The European Securities and Markets Authority ('ESMA') has published Guidelines on Sound Remuneration Policies under the Alternative Investment Fund Managers Directive ('AIFMD')1. The underlying aim is to move the financial services industry away from a culture of financially incentivised risk-taking by key staff members.
The AIFMD was approved by the Council of Ministers on 17 November 2010 and published in the Official Journal on 1 July 2011. The deadline before which the Member States are expected to have transposed the AIFMD into national law is 21 July 2013.
The AIFMD is a response to the problems arising from the economic crises that have arisen since 2008. European political leaders wanted to establish a framework to address and monitor the potential risks that might arise from the activities of alternative investment fund managers ('AIFM'). The AIFMD also provides for a harmonised EU passport regime that will allow AIFM to provide services and market their products across the EU. It is hoped that in time the AIFMD brand will become as successful as the UCITS brand especially in a post-Madoff market where investors have become more cautious and seek to minimise risk to their investment. The AIFMD will apply to2:
EU AIFMs that manage one or more AIFs, whether or not those AIFs are EU AIFs or non-EU AIFs; Non-EU AIFMs that manage one or more EU AIF; and Non-EU AIFMs that market one or more AIFs in the EU, whether or not those AIFs are EU or non-EU AIFs. One of the areas addressed by the AIFMD is that of remuneration. Accordingly, as provided for under Article 13(2) of the AIFMD, ESMA published Guidelines on Sound Remuneration Policies under the AIFMD on the 28 June 2012 (the 'Guidelines')3. The publication of these Guidelines opens up a consultation process that will conclude on 27 September 2012. The final report is expected to be published before the end of 2012. The aim is to have these Guidelines applied in the industry before the deadline for the transposition of the AIFMD into the laws of member states on 22 July 2013.
These Guidelines are part of a number of initiatives by political leaders to move the financial services industry away from a culture of financially incentivised risk-taking by key staff members to a culture where financial reward is based on the performance and risk profile of the alternative investment fund ('AIF') under management and the activities of the individual concerned. This change from a quantitative to a qualitative assessment of performance and remuneration of key staff will ensure the protection of investors, increased transparency and enhanced market stability. However, it must be noted that the AIFMD does have critics who argue that it merely papers over the cracks and will actually result in funds and jobs leaving the EU to relocate elsewhere.
It remains to be seen if the AIFMD will result in a flight of funds and key staff outside Europe but it is suggested that this will not occur simply due to the scope of the AIFMD itself and, from a business perspective, the importance of the domiciliation and marketing of funds within the EU.
The Remuneration Policy
Under the Guidelines, the AIFMs will be obliged to create and maintain a remuneration policy based on the following principles4:
measures must be taken to avoid conflicts of interest; The governing body must periodically review the policy and they are responsible for ensuring that it is applied in accordance with the Guidelines; The application of the policy must be subject to a central and independent review on at least an annual basis; guaranteed bonuses should only occur...