UK: FCA Consultation | AIFMD Remuneration Code

On 6 September 2013, the Financial Conduct Authority (FCA) released their quarterly consultation paper (FCA CP) which proposes draft guidance on:

  • The FCA's "AIFM Remuneration Code"; and
  • The European Securities and Markets Authority's "Guidelines on sound remuneration policies under the AIFMD" (ESMA's Guidelines).

The AIFM Remuneration Code and ESMA's Guidelines apply to UK-based managers of hedge funds, private equity funds and real estate funds, as well as managers of other non-UCITS-regulated funds.

This alert summarises the key points of the FCA CP for these firms which offers them further clarity in a number of areas including timing, proportionality and payment in instruments (including carry). The paper also sets out a number of non-exhaustive examples working through the FCA's suggested approach to proportionality.

For our previous alert on ESMA's Guidelines please click here.


Timing& scope

The AIFM Remuneration Code will apply to the first full performance period after the fund manager becomes authorised. This means that, for firms authorised in 2014, the first performance period that will have to comply will be 2015 (assuming a calendar year performance period).

For individuals whose work consists of AIFMD and non-AIFMD responsibilities (e.g. CRD responsibilities in the wider corporate group of the fund manager), firms may apportion remuneration based on time spent or funds under management after taking into account any risks created.

ESMA's Guidelines include a "delegation rule" that effectively extends the remuneration rules to firms to which the fund manager has delegated portfolio or risk management. The FCA will consider delegates compliant with this rule if they are subject to the MiFID or CRD remuneration rules, or other rules which the FCA considers achieve the same objectives as AIFMD.

Deferral, retention, malus and clawback (the "pay-out process requirements")

The pay-out process requirements can be switched off where assets under management (AUM) are less than £500m to £1.5bn. This threshold is increased to £4bn to £6bn for fund managers of unleveraged funds with no redemption rights exercisable during a period of 5 years following initial investment in each fund. (The FCA intends to specify a single threshold and has asked firms whether they agree an AUM threshold provides a sound working presumption as to whether proportionality applies and, if so, what an appropriate threshold would be for the two categories of managers.)

Managers of private equity and other unleveraged closed-ended funds are therefore likely to test themselves against the £4bn to £6bn threshold, whilst managers of hedge funds and other non-UCITS open-ended investment funds are likely to test themselves against the £500m to £1.5bn threshold.

Other factors can override these quantitative AUM thresholds. The FCA provides a non-exhaustive list of these, including the fund manager's size, ownership, risk level of investment strategies and fee structures.

Regarding fee structures, the FCA give an example of a typical private equity fee structure where carry and co-invest fall outside the pay-out process requirements. No equivalent example is given for an open-ended investment fund with a performance fee structure.

At the level of individual staff members, in line with the CRD III Remuneration Code, the FCA will not generally consider the pay-out process rules to apply to those whose total remuneration is less than £500,000 and where less than 33% of this is delivered as variable remuneration.

Payment in fund units or similar instruments

The requirement to pay variable remuneration in fund units can be dis-applied where the fund has minimum investment requirements, or there are sufficient legal or regulatory constraints. For closed-ended funds it can be dis-applied where no units are "available to acquire". Also, phantom arrangements need not be implemented if their costs outweigh their benefits.

Where the requirement to pay in fund units or similar is disproportionate due to the number of funds managed, firms may, as an alternative, pay staff in:

  • instruments linked to the collective (weighted) performance of multiple funds; or
  • shares in the fund manager (or their parent).

The same approach can be taken for certain staff such as senior management or compliance and audit functions, subject to this not representing a conflict of interest.

Remuneration committees

The FCA has said that an analysis of each of the proportionality elements (size, internal organisation and nature, scope and complexity of activities) should be considered when assessing the requirement to establish a Remuneration Committee (RemCo) and that the FCA's proposed AUM threshold and other factors specified in the consultation paper should be used to analyse this.

Where a firm is above the relevant AUM threshold, this would provide a working presumption in terms of size. Where a firm is listed and its equity is traded on a regulated market, a firm is likely to be significant in terms of its internal organisation. As for the rest of the analysis, comparisons with a firm's peer group may be done to assist in determining whether a firm is significant.


Fund managers structured as partnerships will need to determine how much of their profits are "remuneration" and split this between "fixed" and "variable" elements.

The FCA is not prescriptive on the approach that should be used, but suggests two alternatives:

  • Referring to existing payments to partners and, broadly, whether they are discretionary (i.e. "variable remuneration") or not; and
  • Referring to a benchmark in terms of remuneration received for services performed and/or the return on equity invested.

The FCA are discussing with HM Treasury (HMT) the issue of tax charges arising on partners at the point of deferral as part of HMT's existing consultation on partnership taxation. However, it is not clear from the FCA CP what has been proposed other than it could still involve a tax charge on deferral.

General requirements

Even if proportionality dis-applies key requirements, certain general requirements will continue to apply. These include (among other things) reporting remuneration details in the annual reports of funds and having a remuneration policy that is at least annually subject to review.

Next steps

Firms should start reviewing their existing or proposed remuneration structures in light of this new guidance and consider responding to the FCA CP if appropriate. The FCA's deadline for receiving responses is 6 November 2013.

Deloitte view

This additional clarity will be welcomed by the industry and we encourage firms to respond to the consultation paper.

It is helpful that the FCA recognises the differences of size, scope and complexity between firms with the general direction taken that one size does not fit all and the onus on firms is to justify any application of proportionality.

For further information on the AIFMD, please visit

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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