On 23 July 2015, the European Securities and Markets Authority ("ESMA") issued a consultation paper and draft guidelines (the "Consultation Paper" and "Draft Guidelines"1) in relation to the remuneration provisions of the UCITS V Directive2.
You can access the Consultation Paper/Draft Guidelines here.
In a move that will be welcomed by the funds industry and particularly by operators of both UCITS and alternative investment funds ("AIFs"), the Draft Guidelines are broadly aligned with the ESMA Guidelines on Sound Remuneration Policies under AIFMD (the "AIFMD Guidelines").
Set out below is a brief overview of some key aspects of the Consultation Paper and Draft Guidelines.
ESMA states in the Consultation Paper that, consistent with its mandate in the UCITS V Directive, its aim in developing the Draft Guidelines has been to take the AIFMD Guidelines as its starting point and depart from them only if and when necessary.
Reference is made to a consultation paper3 issued by the European Banking Authority (the "EBA") in, the context of CRD IV4. This EBA consultation paper considered that proportionality could not be relied upon to disapply the remuneration rules. However, in ESMA's view a different approach can be taken in a UCITS context. This is based on the mandate to align the guidelines with AIFMD and also on a precise consideration by ESMA of the key provisions in the UCITS legislation on this point. In further justifying a different approach, ESMA notes that the EBA position relates to a different sector of the financial services industry.
Accordingly, ESMA considers that there is scope to interpret the UCITS legislation so as to permit the disapplication of remuneration rules on the basis of proportionality in certain circumstances.
This relates specifically to "pay-out process" rules due to be introduced under UCITS V. These rules require that key staff receive at least 50% of their bonus in fund shares and also defer at least 40% of their bonus for a period of at least three years.
The Draft Guidelines, if finalised in current form, would enable entities (that meet certain criteria) to fully disapply these pay-out process rules on the grounds of proportionality, in a manner similar to that prescribed under the AIFMD Guidelines.
However, in the Consultation Paper, ESMA specifically asks5 responding managers to indicate if they would have difficulties if ESMA took the contrary position, in line with the EBA, and did not permit a disapplication of the remuneration rules on the grounds of proportionality. Fund managers should therefore not consider this point to be fully closed and are urged to respond to the consultation in support of the current proposals.
In the Consultation Paper/Draft Guidelines, ESMA has adhered closely to the AIFMD Guidelines in relation to delegates performing investment management activities. Therefore the remuneration rules can be disapplied for such delegates that are subject to regulatory requirements on remuneration that are "equally as effective" as those under UCITS V. Otherwise the relevant remuneration rules must be applied to such delegates under contract.
Continuing from the approach outlined in the ESMA Q&A on AIFMD6, the Draft Guidelines expressly state that entities that are subject to remuneration rules under AIFMD or CRD IV7 will be deemed automatically to meet this "equally as effective" test.
(iii) Pro-rata application to persons with split functions
The Draft Guidelines provide for remuneration rules to apply on a pro rata basis where a person performs multiple services subject to different remuneration regimes.
(iv) Bonus in fund shares – test on a per fund basis
A significant clarification is made by ESMA regarding the requirement to pay at least 50% of variable remuneration in shares of the relevant UCITS (or equivalent instruments / instruments with equally effective incentives) where the UCITS represents more than 50% of the relevant management company's assets under management.
ESMA considers this should be assessed on an individual fund basis, rather than on the aggregate level of UCITS assets as a percentage of total assets under management. Therefore the bonus in fund shares rule will only apply to a management company if it manages a single UCITS that represents more than 50% of its total asset under management. For managers running large scale UCITS but across a diversified range of funds, this is a very positive clarification and should facilitate disapplication of one of the key pay-out process rules.
(v) Group companies
A group company provision is included in the Draft Guidelines (and will also be carried into the AIFMD Guidelines). This provides that a regulator of another entity within a group could deem other remuneration rules (for example, under CRD IV) to apply to staff of the relevant UCITS management company/AIFM as identified staff of the connected group entity.
Consultation invites feedback
ESMA invites public or confidential responses - to be received on or before 23 October 2015. Finalised guidelines are then expected to issue in Q1 2016, ahead of the transposition deadline for UCITS V (18 March 2016). It is expected the guidelines will then apply to UCITS management companies in respect of the next full financial year/remuneration period that starts after that date.
1 ESMA Consultation Paper (2015/ESMA/1172): Guidelines on sound remuneration policies under the UCITS Directive and AIFMD
2 Directive 2014/91/EU
3 Consultation paper on draft guidelines on sound remuneration policies (EBA/CP/2015/03).
4 Capital Requirements Directive 2013/36/EU
5 In Question 1.a
6 ESMA Questions and Answers (ESMA/2015/1137): Application of the AIFMD
7 Although it is noted that ESMA's AIFMD Q&A refers to CRD rather than CRD IV
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.