The Financial Conduct Authority’s eagerly awaited final guidance on the AIFMD (Alternative Investment Fund Managers Directive) remuneration regime has been published. The guidance sets out how the AIFM Remuneration Code should be interpreted and applied by alternative investment fund managers.
Dan Roman, UK head of hedge funds at KPMG, commented: “The guidance provides a lot of clarity to the alternatives industry, specifically around the proportionality regime, delegation provision, LLP partners or members, remuneration disclosure and payments in units, shares or other instruments.
“Affected businesses will need to review their compliance plans as a matter of urgency, to ensure they are robust under these new guidelines which have immediate effect.
“The biggest surprise to come out of the FCA’s announcement is their expectation that managers of the majority of alternative investment fund assets in the UK will be subject to the full regime. This will be particularly worrying news for hedge funds above the £1bn AUM threshold that had intended to rely on the additional proportionality factors to be exempt from this. The proportionality regime, as we understood it, was intended to be a two stage process. It remains to be seen whether equal weight will be attached by the FCA to the outcome of the additional proportionality factors in stage two.”
Key points addressed in the guidance document include:
- Proportionality regime: The thresholds permitting AIFMs to disapply the Pay-out Process Rules are now set at GBP 5 billion AUM for closed-ended unleveraged AIFs and £1 billion AUM for all other types of managed AIFs. The FCA states that they ‘ expect these thresholds to create the presumption that managers of the majority of AIF assets in the UK will be subject to the full regime because of the concentration of assets in a number of very large asset managers ’.
- Other proportionality factors: Additional colour has been provided in relation to the factors used to determine whether there are characteristics of the AIFM or AIF that render it less complex or smaller scale, as compared to its peers in the UK or EU market.
- Delegation provision: The FCA has confirmed that the only remuneration regimes they consider to be ‘equally as effective’ to the AIFM Remuneration Code are the Capital Requirements Directive (CRD) and the Markets in Financial Instruments Directive (MiFID).
- Further guidance for partners or members of an LLP: Clarification on how to categorise payments received by partners or members of an LLP. I.e. the split between the portion considered to be ‘return on equity’ in the firm and the portion that represents ‘payment for their services to the AIFM ’. Guidance is also given on benchmarking methodologies that might be used and possible tax implications for partners, as well as the further bifurcation between fixed and variable remuneration.
- Remuneration disclosure: The disclosures on remuneration in the AIF annual report may need to be published before the AIFMD compliant remuneration policy has come into force and/or before the first post-authorisation performance year has ended. The FCA confirms that when faced with inappropriate circumstances the AIFM may consider omitting the disclosure from the relevant annual report whilst noting the allowable reason for doing so.
- Payments in units, shares or other instruments: The FCA gives further guidance to disapplying the rule for 50% of variable remuneration to be paid out in shares of the AIF. This can be done using either the proportionality rule or because the legal structure of the AIFs precludes it. However, best practice will remain for firms to elect to pay AIFM Code Staff in instruments linked to the AIFM or its parent company, or instruments linked to a weighed performance average of the AIFs managed.