On 23 July 2015 the European Securities and Markets Authority (ESMA) published a consultation paper in respect of its guidelines on sound remuneration policies under the UCITS Directive and AIFMD (the CP). This consultation closed in October 2015.

Article 14a(4) of Directive 2009/65/EC, as amended by Directive 2014/91/EU (UCITS V) provides that ESMA shall issue guidelines addressed to competent authorities or financial market participants concerning the application of the remuneration principles.

The CP is the first step in the development of the guidelines on sound remuneration policies (the Guidelines) required by UCITS V and sets out ESMA’s formal proposals for these guidelines. Incidentally, the CP also proposes a targeted revision of ESMA’s guidelines on sound remuneration policies under the AIFMD (ESMA/2013/232), which were published on 3 July 2013.

ESMA has yet to finalise the Guidelines and so regard should be had to the final Guidelines once published, the content of which may diverge from the draft discussed in this note.


UCITS V entered in to force on 17 March 2015, giving member states until 18 March 2016 to transpose UCITS V into national law. UCITS V was introduced in response to the various financial crises and is in line with other global and EU initiatives such as banking reform and AIFMD. Under UCITS V, UCITS management companies (in common with alternative investment fund managers under AIFMD) are obliged to implement remuneration policies and practices for staff to address the potentially detrimental effect of poorly designed remuneration structures on the sound management of risks and on the control of risk-taking behaviour by individuals in respect of the UCITS they manage.

Who is affected?

The remuneration provisions apply to management companies of UCITS (ManCos) and self-managed UCITS (UCITS). In this context, UCITS V referred to categories of staff whose professional activities have a material impact on the risk profiles of the UCITS that they manage, including, senior management, risk takers, and control functions and employees whose total remuneration falls within the bracket of senior management or risk takers.

Notably, the recitals of UCITS V, though not legally binding, state that the remuneration requirements should apply, in a proportionate manner, to any third party which takes investment decisions that affect the risk profile of the UCITS because of functions delegated to it. The CP states that ESMA will take the same approach as under the AIFMD Remuneration Guidelines, such that management companies should not circumvent the remuneration requirements through delegation of activities to external providers. In short delegates responsible for investment management will be impacted.

The CP proposes that the Guidelines apply to the following staff unless it is verified that the relevant member of staff has no material impact on the risk profile of the UCITS:

  • executive and non-executive directors;
  • senior management;
  • staff involved in compliance, internal audit and risk management functions;
  • staff responsible for heading up the portfolio management,
  • administration, marketing and human resources divisions;
  • other risk takers who take decisions that materially affect the risk positions of the UCITS; and
  • categories of staff to which investment management activities have been delegated by the UCITS, whose professional activities have a material impact on the risk profile of the UCITS.

The list is not definitive. The job functions and responsibilities within the UCITS/ManCo should be independently analysed and a proper assessment of the roles that could materially affect the risk profile of the UCITS should be identified. It is likely that at least in some cases, those staff members who do not fit into one of the above categories, but whose remuneration is as high as or higher than senior executives and risk takers within the UCITS/ManCos, will in fact be found to be exerting material influence in some way on the risk profile of the UCITS. In other instances this will not be the case.

When delegating investment management activities, the Guidelines require that either:

  • the entities to which investment management activities have been delegated are subject to equivalent regulatory requirements on remuneration; or
  • appropriate contractual arrangements are put in place in order to ensure that there is no circumvention of the remuneration requirements. These contractual arrangements should cover any payments made to the delegates’ identified staff in respect of compensation for the investment management activities on behalf of the UCITS/ManCo.

Equivalency and other sectoral rules

The Guidelines provide that a delegate would be considered subject to equivalent regulatory requirements on remuneration if the delegate is subject to the remuneration rules under either the Capital Requirements Directive (CRD IV) and AIFMD or if the staff of the delegate (who are identified staff for the purpose of the Guidelines) are subject to CRD IV or AIFMD remuneration rules.

What is remuneration?

UCITS V provides that the remuneration comprises of any benefit (direct or indirect, monetary or non-monetary) paid by the UCITS/ManCo to the affected individuals including fixed and variable components of salaries and discretionary pensions and specifically includes performance fees and the transfer of shares of the UCITS.

Payments or benefits that are part of a general, non-discretionary policy of the UCITS and which pose no incentive effects in terms of risk management can be excluded from this definition of remuneration.

There are additional rules regarding discretionary pension benefits. These should be paid in the form of instruments where possible and five year retention periods are likely to apply to such discretionary pension benefits.

Pay-out Process for Variable Remuneration

One of the most contentious and problematic aspects of the AIFMD Remuneration Guidelines were the Pay-out Process Rules for variable remuneration. Similar rules are included in the UCITS Guidelines, though there are some important differences. Where the Pay-out Process rules apply for variable remuneration, the following are key factors to consider:

  • the proportion of the variable remuneration that should be deferred (i.e. not paid at the end of the accrual period to which it relates) should range from 40-60% and depending on the impact the staff member (or category of staff) can have on the risk profile of the UCITS, the responsibilities and tasks performed and the amount of variable remuneration (the higher the amount, the bigger the percentage that should be deferred);
  • the deferral period must be at least three years though pro-rata vesting is permitted (e.g. one third of the deferred remuneration vested at the end of year one, year two and year three respectively where “year one” is the first year after the end of the accrued period. Pro-rata vesting should not take place more frequently than on a yearly basis and the first amount should not vest sooner than 12 months after the accrual;
  • the deferral period should be calculated on the basis of the holding period recommended to the investors of the UCITS concerned (subject to a minimum deferral period of three years);
  • there are provisions around paying variable remuneration in instruments provided this does not trigger interest misalignment or encourage risk taking which is inconsistent with the risk profiles, rules or constitutional documents of the relevant UCITS;
  • variable remuneration paid in instruments should be subject to retention periods but these retention periods do not count towards the minimum deferral period of an award as referred to above. The rationale for this is that where the awarded is deferred the amount can be adjusted due to back testing of the underlying performance hence leading to a reduction in the number of instruments that will eventually be paid out;
  • there is a requirement to pay at least 50% of variable remuneration in shares or units of a UCITS fund (or equivalent share-linked instruments etc) if the management of that UCITS fund accounts for at least 50% of the total portfolio managed by the management company under its authorisation under the UCITS Directive (i.e. any portfolios managed under an AIFMD authorisation should not be taken into account);
  • various claw-back provisions will need to apply in certain circumstances. In addition, for deferred remuneration an ex-post risk analysis should be undertaken which may reduce the amount of deferred remuneration payable.


UCITS V provides that when establishing and applying the remuneration policies, UCITS/ManCos must comply with the remuneration requirements in a way and to the extent that is appropriate to their size, internal organisation and the nature, scope and complexity of their activities.

From that starting point, the CP proposes that proportionality may, subject to certain conditions, lead to the disapplication of only certain requirements if this approach can be reconciled with the risk profile, risk appetite and strategy of the UCITS specifically the pay-out process rules and the need to have a remuneration committee.

In addition, to the size, internal organisation and nature, scope and complexity of its activities, the CP proposes that the UCITS/ManCo consider any relevant other criteria.

Non-EU delegates

We await guidance in relation to the remuneration requirements for non-EU delegates but anticipate that the requirements are likely to follow those provided in the alternative space under AIFMD. There are key issues that need to be considered by non-EU delegates under AIFMD which are also likely to apply in the UCITS context:

  • where investment management activities of the UCITS are delegated to a non-EU delegate, that non-EU delegate must be subject to local regulatory rules on remuneration broadly equivalent to the European rules. If this is not the case, then a contract must be entered into with the delegate that will, in effect, impose the European standards on the delegate;
  • there may be scope to dis-apply some of the requirements in circumstances where the activities carried out by the non-EU delegate have little or no scope to affect the risk profile of UCITS, or in circumstances where the delegate’s investment authority is strictly limited, or where on the grounds of proportionality (as discussed above) it would be appropriate to disapply certain rules, such as the pay-out process rules.

Next Steps and Timings

UCITS V does not impose a specific deadline for the finalisation of the Guidelines but with the transposition deadline for UCITS V being 18 March 2016, we hope to see the Guidelines soon.

We would expect that remuneration rules would apply from the first full financial year starting after 18 March 2016 at the earliest but this is another point to be confirmed.

Once effective, details of remuneration paid will have to be disclosed in the UCITS annual report and the KIID will need to disclose where details of the UCITS remuneration policy can be found.

ESMA recently stated that it is not necessary to include the remuneration-related information in annual reports for periods ending before 18 March 2016. For annual reports relating to periods ending on or after 18 March 2016, but before the UCITS/ManCo has completed its first annual performance period, the remunerationrelated information should be included on a best efforts basis and to the extent possible, explaining the basis for any omission.