1.    Remuneration: ESMA approach on proportionality

The UCITS V Remuneration Guidelines(1), which were published on 31 March 2016, clarify the remuneration policy requirements under the UCITS Directive for management companies and self-managed UCITS.

These guidelines aim to ensure a convergent application of the remuneration provisions and provide guidance on inter alia:

  • management companies as part of a group: the guidelines clarify that in a group context, non-UCITS sectoral prudential supervisors of group entities may deem certain staff of the UCITS management company which is part of that group, to be "identified staff" for the purpose of their sectoral remuneration rules;
  • application of different sectoral rules: the guidelines include proposals on how different rules, such as those set out in the AIFMD and in the CRD IV Directive, should apply where employees or other categories of personnel perform services subject to different sectoral remuneration principles;
  • definition of performance fees;
  • application of the rules to delegates;
  • payment of variable remuneration in instruments.

In the UCITS V Remuneration Guidelines, ESMA did not take a firm position on the application of the proportionality principle to the remuneration requirements.

It provides that when taking measures to implement remuneration principles, EU Member States should take account of the size, nature and scope of financial undertakings’ activities and that in taking measures to comply with the remuneration principles, management companies should comply in a way and to the extent that is appropriate to their size, internal organisation and the nature, scope and complexity of their activities. ESMA underlines also that it is primarily the responsibility of the management company to assess its own characteristics and to develop and implement remuneration policies and practices which appropriately align the risks faced and provide adequate and effective incentives to its staff and that competent authorities should review the ways management companies actually implement proportionality, taking into account the achievement of regulatory objectives and the need to preserve a level playing field among different management companies and jurisdictions.

In addition to the UCITS V Remuneration Guidelines, ESMA published a letter addressed to the EU Commission(2) ("UCITS V Remuneration Letter") which focuses on the application of the proportionality principle and remuneration rules in the financial sector.

In the UCITS V Remuneration Letter, ESMA goes one step further regarding the proportionality principle and regarding the possibility to waive specific remuneration requirements in certain cases. In this letter, ESMA also draws the attention of the EU Commission to the characteristics of the asset management sector in order to justify the application of the proportionality principle. It clarifies the ESMA approach on the proportionality principle, i.e. application to small and non-complex fund managers, application of the deferral rules and of the payments in instruments rules, application of the pay-out process rules to delegates and to portfolio managers who not only manage portfolios of UCITS.

The UCITS V Remuneration Guidelines will become applicable on 1 January 2017. However, the ESMA guidance on the pay-out process for variable remuneration for the calculation of payments relating to new awards of variable remuneration to identified staff will start applying for the first full performance period after 1 January 2017(3).

As regards the update of the fund documentation, the ESMA Q&A on UCITS(4) allows UCITS to update their KIID with the information on the remuneration policy(5) at the next annual update after 18 March 2016, or on the first occasion after 18 March 2016 on which the KIID is revised or replaced for another purpose.

2.    ESMA Q&A on UCITS: Update

On 19 July 2016, ESMA updated its Q&A on UCITS (ESMA/2016/1135) by adding a new question on the impact of the EMIR Regulation on UCITS(6).

Essentially, as regards the valuation of OTC financial derivative transactions that are centrally cleared and subject to the reporting obligation of EMIR, ESMA states that AIFMs must have in place a process for proper and independent verification of the value of the OTC financial derivative transactions.

The valuation provided by the CCP (central counterparty) can therefore only serve as a point of reference for the verification performed by the AIFM.

(1) Final report on sound remuneration policies under the UCITS Directive and AIFMD, 31 March 2016, (ESMA/2016/411).
(2) ESMA letter to the EU Commission on the proportionality principle and remuneration rules in the financial sector, 31 March 2016, (ESMA/2016/412).
(3) This is without prejudice to the application of the requirements stemming from the UCITS V Directive by 18 March 2016.
(4) ESMA Q&A on the application of the UCITS Directive, 5 April 2016, ESMA/2016/569.
(5) i.e. with a statement indicating that all information regarding the updated remuneration policy is available by means of a website (and the indication of the website) and that paper copies are available free of charge upon request.
(6) At the same time as this update of the UCITS Q&A, ESMA updated its AIFMD Q&A on the same topic by taking the same approach for AIFMs as the one taken for UCITS management companies.