UCITS V regulates the remuneration policy of UCITS management companies. The rules broadly replicate, in almost all respects, those which already apply to managers of AIFs under AIFMD. Member states have until 18 March 2016 to transpose UCITS V into national law.
Most of the remuneration rules in respect of UCITS managers are set out in articles 14a and 14b of UCITS V. These will be supplemented by guidelines to be published by ESMA.
UCITS V also introduces transparency provisions under which disclosure of the remuneration policy of UCITS management companies, and certain details of remuneration paid, must be included in a UCITS’ prospectus, annual report and key investor information.
UCITS V does not govern remuneration in respect of all of the potential services offered by a UCITS manager. Where the manager offers investment services under Article 6(3) of the UCITS Directive, these are subject to the MIFID and the ESMA Guidelines on Remuneration under MiFID. MiFID 2 has introduced an explicit requirement on management bodies and remuneration.
UCITS management companies must establish and apply remuneration policies and practices which:
- are consistent with, and promote, sound and effective risk management
- do not encourage risk taking which is inconsistent with the risk profiles, rules or instruments of incorporation of the UCITS which they manage
- do not impair compliance with the management company’s duty to act in the best interests of the UCITS
- are in line with the business strategy, objectives, values and interests of the management company and the UCITS which it manages and of the investors in those UCITS
- include measures to avoid conflicts of interest.
Remuneration policies and practices apply to staff whose professional activities have a material impact on the risk profiles of the management companies or the UCITS which they manage, including:
- senior management
- risk takers
- those exercising control functions
- employees receiving total remuneration falling within the remuneration bracket of senior management and risk takers.
Management body oversight and control functions
The remuneration policy must be adopted by the management company’s management body and must be reviewed at least annually.
The implementation of the policy, and its compliance with the remuneration policies and procedures adopted by the management body, must also be subject to central and independent internal review at least annually.
Where a remuneration committee has been established, that committee must directly oversee the remuneration of senior officers in the risk management and compliance functions.
Staff who are engaged in control functions must be compensated based on the achievement of the objectives linked to their functions, independently of the business areas which they control.
Management companies which are significant in terms of their size or of the size of the UCITS that they manage, their internal organisation and the nature, scope and complexity of their activities, must establish a remuneration committee.
Any such committee must be constituted in a way which enables it to exercise competent and independent judgment on remuneration policies and practices and on the incentives created for managing risk.
The committee will be responsible for the preparation of decisions regarding remuneration, including those which have implications for the risk and risk management of the management company and the UCITS concerned and which are to be taken by the management body. When preparing its decisions, the committee must take into account the long-term interests of investors and other stakeholders and the public interest.
The Chairman of any remuneration committee and its members must also be members of the management body who do not perform any executive functions in the management company.
Where national law provides for employee representation on the management body, the committee must include one or more employee representatives.
Requirements for risk alignment
Article 14b of the amended UCITS Directive sets out a number of principles which must be complied with. Compliance must be proportionate based on the size and internal organisation of the management company concerned and nature, scope and complexity of its activities.
Variable remuneration principles
Fixed and variable components of total remuneration must be appropriately balanced. The fixed component should represent a sufficiently high proportion of the total remuneration to allow the operation of a fully flexible policy on variable remuneration components, including the possibility of not paying any variable remuneration at all.
Guaranteed bonuses must be exceptional and only be given in the context of hiring new staff, and must be limited to the first year of engagement.
At least 50% of variable remuneration must consist of units of the UCITS concerned, equivalent ownership interests, or share-linked instruments or equivalent non-cash instruments with equally effective incentives. The 50% minimum does not apply where the management of UCITS accounts for less than 50% of the total assets managed by the management company.
Variable remuneration which consists of units in the UCITS or other instruments must be subject to an appropriate retention policy designed to align investments with the interests of the management company and the UCITS which it manages and the investors in those UCITS. Member states or their regulators may place restrictions on the types and design of those instruments or ban certain instruments, regardless of whether they relate to deferred or non-deferred components of variable remuneration.
A substantial proportion of variable remuneration (and, in any event, at least 40%, rising to at least 60% where the variable remuneration is of a particularly high amount) must be deferred over a period which is appropriate in view of the holding period recommended to investors of the UCITS concerned and which is correctly aligned with the nature of the risks of the UCITS in question. This period must be at least three years and remuneration payable under deferral arrangements must vest no faster than on a pro-rata basis over that period.
Variable remuneration, including any portion which is deferred, must be paid or vest only if it is sustainable based on the financial situation of the management company as a whole, and justified according to the performance of the business units, the UCITS and the individual concerned. Total variable remuneration should generally be considerably reduced in the event of subdued or negative financial performance of the management company or the UCITS concerned, taking into account both current compensation and reductions in payouts of amounts previously earned, including through “malus” or clawback arrangements.
Performance-related remuneration principles
Where remuneration is performance-related, the total amount must be based on a combination of the assessment of the performance of the individual and of the business unit or UCITS concerned and their risks, and of the overall results of the management company, when assessing individual performance. This assessment must take into account both financial and non-financial criteria.
Any assessment of performance should be set in a multi-year framework which is appropriate to the holding period recommended to investors in the UCITS which are managed by the management company in order to ensure that the assessment process is based on the longer-term performance of the UCITS and its investment risks and that the actual payment of performance-based components of remuneration is spread over the same period.
The measurement of performance used to calculate variable remuneration or pools of variable remuneration should include a comprehensive adjustment mechanism to integrate all relevant types of current and future risks.
The last three principles of variable remuneration referenced in the section above are equally applicable to performance-related remuneration.
General remuneration principles
UCITS V also sets out other more general principles which should be complied with when establishing and applying remuneration policies and which are designed to align incentives with the interests of the management company, the UCITS which it manages and the investors in those UCITS:
- Payments related to early termination of a contract should reflect performance achieved over time and should be designed in such a way that they do not reward failure.
- The pension policy of the management company should be in line with the business strategy, objectives, values and long-term interests of the management company and the UCITS which it manages.
- If an employee leaves the management company before retirement, discretionary pension benefits should be held by the management company for a period of five years in the form of units of the UCITS concerned, equivalent ownership interests, or share-linked instruments or equivalent non-cash instruments with equally effective incentives. Where an employee reaches retirement, discretionary pension benefits should be paid to the employee in the form of such instruments and should be subject to a five-year retention period.
- Staff should be required to undertake not to use personal hedging strategies or remuneration-related or liability-related insurance to undermine the risk alignment effects embedded in their remuneration arrangements.
- Variable remuneration should not be paid through vehicles or methods which facilitate the avoidance of the remuneration requirements contained in UCITS V.
In addition to the requirements on management companies in respect of their remuneration policies and practices, UCITS V also introduces new transparency requirements in relation to disclosure of remuneration-related information to investors and regulators.
The prospectus for a UCITS must include one of the following:
- Details of the up-to-date remuneration policy, including a description of how remuneration and benefits are calculated and the identities of the persons responsible for awarding remuneration and benefits (including the composition of the remuneration committee where such a committee has been established).
- A summary of the remuneration policy and a statement that the details of the up-to-date remuneration policy - including a description of how remuneration and benefits are calculated and the identities of the persons responsible for awarding remuneration and benefits (including the composition of the remuneration committee where such a committee has been established) - are available at a given website address and that a paper copy will be made available free of charge if requested.
A UCITS’ annual report must include the following details:
- The total amount of remuneration for the financial year, split into fixed and variable remuneration paid by the management company and the investment company to its staff, and the number of beneficiaries (including, where relevant, any amount paid directly by the UCITS itself, including any performance fee).
- The aggregate amount of remuneration broken down by categories of staff.
- A description of how the remuneration and benefits have been calculated.
- The outcome of the annual reviews of the management company’s remuneration policies, including any irregularities which have occurred.
- Any material changes to the adopted remuneration policy.
A UCITS’ key investor information must include a statement that the details of the up-to-date remuneration policy, including a description of how remuneration and benefits are calculated and the identities of the persons responsible for awarding remuneration and benefits (including the composition of the remuneration committee where such a committee has been established) are available at a given website address and that a paper copy will be made available free of charge if requested.
UCITS management companies, investment services and MiFID 2
MiFID governs the remuneration for the performance of investment services, such as portfolio management and the giving of investment advice in addition to the core service of managing a UCITS. UCITS managers are currently subject to the ESMA Guidelines on Remuneration Policies and Practices published in June 2013. Whereas the UCITS V remuneration requirements, like those under the AIFMD and Capital Requirements Directive, are aimed primarily at reducing the risk to a UCITS V manager, the MiFID requirements are aimed at enhancing compliance with conflicts of interest and conduct of business requirements.
MiFID 2 introduces an explicit requirement on those offering investment services to adopt remuneration policies which encourage responsible business conduct and fair treatment of clients, as well as avoiding conflicts of interest. These complement the UCITS V requirements, which also seek to address conflicts issues. ESMA’s Technical Advice to the Commission published on 19 December 2014 amplifies the requirement addressing the application of the remuneration principles, design criteria for remuneration policies, approval of the policies and criteria for determining variable remuneration. The final requirements will come into force in January 2017.