The Directive lays down principles for firms to ensure that their remuneration policies and practices “are consistent with and promote sound and effective risk management and do not encourage risk-taking which is inconsistent with the risk profiles, rules or instruments of incorporation of the AIFs they manage.”
The remuneration provisions fall into three categories:
- Governance - who gets involved in the decision-making;
- Risk alignment - the design and structure of remuneration; and
- Transparency - disclosure of the amounts paid and the processes involved.
In addition to an authorised AIFM being subject to the remuneration rules, the rules also require an authorised AIFM to (i) ensure that a delegate is subject to regulatory remuneration requirements that are equally as effective as those under the Directive; or (ii) put in place contractual arrangements with a delegate to ensure that there is no circumvention of the Directive remuneration rules.
Where are the rules?
The Directive contains an annex setting out the detailed principles to be adhered to when establishing and applying remuneration policies for staff whose professional activities have a material impact on the risk profiles of the AIFM and/or the AIF they manage. Click here for a link to the remuneration policies set out in Annex II of the Directive. In addition to the Directive, the Level 2 Regulations contain provisions relating to an AIFM’s remuneration policy, conflicts of interest issues relating to remuneration, and the disclosure of remuneration.
On 11 February 2013, ESMA issued guidelines (the “Guidelines”) on remuneration policies and practices to assist in the implementation of the Directive. Click here for a link to the Guidelines. The Guidelines do not have direct effect in EU Member States. However, EU Member States were required to implement the Directive in accordance with the final Guidelines.
In the UK, the Directive has been implemented by a combination of HM Treasury Regulations and FCA rules:
- The FCA transposed the Directive’s remuneration rules and principles through the introduction of a new Remuneration Code at SYSC 19B of the FCA Handbook, which is applicable to firms caught by the Directive. In January 2014, the FCA published finalised guidance on the AIFM Remuneration Code at SYSC 19B. This guidance followed the publication of two consultation papers by the Financial Services Authority in November 2012 and March 2013 respectively, with the latter consultation paper discussing responses received to the former consultation paper.
- HM Treasury released a consultation paper on 11 January 2013 on the transposition of the Directive which, among other things, sought views on the proportionate implementation of the Directive remuneration provisions (specifically to disapply the Directive’s remuneration provisions to sub-threshold AIFMs which manage authorised funds). Click here for the March 2013 consultation, which discusses the responses received by the HM Treasury to the consultation.
Further details on the Directive remuneration rules are available on our remuneration microsite accessible via the Linklaters Knowledge Portal.
If you are not already registered to the Linklaters Knowledge Portal, please email us to request access to the microsite.