The Financial Conduct Authority (FCA) has recently published its finalised guidance on the AIFMD remuneration provisions which form the basis of its AIFM Remuneration Code (SYSC 19B). The guidance follows a period of consultation (see our previous briefing) and helpfully clarifies a number of the outstanding points on the application of proportionality, the AIFMD disclosure requirements and the requirement to pay a proportion of variable remuneration in units, shares or other instruments.


Managers of alternative investment funds (AIFs) in the UK are required to seek a variation of permissions to be authorised as an alternative investment fund manager (AIFM) in accordance with the provisions of the Alternative Investment Fund Managers Directive (AIFMD) by 22 July 2014. In order to become authorised, the AIFM must confirm to the FCA that it will operate a remuneration policy which is compliant with the provisions of the AIFM Remuneration Code.

The FCA has now confirmed that such a policy need only apply to awards of variable remuneration for performance periods commencing after the AIFM has received authorisation. In particular, the AIFM’s new remuneration policy will not affect any remuneration which has previously been awarded, whether or not it has been paid by the time of authorisation.

The FCA has also helpfully confirmed a number of additional provisions which such AIFM will need to take into account in formulating their remuneration policy.


Certain of the provisions of the AIFM Remuneration Code, namely the requirement to defer a portion of variable remuneration, pay in units, shares or other instruments, and the requirement to apply malus adjustments (collectively referred to as the “Pay-out Process Rules”), may be disapplied by AIFMs on grounds of proportionality. In determining whether or not an AIFM is able to take advantage of the proportionality provisions the AIFM will need to consider its size, internal organisation and the nature, scope and complexity of its activities. The FCA has confirmed that this disapplication of the Pay-out Process Rules should never be seen as automatic and the AIFM must be able to justify, having gone through a process of considering each of the elements set out by the FCA in its guidelines, its approach in this respect.

Size – Assets Under Management

The FCA guidance provides for a working presumption that certain AIFMs will be able to disapply the Pay-out Process Rules based on the level of their AIF assets under management. Whilst it has clarified the types of firm to which each of the assets under management thresholds will apply, the threshold levels have not been set, as most had expected, at the top end of the spectrum proposed in the consultation, but in the middle (see below). The reason the FCA gives for this is that, given that the majority of funds under management in the UK are held by a relatively small number of AIFMs, setting the assets under management threshold at these levels should result in those large AIFMs managing the majority of such assets being fully subject to the requirements to operate the Pay-out Process Rules.

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Other Factors

The majority of the factors which the FCA considers that AIFMs will be able to take into account in accessing their proportionality status, have remained unchanged from its consultation document. The FCA has, however, confirmed that AIFMs which manage only non-UCITS retail schemes (NURS), or other regulated products, may be able to consider themselves to be non-complex as regulations limit the scope of investments and so mitigate investor risk.

The FCA has also clarified that, in relation to its own conduct and prudential supervision categories, only those within the lowest risk band (by FCA impact score) will be able to take this fact into account in assessing their proportionality status. Again, this seems to be a narrowing of scope from the FCA’s consultation position.


Where portfolio management or risk management has been delegated to another entity, the AIFM will be required to ensure that the remuneration of staff of such delegates, who may be considered to be AIFM Remuneration Code Staff of the AIFM (not withstanding that they are employed by another entity), is subject to the provisions of the AIFM Remuneration Code unless the delegate is itself subject to regulatory requirements on remuneration that are considered to be equally as effective. The FCA has confirmed that firms which are subject to the remuneration provisions of CRD IV (the UK Remuneration Code contained in SYSC 19A) or the remuneration provisions applying to BIPRU (MiFID) firms (the UK Remuneration Code contained in SYSC 19C) or EEA equivalents will be considered subject to remuneration regimes which are equally as effective, even where such entity is able to take advantage of the proportionality provisions of either of those two Remuneration Codes.

In relation to delegates which are not subject to EEA regulation, the FCA has rejected suggestions that countries which have entered into a memorandum of understanding with the FCA in relation to the AIFMD, or countries which have signed up to the FSB’s Principles on Sound Compensation Practices, would automatically be considered to be subject to equally effective regulation on remuneration, although this may be taken into account by AIFMs in determining how to apply their remuneration policies to staff of delegates.


Whilst most AIFMs will be required to ensure that their AIFM Remuneration Code Staff receive at least 50% of variable remuneration in the form of units or shares in the AIF in respect of which the individual provides services, this requirement may be disapplied where, as a result of the legal structure or the constitution of the AIF, this is impractical. The FCA has set out a list of examples where this would be the case, including where the AIF is closed-ended and either unlisted or illiquid, where regulation restricts individuals from holding such units or where it may be disproportionately costly to set up a structure for individuals to hold the AIF’s units. In such circumstances the FCA confirms that shares in the AIFM or its parent company may be used where it is reasonable to do so, for example, because the shares are listed or the performance of the AIFM is relevant to the valuation of such shares. Alternatively, shares or instruments linked to the performance of other AIFs managed by the AIFM may be used. This is a change to the previous suggestion from the FCA that, in circumstances where the instruments requirement could be disapplied, the AIFM should consider using a weighted average of its AIFs. By contrast, where the AIFM is not able to disapply the requirement to pay in instruments, it may, for certain staff (for example those in senior management or compliance and audit functions) use shares in the AIFM or its parent company or, in this case, a weighted average of the AIFs managed by the AIFM. There needs to be a clear link between the individual and the instrument used, for example, showing that it aligns the interests of the individuals with the AIF, the investors in such AIF or the AIFM itself.

Where instruments are received by an individual, the FCA has confirmed that there should be a minimum of a 6 month retention period applying from the date on which the instruments vest. Should tax arise on vesting, the FCA accepts that sufficient shares may be sold to cover the tax provided that no shares are sold to cover tax arising in relation to any cash payments received at the same time.


The AIFMD remuneration provisions will apply to members of a partnership, although a certain amount of a member’s profit allocation may be able to be attributed to a return on capital, rather than being seen as remuneration. In relation to the remainder of the profit share, this will need to be apportioned between fixed and variable remuneration, which the FCA indicates should be easy to do where members receive advance drawings on a monthly basis (which would be treated as fixed remuneration) and a discretionary or variable share of profits.

Where members of a partnership are AIFM Remuneration Code Staff, the requirements to defer variable remuneration and pay a proportion of variable remuneration in instruments will apply, notwithstanding that there may be tax consequences for the member or the partnership on profits arising. In this respect, the FCA notes that there are current proposals which have been put forward by HMRC in relation to the taxation of partnerships which include a mechanism for LLPs to pay upfront tax in place of the individual member until the deferred element, or any payment in instruments, is made available to the member. The FCA does not, however, address the current issue with the draft legislation whereby only AIFMs whose business is wholly or substantially formed of the management of AIFs will be able to take advantage of the proposed mechanism. The FCA proposes that, where the mechanism is not utilised by the partnership, the deferral of remuneration should be on a gross of tax basis.


Following authorisation, AIFMs are subject to the remuneration disclosure rules set out in the AIFMD and the Commission Delegated Regulation. In particular, an AIFM must disclose on an aggregated basis the remuneration of its AIFM Remuneration Code Staff in the annual reports of the AIFs which it manages. A concern which had been raised with the FCA is that this requirement does not align with the application of the AIFM Remuneration Code and the AIFM’s new remuneration policy which will take effect from the start of the next performance period. The FCA has clarified that, whilst the disclosure rules do apply from authorisation, and the timing of the annual reports for some AIFs may require disclosure before the AIFM has completed or even possibly started its first full performance period after authorisation, the AIFM may decide that such a disclosure would not be relevant, reliable or provide a proper basis for comparison and so is able to consider omitting remuneration disclosures from those AIF annual reports. The same could apply where there is a lack of relevant information on remuneration available to the AIFM to make the disclosure. If the AIFM chooses to exclude disclosure of remuneration it must not only explain the basis for the omission in the AIF annual report, but must also ensure that the required disclosures in relation to the AIFM’s remuneration policy are included.