News Flash: ESMA consultation paper on sound remuneration policies

On 23 July 2015 ESMA released a consultation paper relating to its guidelines on sound remuneration policies under the UCITS and AIFM directives. This documents represents the first step in the development of the guidelines on remuneration policies required by the UCITS V Directive, setting out ESMA’s formal proposals for these guidelines and also proposes a targeted revision of the AIFMD Remuneration Guidelines (ESMA/2013/232).

A comparison table in which the relevant UCITS V provisions on remuneration are marked up against the corresponding AIFMD provisions is also provided.

Application of the remuneration rules to delegates

One of the most salient information of this paper concerns the application of the remuneration rules to delegates. In particular, ESMA aims to avoid the circumvention of the remuneration rules by the management companies through delegation of their activities to external service providers. This shall be achieved by applying the same approach as followed under AIFMD meaning that, when delegating investment management activities according to Article 13 of the UCITS V Directive, where the remuneration rules would otherwise be circumvented, management companies should ensure that:

-          the entities to which investment management activities have been delegated are subject to regulatory requirements on remuneration that are equally as effective as those applicable under these guidelines; or

-          appropriate contractual arrangements are put in place with entities to which investment management activities have been delegated.

“Equally as effective” should in our view mean “same effect” rather than “same legislation” and it remains to be seen whether the final guidelines will further specify this concept.

This system of equivalence between UCITS V, AIFM and CRD IV should mean that no material compliance with the UCITS V rules should be required for a UCITS management company delegating PM to, say, a bank whose relevant staff are subject to CRD IV.