Further to the entry into force of Directive 2014/91/EU of the European Parliament and of the Council of July 23rd 2014 (“UCITS V Directive”), the European Securities and Markets Authority (“ESMA”) released on July 23rd 2015 a consultation paper (the “Consultation Paper”) on sound remuneration policies under the UCITS V Directive.
The aim of the Consultation paper is to obtain feedback from market participants in respect of the draft guidelines on remuneration (which are attached to the Consultation Paper) proposed by ESMA (the “UCITS Remuneration Guidelines”).
The UCITS Remuneration Guidelines do not differ substantially from the equivalent guidelines applicable to alternative investment fund managers under Directive 2011/61/EU which were published on July 3rd 2013 (“AIFMD Remuneration Guidelines”).
"The UCITS Remuneration Guidelines will apply to management companies and to investment companies which have not appointed a management company."
In line with the AIFMD Remuneration Guidelines, the UCITS Remuneration Guidelines impact the remuneration paid to so-called identified staff but also impose obligations on management companies/investment companies to establish or amend certain internal procedures.
Identified staff are within the management of a UCITS the “categories of staff, including senior management, risk takers, control functions and any employee receiving total remuneration that falls into the remuneration bracket of senior management and risk takers, whose professional activities have a material impact on the management company’s risk profile or the risk profiles of the UCITS that it manages [and to the delegates thereof …]”.
The UCITS Remuneration Guidelines shall apply to any type of remuneration paid to identified staff, including performance fees and any transfer of shares/units of the UCITS.
In order to avoid circumvention of the remuneration rules, the UCITS Remuneration Guidelines require management companies/investment companies to ensure that their service providers are subject to similar rules and that appropriate contractual arrangements are put in place.
The main requirements of the UCITS Remuneration Guidelines can be summarised as follows:
- UCITS management companies/investment companies shall identify the persons qualifying as “identified staff”;
- UCITS management companies/investment companies shall enact a remuneration policy which takes into consideration the factors mentioned in the UCITS Remuneration Guidelines, e.g. the remuneration must be related to the impact of the identified staff on the risk profile of the UCITS;
- The supervisory function shall approve and maintain the remuneration policy as well as supervise its effective implementation;
- Requirement to set up a remuneration committee for certain management companies;
- Clarification on the role of the control functions (such as the internal audit function, the risk management function, etc.) in the design, oversight and review of the remuneration policy;
- Clarifications on best practice when implementing performance related remuneration mechanisms such as deferral and retention mechanisms; and
- Clarification of the proportionality principle which allows the non-implementation of certain guidelines in light of the relatively small size of the relevant UCITS management company/investment company.
The UCITS Remuneration Guidelines do not impose any reporting duties on the management companies/investment companies but they are required to disclose the policy internally, and to a certain extent, externally (e.g. stating the main principles in the annual report).
The consultation is open until October 23rd 2015 and the guidelines in their final form are expected to enter into force on the transposition deadline for UCITS V being March 18th 2016.