esma publishes final ucits remuneration guidelines … · esma publishes final ucits remuneration...
TRANSCRIPT
ESMA Publishes Final UCITS Remuneration Guidelines
On 31 March 2016, the European Securities and Markets Authority (“ESMA”) published its final report
on Guidelines on Sound Remuneration Policies under the UCITS Directive and AIFMD (the
“Guidelines”). The publication of the report follows a public consultation relating to the Guidelines
launched by ESMA in July 2015 (the “Consultation”). The Guidelines are intended to provide clarity
on the requirements under the UCITS Directive for management companies when establishing and
applying a remuneration policy for key staff and will apply to UCITS management companies from
1 January 2017, subject to the transitional provisions stated within the Guidelines (see further below).
The most significant change to the draft version of the Guidelines consulted upon in July 2015 is that
the final Guidelines do not offer any guidance as to whether the application of the proportionality
principle may result in certain specific requirements of the pay-out process being dis-applied in full
(that is, the requirements on variable remuneration in instruments, retention, deferral and ex-post
incorporation of risk for variable remuneration). This does not mean, however, that ESMA has
determined that certain remuneration requirements may not be dis-applied. Alongside the publication
of the Guidelines, ESMA has published a letter to the European Commission, European Parliament
and the Council of the European Union (the “Letter”) making it clear that it believes that the
proportionality principle should continue to apply so as to enable management companies to dis-apply
specific requirements of the pay-out process and suggesting that legislative change may be necessary
to provide clarity in this area.
The Proportionality Issue
The proportionality provisions in the UCITS Directive and the Alternative Investment Fund Managers
Directive (“AIFMD”) require management companies and AIFMs to comply with the remuneration
principles “in a way and to the extent that is appropriate to their size, internal organisation and the
nature, scope and complexity of their activities”. In a departure from the earlier draft version of the
Guidelines, which was the subject of the July 2015 Consultation, the Guidelines do not provide
guidance on the possibility of the proportionality principle operating to dis-apply certain specific
requirements of the pay-out process.
In drafting the Guidelines, ESMA was required to cooperate closely with the European Banking
Authority (“EBA”) in order to ensure consistency with the requirements developed for credit institutions
and other financial services sectors and also to align the Guidelines to the extent possible with the
equivalent guidelines issued under the AIFMD. The ESMA Consultation had proposed an
interpretation of the provisions on proportionality in the UCITS Directive which would permit the dis-
application of the requirements on the pay-out process in certain circumstances on an exceptional
basis, consistent with the approach adopted under the AIFMD equivalent guidelines.
2
This proposed approach, however, differed to that of the EBA’s March 2015 consultation paper on
remuneration guidelines under CRD IV and the final version of those guidelines published in
December 2015. In its March 2015 consultation paper, the EBA stated “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 guidelines are
silent on the possibility of dis-applying any of the CRD IV remuneration requirements but were
accompanied by an opinion of the EBA suggesting changes to the CRD to clarify that certain
provisions on variable remuneration do not apply to certain firms and / or their staff. ESMA’s approach
in the final Guidelines in not providing guidance regarding the possible dis-application of certain
remuneration requirements is therefore consistent with that adopted by the EBA in its final
remuneration guidelines under the CRD.
However, this does not mean that ESMA believes that entities in the fund management sector should
be subject to the same remuneration rules as credit institutions. In the Letter sent by ESMA to the EU
law-making institutions on 31 March 2016, ESMA draws particular attention to the differences between
the two sectors, noting in particular that:
“Fund managers operate according to an agency model and do not accept deposits or deal on
their own account. As a consequence, fund managers, unlike credit institutions, do not issue
liabilities to fund investors. Fund investors have a claim on the investment portfolio which is
ring-fenced from the fund manager. Fund managers manage a portfolio of securities on behalf
of a fund, in the interest of the investors in such fund, under an investment mandate. Their
discretion on how to dispose of the assets in the relevant portfolio is constrained by the
investment objectives and specific limits and restrictions set out in the investment management
mandate and in specific product regulation (e.g. UCITS concentration limits). ESMA recalls that
remuneration rules under the UCITS Directive and the AIFMD are aimed to align the interests
of, including the risks taken by, the fund managers with those of the investors of the funds that
they manage.
Given the nature of activities of fund managers, and the variety of funds they manage and
strategies they implement for those funds, it is appropriate to recognise the possibility to tailor
the rules on the pay-out process of variable remuneration when these do not, in the specific
circumstances, achieve the goal of aligning the interests of the fund manager’s staff.”
ESMA notes that recent work and legal analysis has called into question the existing understanding
that the proportionality provisions set out in the UCITS Directive and the AIFMD may lead to a result
where:
(a) under specific circumstances, the requirements of the pay-out process are not applied; or
(b) it is possible to apply lower thresholds whenever minimum quantitative thresholds are set
for the pay-out requirements (for example, the requirement to defer at least 40% of variable
remuneration).
ESMA states in its Letter that it considers that the scenarios under (a) and (b) should remain possible
in certain situations and that further legal clarity on this possibility could be beneficial to all interested
parties.
ESMA provides a number of examples in the Letter of circumstances in which it believes it should be
possible to tailor the rules on the pay-out process and concludes that it would be inappropriate for the
following fund managers to be subject in all circumstances to the requirements of the pay-out process:
3
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.
The ESMA Letter also states that it would be disproportionate to apply the requirements to relatively
small amounts of variable remuneration and to apply certain requirements to certain staff when this
would not result in an effective alignment of interests between the staff and the investors in the funds.
Application to Delegates
ESMA has provided in the Guidelines that the remuneration principles should apply to delegates of the
management company. This had been expected, notwithstanding that the provisions in relation to the
application to delegates had been included in the recitals to the UCITS V Directive, rather than in the
substantive provisions of the Directive. It also reflects that approach which had been taken by ESMA
in the context of the AIFMD.
However, ESMA goes on to acknowledge in the Letter that there may be cases where the application
of the pay-out process rules to the staff of the delegate would not be proportionate and would not
achieve the outcome of aligning the delegates’ staff interests with those of the investors in the UCITS.
It also acknowledges the risk that the unwillingness of delegates outside the EEA to be subject to
some requirements which they consider disproportionate, could prevent access of EU management
companies to certain investment strategies. It remains to be seen whether the additional clarifications
on proportionality requested by ESMA in the Letter might extend to delegates but we believe that the
factors mentioned by ESMA above should be regarded as relevant for management companies when
considering the application of the Guidelines to their delegates.
Other Changes to the Draft Guidelines
ESMA has introduced the following changes to the draft Guidelines in response to the feedback
received on its Consultation:
the application date of the Guidelines has been amended from 18 March 2016 to 1 January
2017;
transitional provisions have been introduced in respect of the rules on variable remuneration
(see below);
the wording relating to management companies being part of a group has been amended to
clarify that non-UCITS or non-AIF sectoral prudential supervisors of group entities do not have
a discretion to decide which set of sectoral rules should prevail;
the guidance relating to payment in instruments has been amended to state that, where it is
appropriate to ensure the better alignment of interests with investors, it may be possible to
remunerate identified staff with non-cash instruments whose performance is correlated with
the performance of the portfolios that they manage, provided that these instruments feature
equally effective incentives as any of the instruments referred to in the UCITS Directive (units
of the UCITS concerned, equivalent ownership interests, or share-linked instruments); and
in relation to the requirement to pay at least 50% of variable remuneration in instruments
unless the management of UCITS accounts for less than 50% of the total portfolio managed
4
by the management company, the wording has been amended to state that the 50% threshold
should be based on the total net asset value of all the UCITS managed by the management
company and the total portfolio managed should be the portfolios collectively and individually
managed under its authorisation under the UCITS Directive and its authorisation under the
AIFMD, if any.
Next Steps and Transitional Provisions
The Guidelines will now be translated into the official languages of the EU and the final texts will be
published on the ESMA website. National competent authorities must inform ESMA within two months
of publication of the translations on the ESMA website whether they intend to comply with the
Guidelines. We expect the Central Bank of Ireland to comply with the Guidelines. The Guidelines will
apply from 1 January 2017.
The Guidelines state that the guidance on the rules on variable remuneration should apply for the
calculation of payments relating to new awards of variable remuneration for identified staff for the first
full performance period after 1 January 2017. For example, a management company whose
accounting period ends on 31 December 2016 should apply the guidance on the rules on variable
remuneration to the calculation of payments relating to the 2017 accounting period. However, a
management company whose accounting period ends on 30 November 2016 may be in a position
where the provisions in relation to variable remuneration will only apply for the accounting period
commencing 1 December 2017. This is a welcome clarification given the ambiguity on this issue in
ESMA’s recent Q&A relating to the update of fund documentation to reflect the UCITS V requirements.
Comment
While ESMA’s views on the application of proportionality as expressed in the Letter are welcome, it is
unfortunate that there is no clear guidance on this issue and the current position is somewhat unclear.
In the absence of legislative amendment at European level, or clarification at member state level, by 1
January 2017, it may be necessary for the relevant management company to make its own
assessment as to application of the proportionality principle. In doing so, we believe it would be
appropriate for management companies to have regard to ESMA’s views in the Letter regarding the
circumstances in which a UCITS management company may rely upon proportionality.
The equivalent remuneration guidelines under the AIFMD currently provide that the pay-out process
rules may be dis-applied in certain circumstances and ESMA has stated that the AIFMD remuneration
guidelines will not be amended to bring them into line with the UCITS Guidelines pending clarification
on the application of the proportionality principle.
The delay in the application of the Guidelines from March 2016 to 1 January 2017 and the transitional
provisions with respect to the application of the guidance on the variable remuneration rules are
positive developments. It remains to be seen whether there will be further legislative change, as
advocated for by ESMA, to clarify the proportionality issue or whether national regulators will seek to
clarify the issue at member state level. We will keep our clients updated regarding further
developments.
ESMA’s final report on the UCITS remuneration guidelines may be accessed here. The ESMA Letter
to the EU law-making institutions may be accessed here.
Please get in touch with your usual Asset Management and Investment Funds Group contact or any of
the contacts listed in this publication should you require further information in relation to the material
referred to in this update.
5
Full details of the Asset Management and Investment Funds Group, together with further updates,
articles and briefing notes written by members of the Asset Management and Investment Funds team,
can be accessed at www.matheson.com.
The material is provided for general information purposes only and does not purport to cover every
aspect of the themes and subject matter discussed, nor is it intended to provide, and does not
constitute, legal or any other advice on any particular matter. The information in this document is
provided subject to the Legal Terms and Liability Disclaimer contained on the Matheson website.
Copyright © Matheson
6
Matheson Publication April 201