AIFMD already contains fairly prescriptive rules on remuneration for full-scope AIFMs, and the ESMA guidelines published in July 2013 (which the FCA has adopted) progressed matters a bit further, but it has been the FCA’s views on proportionality in this area which relevant AIFMs have most eagerly been waiting to see as these will determine whether most fund managers are in or out of the most onerous elements of the new remuneration regime (deferral, payment of bonuses in the form of fund units etc).
The FCA’s draft position on this and some other remuneration issues were published in draft last week as part of the FCA’s Quarterly Consultation Paper 13/9 (see Chapter 14 and Appendix 14A and 14B of that paper).
Comparisons will inevitably be drawn with the implementation of the Remuneration Code for banks and other investments firms which in most cases took place in 2010.
For those that are caught by these new rules, the AIFM Remuneration Code rules on variable remuneration (which are wider than the rules on deferral etc) will only apply to the first full performance period after the firm becomes authorised as a full-scope AIFM. Firms are generally delaying their authorisation, but the key point here is that it is not clear whether this is the performance period of the fund or the fund manager’s bonus year. If the latter, with a calendar year end company, it is possible that the AIFM Remuneration Code would not take effect for that manager until 1 January 2015.
Who is in scope?
The consultation paper confirms that small authorised UK AIFMs, small registered UK AIFMs, non-EEA AIFMs and small non- EEA AIFMs are not required to comply with the AIFM Remuneration Code or the ESMA Guidelines, though may choose to do so voluntarily. It is just full scope firms that are caught.
For those in scope, where does the proportionality threshold lie?
The FCA’s proposals divide relevant firms caught by the AIFM Remuneration Code into two, principally on the basis of AIF assets under management, to determine whether firms will or will not be required to apply the rules on payments in the form of fund units etc, deferral and clawback, which are referred to as the “Pay-out Process Rules” in the consultation paper.
There are two relevant thresholds being mooted here:
- The relevant threshold for AIFMs of open ended or leveraged funds would have is suggested to be somewhere between £500 million and £1.5 billion
- The relevant threshold for AIFMs of unleveraged funds which have no redemption rights for 5 years is suggested to be somewhere between £4 billion and £6 billion.
The FCA proposes to pick a number within the ranges given above. However, although there is a presumption that firms with assets under management below and above the finally decided threshold will either have to comply or not need to comply with the Pay-out Process Rules etc, there are other relevant factors which firms will need also to take into account including size (as in number of staff), whether the AIFM is listed (this will tend to suggest that the Pay-out Process Rules will be relevant), whether there is a substantial degree of employee ownership already (which is a factor pointing towards less need to apply the new rules), and other aspects which relate to the nature, scope and complexity of the AIFM’s activities. The consultation paper regularly emphasises that whether or not a firm meets the proportionality test is never formulaic. A judgment must be formed on the basis of all the available information.
The draft guidance also addresses the position of delegates and the extent to which the AIFM must ensure compliance of their remuneration practices, the position of staff members at AIFMs not involved in the management of AIFs and quite detailed rules on the position for partnerships.
There are a large number of partnerships which act as AIFMs. While many are caught by CRD rules as well, the CRD rules did not require the vast majority of fund managers to impose any equivalent deferral or share/fund based remuneration rules and so the particular issues for partnerships did not have to be faced in 2010. Generally, firms where caught by both AIFM and CRD rules are expected to comply with the AIFM rules, where they may not be so lucky as to avoid these rules due to the different regulatory objectives and regimes. The consultation paper looks at what AIFMD partnership returns could be considered to be remuneration as opposed to investment returns (which are not remuneration), and how returns which are remuneration can be split between fixed and variable remuneration. The FCA also implies that the 50% deferral rule will be applied to the after-tax amount. Whereas it is normally relatively easy to provide that employees are taxed only if and when they can convert an amount into cash, this is not so easy for partnership returns when the extent to which profits or cash can be withdrawn is normally not relevant to when tax is payable. However, the FCA’s guidance here is to be linked with announcements of developments later this autumn by HMRC, which it is suggested will put in place a new statutory tax mechanism for deferring tax payments on deferred receipt of profits, and which will be awaited with interest.
The FCA also says that, although there is no formal requirement to do so in AIFMD or the AIFM Remuneration Code, it expects a firm to use interests in the AIFM or “shadow” units in the AIF or AIFM to satisfy the Pay-Out Process Rules where the AIFM is unable to use AIF units for remuneration.
Comments are invited by 6 November 2013. Click here to access the FCA’s consultation paper.