UCITS V is now in force and management companies will become subject to the remuneration code and disclosure requirements over the course of 2016. The FCA has published the final version of the UCITS Remuneration Code (SYSC19E), as well as implementation guidance, and so firms should now be preparing to implement a compliant remuneration policy and considering how they will comply with the new remuneration disclosure regime.
UCITS V came into force on 18 March 2016. The FCA's Policy Statement (“FCA Policy Statement”), dated 2 February 2016 and available here, includes the final version of the UCITS Remuneration Code (SYSC 19E) and further transitional guidance.
What needs to be done and by when?
- 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 will need to identify 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 introduces new disclosure requirements, with disclosures to be included in the fund’s prospectus, KIID and annual report. The disclosures require firms to provide a summary of the remuneration policy (in the prospectus and KIID, as well as in related website disclosures), as well as to make annual quantitative disclosures (in the annual report).
In summary, the first disclosures need to be included in:
- the first UCITS annual report published on or after 18 March 2016 that relates to an accounting period ending after such date;
- the prospectus of a UCITS by 30 September 2016; and
- the key investor information document (KIID) of a UCITS at the time of the next update to the KIID, or otherwise by no later than 18 March 2017.
Transitional guidance on the disclosure requirements
The FCA has acknowledged that firms may be required to produce an annual long report for a UCITS before the end of the first financial year commencing after 18 March 2016 (and so before the end of the first period during which the firm will be complying with the UCITS Remuneration Code). The FCA has therefore issued transitional guidance that, during this interim period, firms should use their best efforts to make the disclosures in the annual report, but may omit information that is not available or which is available but which is not materially relevant, reliable and comparable. Consideration also needs to be given as to how the descriptive disclosure requirements in the KIID and prospectus will be complied with, particularly before a UCITS V compliant policy is implemented.
Firms should therefore now be preparing to make UCITS compliant disclosures (if this process has not already begun) including beginning the process of identifying Code Staff and collating the necessary data, and further considering what approach will need to be taken in relation to the remuneration disclosures.
FCA Policy Statement
The FCA Policy Statement addressed some of the questions that had been outstanding in respect of the implementation of the UCITS remuneration provisions in the UK, although other regulators may not be taking the same approach.
In relation to staff in the same remuneration bracket as senior management, risk takers, and control functions the FCA has clarified that such staff can be excluded from being UCITS Remuneration Code Staff where the firm can show the staff member does not have a material impact on the risk profile of the management company or the UCITS that the management company manages.
The FCA has also included in the UCITS Remuneration Code guidance on the ability for firms which have less than 50% of their total portfolio in UCITS to reduce the proportion of variable remuneration that must be paid in fund units. There was uncertainty on this provision, arising from ambiguities in the draft guidance from the European Securities and Markets Authority (ESMA). The FCA has clarified that this requirement applies where the management of UCITS in general (and not the management of any single UCITS) represents less than 50% of the management company’s total portfolio. A definition of what constitutes a “total portfolio” is expected from ESMA in due course. The FCA requires, however, that the proportion of variable remuneration to be paid in fund units must still represent a “substantial proportion”.
Further guidance to come
Our briefing on ESMA’s draft guidelines is available here. The final ESMA guidelines are expected during 2016, but the timing of publication has not been announced. In particular, whilst ESMA has previously indicated that it disagrees with the European Banking Authority’s interpretation that the “proportionality principle” does not permit smaller firms to disapply the more onerous remuneration code requirements, the final ESMA guidelines are awaited to confirm that ESMA will maintain this approach.
Further implementation guidance is also expected from the FCA during 2016. In particular, guidance on how to apply the proportionality principle is anticipated, and in particular whether there will be an Assets Under Management (AUM) presumption as with the equivalent guidelines issued in relation to the Alternative Investment Fund Managers Directive (AIFMD).