At the end of last week, the European Securities and Markets Authority (ESMA) published its long overdue final guidelines on UCITS V remuneration; according to Linklaters, the key difference is on the application of proportionality on which ESMA has also written a letter to the European Commission, European Council and European Parliament.

The UCITS guidelines take effect for full performance years starting on or after 1 January 2017 and include an amendment to the AIFMD remuneration guidelines (which has the same effective date) in relation to the treatment of groups. The guidelines follow the publication of the draft UCITS remuneration guidelines in July 2015. For a comparison of the final and draft UCITS remuneration guidelines, see http://www.linklaters.com/pdfs/mkt/london/Comparison_Guidelines_on_sound_remuneration_policies_under_the_UCITS_Directive_and_AIFMD.pdf

The four key points are as follows:

- Proportionality - Whilst ESMA thinks some firms should be able to disapply the UCITS and AIFMD payout process rules on deferral, payment in non cash and malus, it doesn’t think it can interpret the directives to allow this without legislative change. As a result, the UCITS guidelines do not include any wording on the possibility to disapply these pay out process rules. However, ESMA hopes that legislative changes will be proposed later this year so that clarity is obtained ahead of the 2017 performance year. Firms should also note that whilst ESMA has not yet amended the ESMA AIFMD guidelines to take the same approach (so the AIFMD guidelines still allow AIFMs to disapply the payout process rules) it envisages that they will be brought into line with the approach under UCITS once the proportionality principle is clarified. The key question is how national regulators will interpret the AIFMD and UCITS guidelines pending legislative change. It is possible that they could take the same approach as the UK regulators have with the EBA guidelines under CRD and decide to continue to allow rules to be disapplied pending legislative change.

- Delegation – It is unclear how the rules applicable to delegates will be applied to EU regulated entities which are not authorized under AIFMD or CRD IV (e.g. UK BIPRU firms). Also, given the discussions onproportionality under UCITS, it is unclear whether delegates will be required to apply the more onerous UCITS rules on deferral, payment in non cash, retention and malus. However, as the guidelines are otherwise drafted in a very similar manner to the AIFMD guidelines, they may be interpreted by national regulators in a comparable fashion.

- Overlap with CRD and AIFMD remuneration regimes – Where staff are subject to CRD, UCITS and AIFMD, ESMA states that either (i) their pay can be apportioned to satisfy the different requirements of the directives, or (ii) the requirements of the most appropriate directive can be applied. However for the latter approach, it is unclear whether parent company shares, instead of AIF/UCITS units, can be used to satisfy the payment in non cash rule because ESMA states that in such cases “variable remuneration should always be paid in the AIF instruments or UCITS instruments”.

- Payment in non-cash instruments – ESMA says that 50% of variable pay is required in non-cash units if the total of all the UCITS funds managed represent more than 50% of the total AuM. This differs from the draft UCITS guidelines where the proposal was to calculate the 50% threshold on an individual fund basis.

ESMA Guidelines on AIFMD remuneration

ESMA proposes to make it clear that there should be no exception for an AIFM which is a bank subsidiary of the sector specific remuneration principles set out in the AIFMD. This suggests that such firms should pay AIFM Identified Staff in units or notional units in the AIFs (rather than parent company shares as is currently allowed by the FCA under certain circumstances). Linklaters has stated that it will follow up with national regulators for clarity on this.