UK: ESMA publishes final versions of UCITS V and updated AIFMD remuneration guidance – where are we now?

ESMA has published the final version of its guidance on the remuneration provisions of UCITS V, available here, and the updated guidance on the AIFMD remuneration provisions, available here. These final versions are the same as those included in in the final report published by ESMA in April 2016. 

Publication of these guidelines is a timely point for UCITS management companies to check that the workstreams required to become compliant with the UCITS Remuneration Code are underway.  Detailed below is the status of the various guidance documents that have been published to date and what further guidance is expected, and an update on the key question of whether UCITS management companies can rely on the "proportionality principle".

What needs to be done and by when?

UCITS firms should already have the following workstreams in progress:

Remuneration Policy: Management companies will need to ensure that they have implemented a remuneration policy that complies with the UCITS Remuneration Code in time for the policy to apply from the start of the first full performance period to commence after 18 March 2016.

Identifying UCITS Remuneration Code Staff: Firms should be identifying those staff who will be UCITS Remuneration Code Staff, before the start of the next performance period, from when these staff will be subject to a UCITS V compliant remuneration policy.

Disclosures: UCITS V introduced new disclosure requirements, with disclosures to be included in the fund’s prospectus, KIID and annual report. Requirements now in force are those to include a summary of the remuneration policy in UCITS prospectus, and to include quantitative remuneration disclosures in UCITS annual reports for fund year-ends on or after 18 March 2016. The KIID also needs to be updated to include a summary of the remuneration policy by 18 March 2017 at the latest.

The FCA has issued transitional guidance, detailing how the remuneration disclosures can be implemented in the period before the firm has completed a full performance period during which the firm will be complying with the UCITS Remuneration Code.

What guidance has been published and is any more guidance expected?

The FCA had previously issued a Policy Statement, available here, addressing certain aspects of the UCITS V remuneration provisions, including confirmation that the UCITS V Remuneration Code (now in force as Chapter SYSC 19E of the FCA Handbook, available here) applies in respect of the first full performance period commencing on or after 18 March 2016.

ESMA has also now published final versions of its guidelines on the UCITS V remuneration provisions (although these are the same as the guidelines included in the ESMA final report published in April 2016).

On a number of issues, including the key question of the application of the proportionality principle, the FCA raised the possibility of further guidance being provided. It is therefore to be hoped that the FCA will proceed to issue more detailed implementation guidance in respect of the UCITS V remuneration provisions (as it did in respect of the corresponding AIFMD provisions) but there has not yet been confirmation from the FCA as to whether it will do or when this might be published.

Where are we at with proportionality?

In short, the FCA is clear that for UCITS management companies in the UK the application of the UCITS Remuneration Code is subject to the proportionality principle, such that smaller or less complex management companies may be able to disapply the more onerous "Pay Out Process Rules" (requiring deferral of up to 60% of variable remuneration, payment in fund units, and the operation of malus and clawback provisions).

This approach reflects the view of ESMA, although the position at a European level is complicated by the European Banking Authority taking a contrary view (that the proportionality principle does not permit firms to disapply any of the remuneration provisions) in respect of the CRD IV remuneration provisions. This situation is discussed in our detailed briefing available here.

What is missing, however, is any detailed guidance from the FCA as to how the proportionality principle will operate under UCITS V. In respect of the AIFMD, the FCA issued implementation guidance which sets out a clear framework under which firms can assess whether or not they are able to rely on the proportionality principle. As explained above, the FCA indicated earlier in 2016 that it may publish corresponding guidance in respect of UCITS V, but it remains unclear whether the FCA will now do so.