Wed, Feb 5, 2014

FCA publishes General Guidance on the AIFM Remuneration Code

On Friday 31 January 2014 the FCA published Finalized Guidance on the AIFM Remuneration Code. This guidance is applicable to Full Scope UK AIFM along with the AIFMs Remuneration Code rules laid down in SYSC 19B.  This guidance was consulted on in CP13/9 which was published in September 2013 and came into force on 31 January 2014.

CP 13/9 also included some proposed changes to the Handbook in SYSC 19B and the FCA did not receive any comments on these changes.

The Finalized Guidance has not substantially altered since the draft text was published but the following changes have been made:

  • Whilst the timing of when Firms need to implement the AIFM Remuneration Code remains the same (i.e. in first full performance period), the FCA has provided some guidance on the timing of Remuneration disclosures required in the Annual Report of an AIF.
  • The size of Assets under Management which acts as thresholds for proportionality has been set at the mid-point of the range consulted on in CP13/9.
  • Clarification has been provided on which Remuneration regimes are equally as effective for the purposes of delegation.
  • Amended guidance on proportionality for AIFMs managing authorized funds and the assessment of whether activities are deemed complex or not.
  • For Partnerships and LLP’s, the FCA will allow a mixture of approaches to remuneration and also allow Firms to switch between different approaches.  The FCA also notes that their guidance on Deferred Remuneration for Partners/Members will be dependent on any changes in tax law and practice.

Further details of these changes are described below.


Once a Firm has become authorized as a Full Scope AIFM it will be subject to the AIFM Remuneration Code (as detailed in SYSC 19B) as well as the ESMA Guidelines on sound remuneration policies under the AIFMD (ESMA/2013/232) (the “Guidelines”).  The Finalized Guidance on AIFM Remuneration Code will be referenced as a link available from SYSC 19B and should be interpreted as if it is an Annex to SYSC 19B.1.

Summary of General Guidance

Timing and Scope of Remuneration Code

As detailed above, the Finalized Guidance is applicable to Full Scope UK AIFMs from 31 January 2014.  Firms however, are not expected to implement the AIFM Remuneration Code until the first full performance period following their initial authorization as an AIFM (e.g. for a Firm with a 1 January to 31 December performance period that gets authorized as an AIFM on 22 July 2014 the AIFM Remuneration Code will only be applicable for the performance period 01 January 2015 to 31 December 2015).

The Annual AIF Report, as required by Article 22 of AIFMD, is made available no later than six months after the financial year end of the AIF and includes certain disclosure in relation to remuneration at the AIFM. The timing of the implementation of the AIFM Remuneration Code may result in AIFMs having to produce Annual Reports prior to the date of implementation.

The FCA has confirmed in the Finalized Guidance that if the information required by the disclosures is not available or will not provide materially relevant, reliable, comparable and clear information to investors, the AIFM can omit the disclosure but must include an explanation of the omission.

Small AIFMs

The Finalized Guidance confirms that Small AIFMs are not required to comply with the AIFM Remuneration Code, which is not in line with the recommendation detailed in the ESMA Guidelines.


The Finalized Guidance on proportionality includes detail on the proportionality elements which should be considered when an AIFM is assessing whether it should apply all of the Pay-Out Process Rules.

As a reminder the Pay-Out Process Rules are:

  • Retained units, shares or other instruments (SYSC 19B.1.17R);
  • Deferral (SYSC 19B.1.18R); and
  • Performance adjustment (SYSC 19B.1.19R & SYSC 19B.1.20G).

The assessment of proportionality is one of the key changes for Firms who were previously subject to the CRD Remuneration Code as Firms are now required to undertake a full assessment of a number of proportionality elements rather than just relying on the fact that their prudential categorization means they fall within a certain level.  This assessment of proportionality may end up with the same result as under the CRD Remuneration Code, but the process under which Firms can determine what is proportionate, will be more in-depth and may well apply to more staff than previously.

Full details of the proportionality elements are set out in the guidance and the FCA has now confirmed the AuM thresholds as set out below.  The AuM is the Net Asset Value at the latest valuation point (excluding the AuM for any AIFs which the AIFM is managing under delegation).


Type of Firm

AuM Threshold


AIFMs which manage portfolios of AIFs that are unleveraged and have no redemption rights exercisable during a period of five years following the date of initial investment in each AIF.

Less than £5 billion

It is appropriate to disapply Pay-Out Process Rules

Greater than £5 billion

It is not appropriate to disapply Pay-Out Process Rules

AIFMs which manage portfolios of AIFs in other cases, including any assets acquired through the use of leverage.

Less than £1 billion

It is appropriate to disapply Pay-Out Process Rules

Greater than £1 billion

It is not appropriate to disapply Pay-Out Process Rules


Other changes documented in this final guidance in relation to proportionality include:

  • In relation to the assessment of the nature of any delegation, one of the key elements to consider is whether the delegate is subject to regulatory requirements on remuneration which are equally as effective as those to which the AIFM is subject.  The FCA has now clarified which regimes they deem to be equally effective (which are the CRD and MiFID remuneration regimes) and note that they have not, at this stage, included the UCITS remuneration regime as this has not yet been adopted.
  • In relation to the assessment of strategies and styles of AIFs, the FCA has stated that the AIFM may consider its activities as non-complex where the AIF is authorized and regulation limits the AIF strategies carried out and/or limits the scope of investment which results in investor risk being mitigated (e.g. for a NURS).


The guidance also provides a number of examples of how proportionality can be applied.

Remuneration Committees

The Guidelines confirm that only significant AIFMs are required to establish a remuneration committee in line with SYSC 19B.1.9R(1) and that each of the proportionality elements should show the AIFM is significant for it to be deemed a significant AIFM. Firms are able to set up a remuneration committee even if they are not significant.

Treatment of payments to Partners or Members of an AIFM

The guidance details how Firms should treat Remuneration that is paid to Partners or Members; Firms should firstly determine if a Partner/Member is code staff and then the proportion of remuneration for Members/Partners that is subject to the AIFM Remuneration Code.  As part of this determination Firms will need to allocate the payments or benefits the Partners/Members are paid between that which are a return on investment, in a similar way to dividends in a company, and the remainder, if any, divided between Fixed Remuneration and Variable Remuneration.

The final guidance also discusses the issues with unfunded tax charges in relation to deferred Remuneration and notes that a statutory tax mechanism has been set up and, subject to Parliamentary approval of the Finance Bill 2014 legislation and tax guidance, SYSC 19B.1.18R will be updated to note that Deferred Variable Remuneration should be read as being “net-of-tax” when the partnership uses the statutory tax mechanism, such that it will pay tax on Deferred Remuneration upfront.  If the statutory tax mechanism is not used deferral should be on a gross of tax basis.

Remuneration in the form of units, shares or other instruments

For those Firms not able to disapply this requirement there is further guidance on the circumstances in which the legal structure or instrument of the AIF makes it impracticable to apply this rule. In these cases, the AIFM should consider whether payments in units linked to other entities would align the incentives of relevant staff with those of the AIFs.

Minimum retention periods

This section of the guidance sets out that the FCA considers a retention period of six months for retained units, shares or other instruments is sufficient, provided risk management is sound and effective.


All Full Scope UK AIFMs should ensure they are familiar with the published guidance and determine the dates of their first full performance period to which the requirements will apply.

Whilst Firms who are currently subject to the CRD Remuneration Code will be familiar with this regime, except for the different approach to proportionality, those Firms who are not currently subject to any form of remuneration code will find the changes far more significant.

Existing MiFID Investment Firms should, as a matter of best practice, apply their current Remuneration Code (which is now detailed in SYSC 19C) until the commencement of the first full performance period after authorization as an AIFM, which will then be subject to the AIFMD Remuneration Code.

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