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Compliance

UCITS V: Aligning Remuneration Rules with AIFMD

Posted on 17 Apr 2014

April 17 2014

The European Parliament adopts remuneration rules aimed at preventing managers of UCITS funds from taking excessive risks

Intended to protect smaller investors and restore consumer confidence after the financial crisis, the amended Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities as regards depositary functions, remuneration policies and sanctions (also known as ‘UCITS V’), was yesterday adopted in a plenary session of the European Parliament. Laven Partners examines the new requirements around remuneration and considers the implications for UCITS fund managers.

UCITS V has been trumpeted as essential for investor protection, with Michel Barnier, Internal Market and Services Commissioner, a particularly vocal proponent of the legislation. Welcoming yesterday’s vote, which was approved by a majority of 607 to 28, Mr Barnier declared: “Consumers were shocked by the extent of the Madoff fraud, how inadequately their assets were protected, and how differently their compensation claims were handled in the various Member States. The amended Directive will address those problems. I am very satisfied with the outcome”.

The approval in plenary marks the next step in the legislative process for UCITS V, following 25 February when political agreement was reached with the European Parliament and the Council of the European Union.

UCITS V remuneration requirements are effectively converging with those for hedge fund managers under AIFMD. The broad reform of pay and bonus awards for investment firms, which also includes CRD IV, ultimately stems from the same G20 commitment in 2009 to mitigate risk in the financial services sector.

Key provisions

The UCITS V remuneration provisions are contained in new Articles 14a and 14b of the amended text. Of particular note are the following requirements:

  • Management companies must establish remuneration policies and practices that 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 UCITS they manage.
  • Such policies and practices shall apply to those categories of staff including senior management, risk takers, control functions and employees remunerated within the same bracket as senior management.
  • ESMA is to publish further guidance on the categories of staff to whom the policies and practices should apply. The guidelines should, to the extent possible, be aligned with those for AIFMD.
  • Fixed and variable components of total remuneration must be appropriately balanced.
  • At least 50% of a manager’s variable pay should be paid in the assets of the UCITS, unless the management of UCITS accounts for less than half of the total portfolio managed.
  • At least 40% of variable remuneration shall be deferred for at least 3 years.
  • Where the variable share of remuneration is particularly high, at least 60% of this share shall be deferred.
  • Firms that are significant in size and scope of activities shall be required to establish a remuneration committee.

Some of these restrictions may appear onerous, though it is worth remembering that earlier drafts of the text would have imposed a bonus cap of 100% of fixed pay on UCITS fund managers. This was eventually rejected by the European Parliament in 2013 to the relief of many.

Next steps

The Council is expected to approve the adoption of UCITS V in the next few weeks. Although the rules are not expected to be implemented across the EU until the end of 2015 at the earliest, at Laven Partners we would be glad to discuss with you the potential impact of these new rules on your operations.

Contact
Jerome Lussan, Laven Partners, jerome@www.lavenpartners.com +44 207 838 0010