Worldwide: New Pressure On Investment Management: Regulating Remuneration

Last Updated: 12 March 2014
Article by Justin Chait

It is generally conceded that inappropriate incentives and remuneration structures led to unwelcome behavior in the banking industry: this increased risk and contributed to the crisis. Regulators across Europe and Asia-Pacific are now focusing closely on this topic in relation to investment management firms, reflecting the political imperative to control excess and reduce risk. Firms will have to respond. But it will be important to preserve flexibility.

General anger, specific concern

Remuneration is one of the more politically sensitive issues to emerge as a priority from the financial crisis. When times are good, there appears to be little general concern over levels of remuneration in the financial sector. But when things go wrong, causing loss and damage to millions of people, there is an inevitable focus on the contrast between performance and reward. The sense that senior executives, in particular, have 'got away with it', and in many cases received massive rewards for failure, has been a powerful stimulus to political action.

While this kind of reaction is primarily an expression of generalized and unsophisticated anger, more considered analyses have also led to concern about remuneration arrangements in financial services. There is an increasingly widespread view among political leaders, regulators and supervisors that, in the period leading up to the crisis, remuneration structures created damaging and destabilizing incentives. At the least, they stimulated excessive short-termism at the expense of the long-term sustainability of business models; at worst, they created pressure to make profit at any price, if necessary through behavior which was improper or bordering on illegal.

The apparently endless succession of miss-selling scandals now hitting the industry provides a stark demonstration that remuneration policies and incentives resulted in serious misbehavior. Many – though not yet all – leaders within the financial services industry itself are coming to feel with hindsight that the concerns now being expressed are justified. As regulators focus on prudential management, conduct of business and financial stability, they are also – for the first time – directly addressing the issue of remuneration.1


For investment managers in Europe, this focus on remuneration will mainly be felt through the new Alternative Investment Fund Managers Directive (AIFMD), which places remuneration policy firmly within a framework of promoting sound and effective risk management. The European Securities and Markets Authority (ESMA) published draft guidelines on the remuneration elements of the Directive in June 2012, followed by final guidelines in February 2013. AIFMD must now be implemented at national level by 22 July 2013.

The regulations implementing AIFMD will require investment management firms to make changes to the structure and governance of remuneration, and will introduce a new disclosure regime. In-scope firms will be required to have remuneration policies that 'promote effective risk management' and which align risks with their broad investment objectives. The remuneration requirements will primarily apply to employees whose role has a material impact on the risk profile of the firm or the funds under management ('identified staff').

There will be specific requirements in relation to the funding and delivery of variable remuneration. A portion of the variable remuneration for identified staff must be deferred for between 3-5 years (unless the lifecycle of the fund is shorter). At least half of all variable remuneration must be in the form of equity instruments linked to the performance of the funds managed. Variable remuneration should be determined by performance of the funds, of the business unit and of the individual combined. There will also be controls on guarantees, severance pay and personal hedging strategies.

In addition, there will be new regulations on remuneration committees, on internal controls and on reporting and disclosure.

ESMA has introduced various anti-avoidance measures to ensure that the regulations capture the intended firms, individuals and forms of remuneration. The provisions also introduce the concept of clawback provisions (or 'malus') for remuneration in the case of under-performance. These concepts will be familiar to many in, for example, the banking sector, where they have become a feature of remuneration packages since the crisis. However, it remains unclear how they will work in practice in other industries and for a wide population of staff.


In Australia, the Future of Financial Advice (FOFA) reforms will introduce a ban on 'conflicted remuneration', including commissions, in the retail investment products market. Broadly speaking, licensees and authorized representatives will not be allowed to give or receive payments or non-monetary benefits if these could reasonably be expected to influence financial product recommendations or financial product advice provided to retail clients. As a result, all payments dependent on the total number or value of financial products of a particular type will be presumed to be conflicted, although it will be open to advisers to prove that they are not. These reforms are designed to encourage financial advisers to become more client-focused, with more of their fees being paid directly by the client rather than indirectly through product commissions.

In Japan, there are currently no specific regulations governing executive remuneration. However, the Japan Financial Services. Authority retains the power to require changes to any remuneration system in a financial institution which it feels is creating excessive risk. There is also an obligation to disclose details of high salaries, requiring financial institutions to disclose both the number of highly remunerated individuals and the amounts involved.

Implications for investment managers

The thrust of the increasing regulatory oversight of remuneration in investment management is to limit risk and ensure that it is consistent with an organization's explicit risk appetite and risk management policy. Organizations therefore need to develop remuneration frameworks which connect performance and reward with the strategy, priorities and value drivers of the organization, and which incorporate effective risk management.

In turn, this depends on creating a culture of appropriate behavior and values and on expressing organizational priorities clearly and consistently – embedded using structure, process and training and passed on over time through stories of successes, failures, doing the right thing and doing things right – reinforced through incentives. These arrangements need to be underpinned by robust governance arrangements including appropriate control functions.

Embracing regulatory initiatives early on – seeking the opportunities rather than focusing on the challenges – can allow the organization to respond and act quickly ahead of the competition.

Getting the balance right

The remuneration policies of financial institutions are likely to remain high on the political agenda for the near future. As we have seen, the need to address issues from systemic risks to investor protection and to improve transparency, corporate governance and tax compliance will add to the pressure for tougher regulatory action in this area.

However, it is important to remember that incentive structures which involve a high proportion of variable remuneration, in the form of commission or bonuses, ultimately reflect a desire to improve the flexibility of cost structures, and tie remuneration more closely to performance: where remuneration is largely fixed and rigid, the ability to match costs to revenues and profits is severely curtailed. In the new era of low returns and increased cost pressure, flexible resourcing and remuneration models will be more important than ever in the investment management industry. The challenge for new regulation will be to restrict excessive and perverse incentives while allowing the industry the necessary flexibility to grow and to serve customers effectively.


1 The discussion which follows draws on the latest edition of KPMG's series Evolving Investment Management Regulation: Light at the End of the Tunnel? June 2013.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions