AIFMD and sound Remuneration policy

AIFMD – Remuneration policy

With the date nearing for the commencement of the AIFMD, 22 July 2013, the European supervisor ESMA has met its obligation to come up with further regulations. On 12 February 2013, ESMA issued its ‘Guidelines on sound Remuneration Policies under the AIFMD’. This is a further elaboration of the provisions of the remuneration policy as incorporated in article 13 and Supplement II of the AIFMD.

The common thread is that administrators must have a remuneration policy. The requirements described are similar to the requirements of the ‘Contained remuneration policy’, which already applies to financial enterprises in the Netherlands, but are more rule-based and detailed in some areas.

The essence of a sound remuneration policy under the AIFMD
The requirements from the AIFMD apply to the entire remuneration policy of administrators or investment institutions and not only to variable remunerations or bonuses. There are however specific rules for the distribution of variable remunerations and bonuses.

The point of departure is that variable remunerations cannot have a negative effect on the actions of the employees involved with regard to the investors’ interests, the financial solidity of the administrator and the investment institution and the reputation of the financial sector.

Below, a number of elements from the Guideline are initially highlighted. Subsequently an indication is given of the approach that can be taken by administrators of investment institutions to meet Guideline requirements. Experience shows that this can be a complex and laborious task.

Core elements

ESMA’s Guideline contains many details. The core provisions described below are a summary of a number of these requirements.

  1. The administrator has a policy at his disposal with regard to remunerations which has been approved by the internal regulator (the Supervisory Board). This policy affects all forms of fixed and variable remunerations, including pension schemes, staff discounts and car allowances.
  2. The policy must be based on a risk analysis aimed at controlling risks relating to the administrator and the administrated investment institutions.
  3. Remunerations, and in particular their variable components, may not cause or encourage risk-driven behaviour.
  4. Variable rewards should depend on quantitative as well as qualitative criteria, for instance not only risk indicators and financial results, but also ‘soft criteria’ as customer satisfaction, cooperation and creativity.
  5. At least 50% of the variable remunerations must be paid in financial instruments related to the administrator and the administrated investment institution(s). This must contribute to the risk-awareness of the employee in question and make him or her (more) oriented towards the long term.
  6. At least 40% of the total variable remunerations must be paid in instalments over a period of at least three to five years. The administrator should have a policy based on the five components prescribed by ESMA, determining which terms apply for which groups of employees.
  7. Whether a postponed remuneration is paid out eventually must depend in part on performance criteria for the year in question. In case of underperformance of the employee or the enterprise, based on criteria established beforehand, a penalty can be applied.
  8. Granted but not yet paid variable remunerations may not be paid out unless the administrator is sufficiently financially solid.
  9. The administrator may not use constructions or entities to avoid the objectives of the legally required remunerations policy.
  10. If asset management and/or risk management have been outsourced the party in question must also have a sound remuneration policy.
  11. Departure bonuses (golden handshakes) where payment is not dependent on performance standards and on risk-based criteria, do not in principal comply with the ratio of sound remuneration policy.

Nor should administrators with a limited volume and complexity be permitted to deviate from parts of the ESMA-requirements, as indicated by ESMA.

The approach to achieve a sound remuneration policy
Drawing up a sound remuneration policy is laborious. In the hyperlink we will look at the steps you need to take to achieve this.

In conclusion
The remuneration policy that the administrator is required to set up under the AIFMD aims at controlling risks. It is not a ban on variable bonuses, but a remuneration policy based on risk analysis. In this way a controlled and sound remuneration policy can be reached, in the interest of the investors, the administrator and the financial sector, with the proper controlling measures and criteria that have been established beforehand.

The requirements drawn up by ESMA are comparable with the requirements imposed in the Netherlands by the ‘Contained Remuneration policy’. In certain areas however, ESMA goes into more detail of the requirements, which in addition, are also more ‘rule-based’.

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