In January 2014, the FCA issued guidance on proportionality in the operation of certain remuneration provisions.
The remuneration provisions have been among the AIFMD's most controversial elements. Three of these provisions, in particular, have attracted industry attention:
- retained structures,
- deferral and
- performance adjustment.
Subject to various conditions, the retained structures rules require full scope AIFMs to ensure that at least 50% of any variable remuneration consists of units or shares (or of equivalent ownership interests etc) of the AIF concerned.
The deferral provisions require full scope AIFMs to ensure that at least 40% of the variable remuneration component is deferred over an appropriate period given the AIF's life cycle and redemption policy, and that it is correctly aligned with the AIF's risk profile.
The performance adjustment provisions require full scope AIFMs to ensure that any variable remuneration, including a deferred portion, is only paid if it is sustainable bearing in mind the financial situation of the AIFM as a whole and if it is justified according to the performance of the AIF, the business unit and the individual concerned. These three sets of provisions are collectively known and the 'Pay-out Process Rules'.
Some managers have taken some comfort from the proportionality rule which provides that "an AIFM must comply with the AIFM remuneration principles in a way and to the extent that is appropriate to its size, internal organisation and the nature, scope and complexity of its activities". The FCA has recently published guidance on how it believes that proportionality rule should operate.
The starting point is the value of the assets under management (AuM) of the given AIFM's AIFs.
Click here to view table.
Managers should note, however, that these are only presumptions. In addition to the value of the AuM, there are various other proportionality considerations that may mean that the presumptions above are set aside. The considerations include the number of the AIFM's partners, members etc; whether the AIFM is listed and traded on a regulated market; the level of risk and the nature of certain fee structures. Consideration of these (and other factors) may mean that an AIFM with AuM below the relevant threshold may have to apply the Pay-out Process Rules and that an AIFM with AuM above the relevant threshold may be entitled to disapply the Pay-out Process Rules.
According to FCA guidance, each AIFM has a responsibility "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". This FCA guidance adds that AIFMs "should, if requested, be able to explain to the FCA the rationale for how they apply the AIFM remuneration proportionality rule, particularly where they have concluded that it is appropriate for certain rules to be disapplied".
This is a complicated area and AIFMs would be well-advised to seek advice on how to proceed.