be determined whether these might prove equivalent to European requirements.

Accordingly, while application of proportionality will operate to disapply the pay out rules in relation to some delegates, depending on their nature, scope and complexity, further work will be required in considering the application of these rules to delegates.

Performance Fees

UCITS V specifically includes "performance fees" among the categories of payment that fall within the scope of the remuneration principles.  ESMA notes that there is no definition of performance fee in UCITS V and therefore considers it appropriate to set out a common definition of performance fee in order to ensure consistent application of the rules across member states.  The definition proposed by ESMA is based on the one provided in the IOSCO Final Report on Elements of International Regulatory Standards on Fees and Expenses of Investment Funds (November 2004).  

The proposed definition refers to performance fees paid directly by the management company or the UCITS itself for the benefit of identified staff. 

In a typical UCITS structure, the relevant management and performance fees are paid to the entity appointed as discretionary investment manager.  The payment is to the sole account of the investment manager, which has full discretion as to how it might apply those fees.  Accordingly, we believe that such performance fees would not be captured by the pay out rules unless they are specifically paid to or allocated for the benefit of identified staff.  

We believe that this interpretation is consistent with the spirit of the remuneration provisions, which are concerned with remuneration paid to individuals, rather than fee structures generally.  It is also consistent with the approach in AIFMD, where the equivalent section relates to "carried interest" which is typically a form of compensation mechanism for individuals.

Other Elements of the UCITS Consultation

The UCITS Consultation sets out detailed guidance for UCITS V management companies on a wide range of issues, including the approval of the remuneration policy, the composition and procedures of the remuneration committee, risk alignment, severance pay, personal hedging, pay-out processes, performance management and disclosure to investors.  ESMA has also considered how the rules regarding payments in instruments may be complied with in light of the differences between the UCITS and AIFMD texts.

Next Steps and Transitional Period

Responses to the consultation are requested by 23 October 2015. ESMA intends to use the feedback received on the consultation to finalise the UCITS guidelines and publish a final report by the first quarter of 2016.

The UCITS Consultation states that the proposed guidelines will apply from the date of transposition of UCITS V, ie, 18 March 2016. However, ESMA invites views as to whether there ought to be a transitional period.  In light of the detailed nature of the UCITS Consultation and the volume of work which UCITS management companies will have to complete in order to implement the remuneration guidance (particularly those UCITS management companies that have not implemented equivalent procedures as part of an AIFMD authorisation), it would seem that a transition period of at least one year would be appropriate.  

In this regard, we note that industry participants had a period of 17 months from the date of publication of the final AIFMD Guidelines to implement appropriate remuneration policies in the context of their AIFMD authorisation. If final publication is to take place in 2016, UCITS will have, at most, three months to complete the process.


We welcome ESMA's proposed approach on proportionality and the application of different sectoral remuneration rules.  We believe that the application of the remuneration rules to delegates will be tempered by the proportionality principle, particularly if member states continue to have regard to the various tests set out in Annex II of the UCITS Consultation.  In this regard, we note that the eligible assets and diversification requirements that apply to all UCITS should assist in the complexity analysis.

The partners at Matheson intend to respond to the UCITS Consultation and we will be contributing at an Irish and European level to industry feedback and responses.  We would be delighted to speak with you should you have any queries in relation to the proposals, or to discuss your viewpoint regarding any aspect of the proposed guidelines.

If there are any particular aspects of the UCITS Consultation or UCITS V generally which you would like clarification or advice on, please get in touch with your usual Asset Management Group contact or any of the contacts listed in this email.

The UCITS Consultation is available here.  We have also prepared a briefing note on the UCITS V remuneration provisions which may be accessed here

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.

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