The consultation sets out the Committee of European Banking Supervisors (CEBS') proposals as to how national EU regulators and affected firms should apply the concept of proportionality in implementing the remuneration principles included in the recent amendments to the Capital Requirements Directive (CRD3), which will come into force on 1 January 2011. CEBS is expected to issue its final Report in mid December 2010. This process is likely to impact on the AIFMD implementing measures as well as UCITS V.
The CEBS draft guidelines will enable regulators to allow the dis-application of certain principles (such as the requirements to defer at least 40% of variable remuneration for at least three years; to pay at least 50% of variable remuneration in shares or non-cash equity-like instruments; to have a separate remuneration committee) . However AIMA have called on CEBS to allow for the dis-application of the following requirements:
- that firms set a maximum permitted ratio between the fixed and variable elements of remuneration;
- that total variable remuneration be "generally considerably contracted" where subdued or negative financial performance of the firm occurs; and
- that performance be assessed in a multi-year framework.
AIMA argues that such dis-application would be proportionate for hedge fund managers because the CRD3 amendments were a prudential measure aimed at reducing the potential for systemic risk because of remuneration structures which incentivise members of staff to take risks beyond the general risk tolerance of the systemically important entity for which they work. The fundamental differences between the business models of credit institutions (at whom the principles were primarily targeted) and asset managers are the reason why the interests of the hedge fund managers are already closely aligned to those of the underlying investors, and so they generally already meet the spirit of the remuneration principles.