On 23 July the European Securities and Markets Authority ("ESMA") published its draft guidelines on the implementation of the UCITS V remuneration principles for consultation. The consultation is available here. 

The consultation proposes that the guidelines on the UCITS V remuneration principles will largely follow the corresponding AIFMD guidelines, which is very helpful as this should ensure a largely consistent application of the two regimes at the member state level. 

Interaction with AIFMD and CRD IV

The guidelines are also aimed at ensuring a consistent approach between the UCITS V and AIFMD remuneration principles, and so the consultation also discusses whether any changes to the AIFMD guidelines are needed.  The guidelines specifically address the interaction between the UCITS V, AIFMD and CRD IV remuneration provisions, and propose a pro rata application, unless there are provisions which would need to be applied on a non-pro rata basis in order to achieve their aim (possibly, for example, the bonus capping provisions of CRD IV).  The consultation does not specifically address the position of those individuals whose role is partly outside the scope of EU regulation, for example employees based in the US who provide services to the UCITS Management Company.


ESMA explicitly addresses the issue around proportionality which has been a recent hot topic given the European Banking Authority's ("EBA") initial view as set out in its consultation on revised CRD IV remuneration guidance.  In that consultation, the EBA proposed removing the ability for firms to disapply the CRD IV "Pay Out Process Rules" (requiring deferral of 40% to 60% of variable remuneration, payment of 50% of variable remuneration in instruments, and the operation of malus and clawback policies, as well as the cap on variable remuneration of up to 200% of fixed remuneration).  Given that the proportionality principle under the AIFMD and UCITS V is based on materially the same wording as in the CRD IV directive, ESMA has had to address this issue specifically.

ESMA states that the EBA's view is only one reading of the wording of the relevant text, and then goes on to state that it is not proposing to adopt the EBA's approach in the context of the UCITS V guidance.   ESMA says that: "A possible reading … is that the co-legislators envisaged the possibility that the application of proportionality could lead a UCITS to disapply certain of the remuneration principles. "  ESMA is instead proposing to maintain the possibility (in appropriate cases) of firms being able to disapply the Pay Out Process Rules under AIFMD and UCITS V. 

The question therefore arises as to whether this approach will be limited to the implementation of the remuneration principles under AIFMD and UCITS V, or whether it is now more likely that the ability to disapply the Pay Out Process Rules could be maintained under CRD IV.  Might the EBA now change its position or, irrespective of the EBA's position, could local regulators feel justified in taking the same view as ESMA and decline to follow the EBA on this point?


A key area in which ESMA proposes that the UCITS V guidelines will mirror the AIFMD provisions is in respect of the delegation of portfolio and/or risk management, which seems to resolve one key area of uncertainty.  When delegating, a UCITS Management Company will be required to ensure that it either delegates to a firm which is subject to equally effective regulation (CRD IV and AIFMD are specifically mentioned, but the UK would presumably also be able to continue to permit the BIPRU Remuneration Code to be treated as equivalent), or to enter into contractual provisions with the delegate to ensure that the UCITS V remuneration requirements are not circumvented.

50% in Instruments

One aspect that is bound to draw attention is the proposal which relates to the payment of 50% of variable remuneration in instruments unless the management of the UCITS accounts for less than 50% of the total portfolio.  Here, ESMA's initial suggestion is that the assets comprised in any individual UCITS should be compared to the total UCITS assets managed by the Management Company, in order to determine whether the proportion of the total for the relevant UCITS is above or below the 50% threshold.