Final European AIFMD remuneration guidelines published



However, the guidelines contain little definitive guidance, although this in itself is a victory as it was feared that prescriptive rules might be proposed which the UK would find it difficult to avoid following or that proportionality (see below) would be restricted or not even allowed at all in some areas.

Attention now therefore turns to the FSA’s response as it will at that stage become clearer whether or not a firm has to defer bonuses etc.

The basic principle for remuneration in the ESMA guidelines is that AIFMs must establish and implement remuneration policies that are consistent with and promote sound and effective risk management and do not encourage risk taking which is inconsistent with the risk profiles, rules or governing instruments of the funds (”AIFs”) the manage. The remuneration policy adopted by the AIFM should be in line with the business strategy, objectives, values and interests of the AIFM, the AIFs which it manages and the investors in the AIFs.

The scope of the ESMA guidelines (for example, in relation to the AIFMs, the type of remuneration and the staff caught by the guidelines) remains largely unchanged from the draft guidelines, as do the general remuneration requirements.

These are outlined in detail in our previous Law-Now on the draft guidelines, a copy of which is available here.

ESMA response to specific issues raised in consultation

However, ESMA has responded to concerns raised in the consultation, as follows:

Many AIFMs are owner-managed, which was not a feature of most of those caught by CRD3. The guidelines have moved further since the draft guidelines last year in clarifying that normal investment returns will not be remuneration, but “carry” and other geared or express employment returns will be.


AIFMs have been particularly concerned to know how the ESMA guidelines will be applied on a proportionate basis, which means that smaller, less complex businesses are more lightly regulated. ESMA has provided some clarity here but appears reluctant to provide detailed guidance. Many fund managers will be disappointed by this, although, as stated above the detail that ESMA might have included may not have been welcome.

The FSA has said that it will establish a proportionality framework once the final ESMA guidelines are published and so the FSA’s approach here will be eagerly awaited. AIFMs will hope that the FSA’s AIFM Remuneration Code, which will implement the ESMA guidelines, will give much more leeway to AIFMs on how remuneration principles will be applied.

In its final guidelines, ESMA has said that it may be possible, on a proportionate basis, to disapply the provisions relating to:

- how variable remuneration is paid – ie the requirements to defer between 40% and 60% of variable remuneration for three to five years and the requirement to pay at least 50% of variable remuneration other than in cash (all of which, if disapplied, ESMA considers should be disapplied in full), the requirement to retain non-cash instruments for a period following acquisition and the incorporation of ex post risk adjustments; and

- the requirement to establish a remuneration committee with external appointments, where at paragraph 55 of the final report, ESMA says that AIFMs which manage funds not exceeding €1.25 billion and do not have more than 50 employees or which are part of a group already required by other financial services legislation to have a remuneration committee, need not have a committee at the AIFM level.

However, the ESMA guidelines state that these provisions should never be automatically disapplied on the basis of the guidelines alone and that AIFMs should assess each of the remuneration requirements which may be disapplied and determine whether they can, on the basis of proportionality, disapply each individual requirement. ESMA has stated that proportionality should not be determined purely on the basis of size but also the internal organisation, nature, scope and complexity of the AIFM’s activities. This is broadly the approach taken in relation to the CEBS guidelines for banks. Whether the FSA will give thresholds below which disapplication can take place with little or no justification remains to be seen. It also remains to be seen whether the FSA will develop sector-specific guidance, for example in relation to real estate funds and private equity funds.

Overlaps with other remuneration regulations

One particular concern has been the way in which the ESMA guidelines apply to entities which are also caught by remuneration principles under CRD (ie the FSA’s Remuneration Code in the UK), UCITS and MIFID, all of which have either already developed remuneration guidelines or are in the process of doing so. Despite these concerns, ESMA has not made any specific changes to the guidelines to deal with potential overlaps. In particular, entities which comply with the CEBS guidelines will not automatically be deemed to have complied with the ESMA guidelines. It remains to be seen how the FSA will apply the ESMA guidelines in cases of overlap, particularly where AIFMs are already caught by the Remuneration Code for banks and the two regulatory frameworks are applied differently on the grounds of proportionality. It has already made some encouraging noises in this respect and indicated in November that it would consider compliance with AIFMD as satisfying compliance with the Remuneration Code for banks.

Where an individual works for two separate entities, one of which is subject to CRD and the other to AIFMD, their remuneration should be split pro rata based on the services provided to the two entities and the appropriate remuneration guidelines applied accordingly.

Application of the guidelines where functions have been delegated

One area of debate has been how the ESMA guidelines have evolved to apply to entities to whom an AIFM has delegated portfolio management or risk management activities. The finalised guidelines require that:

- such entities should be subject to regulatory requirements that are equally effective to the ESMA guidelines – for example, the FSA Remuneration Code for banks; or

- appropriate contractual arrangements are put in place with such entities to ensure there is no circumvention of the remuneration requirements of the ESMA guidelines. Such contractual arrangements should cover any payments made to the delegates’ identified staff (ie the staff to whom the main remuneration requirements of the ESMA guidelines apply) as compensation for the performance of portfolio or risk management activities on behalf of the AIFM.

Next Steps

The impact of the guidelines in practice will depend on the way they are implemented and interpreted by national regulatory authorities. The ESMA guidelines will now be translated into the official languages of the EU, following which national regulators have two months to confirm to ESMA whether they comply, or intend to comply, with the guidelines.

In the UK, the FSA published a consultation paper on how AIFMD, including the remuneration provisions, will be implemented in the UK by the FSA’s successor, the Financial Conduct Authority (“FCA”) in November 2012. Further information on how the FSA intends to implement the ESMA remuneration guidelines is expected soon, which should contain proposals with more definitive
guidance and possibly thresholds below which disapplication can take place more or less automatically.

Fund managers caught by AIFMD should, if they have not already done so, begin to take steps for the introduction of the ESMA remuneration guidelines. In particular, they should review the ESMA guidelines – and, once published, the FSA’s AIFMD Remuneration Code – and consider the extent to which their existing remuneration policies and practices and supervisory arrangements are compliant and where changes are necessary. Fund managers should begin preparing a list of identified staff and be able to justify how they have selected the people on it. Once further guidance on the proportionality principle has been published by the FSA, they should consider whether, and to what extent, any of the
ESMA guidelines can be disapplied.

For a copy of the final ESMA guidelines, please click here.