Skip to content

ESMA's finalised remuneration guidelines for UCITS provide no further clarity on proportionality



Further guidance on UCITS remuneration was published on 31 March 2016 by the European Securities and Markets Authority (ESMA) in the form of its finalised Guidelines on Sound Remuneration policies under the UCITS Directive and AIFMD.

The guidelines should be of assistance to UK UCITS management companies – which are required to apply the UCITS remuneration code to their first full performance period beginning after 18 March 2016.  However, UCITS management companies awaiting confirmation of ESMA’s approach to proportionality will be disappointed.

1. Remuneration and proportionality

The UCITS Directive itself indicates that a proportionate approach in the application of the remuneration principles should be permitted, stating that UCITS management companies must comply with the remuneration principles “in a way and to the extent that is appropriate to their size, internal organisation and the nature, scope and complexity of their activities”.

The FCA is supportive of this proportionate approach, highlighting in both its consultation paper and its policy statement on UCITS V that it “believes that the principle of proportionality is a cornerstone of the UCITS Directive”.  The FCA also notes that all of the other remuneration codes (including the AIFMD remuneration code) allow firms to disapply certain remuneration requirements on the grounds of proportionality.

The FCA’s approach to UCITS V implementation was therefore to include the proportionality principle in its UCITS remuneration code (at SYSC 19E) as well as specific guidance to allow UK UCITS management companies to disapply specific remuneration provisions where rewards to their remuneration code staff fell below certain thresholds.

2. ESMA and the EBA – differing approaches to proportionality

The FCA included these provisions following ESMA’s consultation on UCITS V remuneration guidelines which took the view that a proportionate approach was permitted. However, the European Banking Authority (EBA) took a different approach in its final guidelines on sound remuneration policies under CRD IV. In particular, the EBA has stated in its opinion on the application of the principle of proportionality that, although the disapplication of remuneration code requirements should be possible for small and non-complex institutions and for staff that receive only a small amount of variable remuneration, further legislative changes would be needed to CRD IV to allow this. 

3. ESMA's final guidelines

Much of the feedback received by ESMA from the consultation on its draft UCITS V remuneration guidelines highlighted the negative impact that a U-turn on proportionality would have on UCITS management companies.

However, when finalising its guidelines, ESMA was obliged to balance "the co-legislators’ steer to ensure alignment with the AIFMD remuneration guidelines" and its obligation to closely cooperate with the EBA upon UCITS V implementation in order to ensure consistency with requirements developed for other financial services sectors.

ESMA has therefore decided not to include its previous draft guidance on proportionality in its final UCITS remuneration guidelines; however, a proportionate approach is not explicitly prohibited by the final guidelines.

4. Where to now?

For the time being UK UCITS management companies can continue to apply the proportionality guidance set out in SYSC 19E. However, in their final policy statement on UCITS V, the FCA did state that it would revisit its approach to proportionality when ESMA's UCITS V remuneration guidelines were finalised.

It is clear that ESMA believes the conflicting European approaches to proportionality need to be resolved; it has issued a letter to the European institutions setting out its views on proportionality and calling for further clarity.

Needless to say, such uncertainty at a time when many UK UCITS management companies are finalising and implementing their remuneration policies is not to be welcomed. However, firms may take some comfort from the fact that the PRA and FCA recently notified the EBA that they would not comply with the bonus cap set out in the EBA's remuneration guidelines; it is therefore hoped that the FCA will also retain its current approach to proportionality for the time being – despite the uncertainty at the European level.

UK UCITS management companies which are intending to apply the proportionality provisions set out in SYSC 19E will need to keep a close eye on developments coming from the FCA and at a European level. 

If you require further information on anything covered in this briefing please contact Jessica Reed ([email protected]; 020 3375 7518), Grania Baird ([email protected]; 020 3375 7443) or your usual contact at the firm on 020 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, May 2016

Want to know more?

Contact us

About the authors

Grania Baird banking lawyer

Grania Baird


Grania leads the financial services regulatory and funds practice at Farrer & Co. She has over 20 years of experience acting for clients across the sector, including private banks, wealth managers, asset managers and, more recently, payment services firms and Fintech businesses.

Grania leads the financial services regulatory and funds practice at Farrer & Co. She has over 20 years of experience acting for clients across the sector, including private banks, wealth managers, asset managers and, more recently, payment services firms and Fintech businesses.

Email Grania +44 (0)20 3375 7443
Back to top