Irish Funds

10th Floor, One George’s Quay Plaza,

George’s Quay, Dublin 2, Ireland.

t: +353 (0) 1 675 3200

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e: info@irishfunds.ie

w: irishfunds.ie

Irish Funds Industry Association Limited trading as Irish Funds Registered in Dublin No.339784 VAT No. IE6359784T Directors: P. Lardner, B. O’Dwyer, T. Young.

Irish Funds Reply to ESMA Consultation Paper on Guidelines on sound remuneration

policies under the UCITS Directive and AIFMD

(2015/ESMA/1172)

Founded in 1991, Irish Funds (“IF”) represents fund managers, custodian banks, administrators,

transfer agents, professional advisory firms and other specialist firms involved in the international

fund services industry in Ireland. Ireland is a leading centre for the domicile and administration of

investment funds with in excess of €3.8 trillion of assets in over 13,000 funds administered in Ireland.

These assets are comprised of €1.9 trillion in 5,897 Irish domiciled funds (including sub-funds).

Additionally, the industry services €1.9 trillion in non-Irish funds administered in Ireland. For more

information please visit www.irishfunds.ie.

Preliminary comments

We welcome the opportunity to respond to ESMA’s consultation paper on sound remuneration

policies (the “Consultation”).

We have responded below to the individual questions raised by ESMA in the Consultation but

wish to preface our responses by confirming our support for ESMA’s proposed approach to

proportionality and, in particular, the intention to draw a distinction between the approach to be

taken in respect of investment funds under UCITS and the Alternative Investment Fund Managers

Directive (the “AIFMD”) and that proposed by the European Banking Authority (“EBA”) in respect

of credit institutions in the course of its March 2015 consultation on remuneration provisions for

entities subject to the fourth Capital Requirements Directive (“CRD IV”).

We believe that ESMA’s approach reflects the fundamental distinctions to be drawn between the

asset management industry and the banking industry in terms of their structure, compensation

mechanisms and risk profile. These distinctions were identified by Steven Maijoor of ESMA in the

course of a recent speech on Capital Markets Union, delivered on 1 June 2015, when he noted

that:

“Non-banks are non-banks because they are not banks! While we can draw on the important

experience that banking authorities have collected in the past years on macro prudential

regulation, we need to fully take into account that asset management is a sector in its own

right, with a specific business model and risk profile ... It logically follows that the policy

responses we develop must be tailor-made to the specific risk profile of the asset

management sector.”

We believe that the remuneration models followed by the asset management industry under AIFMD

align managers’ incentives with the long-term interests of their clients.

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A key component of these models has been the application of the principle of proportionality,

pursuant to which AIFMs have been permitted by Member States to have regard to such factors as

assets under management, the ratio between fixed and variable remuneration, de minimis thresholds

for variable compensation and the complexity of investment strategy in determining whether it is

appropriate to disapply certain remuneration requirements. The principle of proportionality does not

allow an AIFM to simply disregard its obligations in relation to sound remuneration policies but it

does recognise that the application of all the prescriptive provisions of the AIFMD remuneration

framework may not be appropriate in all cases. Annex II of the Consultation provides a useful

overview of the criteria currently considered by Member States to be relevant in the context of the

proportionality principle and the provisions which have been disapplied under the principle (typically

the “pay out rules”, including retention requirements and deferral and clawback provisions in respect

of variable compensation).

As an industry association, we do not have access to the level of information on costs and

administrative burden that is sought in some of the queries posed by ESMA in the Consultation. We

note that many of our members, including asset managers, are responding directly to the

Consultation and expect that they will be able to provide ESMA with some of the requested

information. However, we do believe the following general comments to be relevant in the context

of the Consultation and the considerations in relation to proportionality.

1 Distinction between the asset management industry and the banking industry

As noted above, the asset management industry is very different to the banking industry in

many respects and fundamentally in terms of its business model, whereby client funds are

managed on the basis of a precise mandate, pre-agreed with investors which clearly defines

risk tolerance and the risk management framework. In the context of UCITS, such

management is done within a heavily regulated product regime which provides clear

constraints in terms of permitted investments, diversification, risk management and the

communication of information to investor and to regulators in a transparent format. The

product rules that apply to UCITS already include significant measures which are designed

to avoid excessive risk taking.

This contrasts with the framework applicable to credit institutions, where depositor’s capital

is invested on a proprietary basis without necessarily having regard to fiduciary obligations

which may be owed to an underlying client or investor. Furthermore, there is a greater direct

linkage, in terms of investment decisions made, between the fund manager and its investors

than there would be between a credit institution and its shareholders. We note that the

proposals made by the EBA in its March 2015 Consultation have been controversial, even in

the context of credit institutions, and that a number of respondents have queried the legal

analysis underpinning the EBA proposals. Regardless of the final approach taken by the

EBA, we believe that it would be incorrect to apply remuneration policies designed to

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constrain excessive risk taking in the banking sector to the asset management framework

and, in particular to remove the ability to have regard to the nature, scale and complexity of

the particular entity.

2 Article 14(a)(4) of UCITS V and Recital 9

Article 14(a)(4) of UCITS V clearly provides that, in framing its guidance on sound

remuneration policies, ESMA shall have regard to “the size of the management company and

the size of the UCITS they manage, their internal organisation and the nature, scale and

complexity of their activities”.

As ESMA has noted in the Consultation, Recital 9 of UCITS V gives further indication as the

appropriate approach by providing that, “ESMA’s guidelines on remuneration should, where

appropriate, be aligned, to the extent possible, with those for funds regulated under [AIFMD]”.

We agree that it is important to ensure consistency between the remuneration rules which

have applied in the case of AIFMD and those to apply to UCITS. Consistency between

remuneration rules would help ensure the decision on whether to structure a fund as a UCITS

or AIFMD is made on the basis of factors such as the complexity of the strategy, the liquidity

of the underlying investments and the proposed target investor market.

Importantly, for the various reasons outlined in this note, and in the response of other industry

associations, such as the European Fund and Asset Managers Association (“EFAMA”) which

we have reviewed and support, we do not believe that the appropriate response to ensuring

consistency would be to apply a restrictive approach to proportionality across both UCITS

and AIFMD.

2 Potential impact on delegates

The success of the UCITS product has been due, in large part, to its capacity to provide retail

and institutional investors with access to the best investment managers on a global basis,

who discharge their functions at all times within the confines of the investment parameters,

asset eligibility criteria, diversification limits, risk management and liquidity requirements of

the UCITS Directive. UCITS are the only retail investment fund product which can genuinely

claim to be a global product and Irish domiciled UCITS are sold in over 50 jurisdictions and

managed by investment managers from 27 different jurisdictions (14 of which are outside the

European Union).

This approach means that European investors have, through the UCITS product, access to

the best available investment management expertise in Non-EU markets, with investment

managers from the United States, Latin America and Asia providing UCITS-compliant

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versions of their own United States, Latin America and Asia providing their strategies and

expertise in a UCITS-compliant manner, thereby giving EU based investors a greater

opportunity of a global pool of investment management talent, wherever based.. These

delegates are subject to prudential regulation in their own jurisdictions, which typically include

protections against excessive risk taking and the alignment of interests with investors.

However, it is unlikely that these local rules will necessarily include the prescriptive details

set out in the pay-out provisions and the clear message from many of these investment

managers has been that the costs of implementing these provisions in full would quickly

outweigh the potential commercial returns available to them through the management of

UCITS products. Accordingly, we believe it is important that this community of managers

can continue to have regard to the proportionality principle upon their appointment to UCITS

structures. Otherwise, the unintended effect of the proposed rules could result in fewer

expert investment managers operating in the UCITS sphere. Reduced investor choice

should not be an outcome of remuneration rules.

The issues which have been identified to us in our discussions with impacted investment

managers include the application of the ‘pay-out rules’ to taxation and staffing. One

consistent theme from US managers has been that the pay-out rules would result in

significant tax costs to the staff involved since a holding in UCITS are tax inefficient structure

for most US individuals. There are also US securities law prohibitions on certain categories

of US persons holding shares in a UCITS.

Furthermore, it is not necessarily a straightforward process to provide an equivalent exposure

through holdings of units in the investment manager itself. In many cases, the relevant

investment manager is a privately held company or partnership structure. These do not

easily lend themselves to being able to offer ownership participations to staff without

potentially significant operational and tax implications and costs. Accordingly, the clear

message has been that the requirement to invest variable remuneration and the deferral

requirements would affect the ability of US managers to hire and retain talent for the

management of UCITS, with a consequent negative impact on their ability / appetite to launch

and manage UCITS funds and, ultimately, the range of investment choices available to

investors in Europe. While this feedback has been provided in the context of US managers it

is likely that managers from other Non EU jurisdictions would have similar challenges.

As mentioned above we would also note that these delegates are subject to prudential

regulation in their own jurisdiction, which will typically include protections against excessive

risk taking and the alignment of interests with investors. However, as legislative requirements

will vary across legislative regimes, these provisions will not simply replicate the European

structures under UCITS and AIFMD. Nevertheless, as part of the due diligence process

(undertaken by each UCITS delegating to such an entity), they will need to consider the

adequacy of the prudential regulation and the remuneration policies at delegate level.

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Accordingly, we would query the need to apply a look-through approach to all delegates. We

nevertheless acknowledge ESMA’s alignment with the corresponding section of the AIFMD

Guidelines and request that the final UCITS Guidelines implement the most flexible approach

possible to management companies to rely on “appropriate contractual arrangements” to

determine how the delegate is to be remunerated for its services as per letter b) of paragraph

33 of the Consultation.

In this regard, we also propose that ESMA follow the approach taken in AIFMD by permitting

CRD III remuneration rules to be recognised as equivalent for the purposes of the

equivalency regime outlined in paragraph 34 of the Consultation.

With respect to the application of the remuneration policies and practices to delegates, we

note that this is referenced in Recital 2 but not in the main body of the Directive itself. We are

aware of concerns raised that the absence of such proposals in the body of the Directive

could limit ESMA’s ability to issue guidance in this regard. Given these concerns we would

encourage ESMA to ensure that any extensions of the remuneration requirements to

delegates are well founded and not subject to challenge.

3 Categories of Identified Staff

The draft UCITS Guidelines state that the UCITS V remuneration rules should apply to those

categories of staff of the entities to which investment management activities have been

delegated by a UCITS Management Company (ManCo), whose professional activities have

a material impact on the risk profile of the UCITS that the ManCo manages. We are of the

view that, apart from portfolio managers, no other staff members of a delegate (whether in a

management role or otherwise) could have a connection with the risk profile of a UCITS.

We note that the ESMA Q&A on the application of AIFMD states that AIFMs cannot choose

to exclude portfolio managers from the scope of identified staff purely because they are

bound by investment limits set out by law and / or internal risk limits set out in the investment

restrictions of the AIF. However, the ESMA Q&A also sets out a number of factors which

should be taken into consideration when assessing whether a portfolio manager can exert

material influence. These factors included the following:-

(a) is the percentage size of the AIF portfolio being managed small?

(b) is the portfolio manager required to meet (and outperform) a performance benchmark?

(c) is the percentage deviation from that benchmark which is tolerated by the AIFM small?

(d) does the AIFM monitor the performance of the portfolio manager daily?

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The ESMA Q&A states that if the answer to all of the above questions is "yes", a portfolio

manager is more likely to fall outside the scope of identified staff. It can be argued that in the

case of, for example, an index tracking UCITS or index tracking UCITS ETF that the factors

listed in (b) to (d) above are relevant and should be taken into account as factors which justify

the exclusion of portfolio managers of index tracking UCITS from the scope of identified staff.

It can be further argued that the staff of a delegate investment manager should be excluded

from the scope of identified staff where the UCITS is an entity such as a low risk equity or

money market fund that does not engage in derivatives for investment purposes and does

not engage in leverage to any significant degree. In such a fund, the portfolio manager will

be subject to the investment restrictions applicable under the UCITS Directive and the

European and domestic implementing regulations and, by virtue of the investment strategy

of the UCITS, will only ever invest in low risk, high quality, unleveraged and highly liquid

assets, e.g. money market instruments and listed equities. On that basis, it is difficult to

demonstrate how the professional activity of any such portfolio manager could have a

material impact on the risk profile of a UCITS for whom the delegate acts as investment

manager.

We would therefore suggest that the Guidelines provide additional criteria that a ManCo may

follow to check whether they are capturing the correct staff members, including the staff of

delegates, namely:

(a) the type of investment strategies pursued by the relevant UCITS, in particular the

extent to which the UCITS may employ leverage and / or invest in derivatives for

investment purposes;

(b) an assessment as to the complexity of the assets in which the UCITS invests, their

liquidity, credit quality and risk profile; and

(c) an assessment of the investment objective of the UCITS, with particular emphasis on

whether the objective is to simply replicate the constituents of a benchmark index.

The UCITS Guidelines state that proportionality should also operate within a management

company at the level of different categories of staff and that the same criteria of size, internal

organisation and the nature, scope and complexity of the activities should apply. The

Guidelines provide a list of non-exhaustive elements which should be taken into account,

where relevant. We would be of the view that, in line with the points made above, the

Guidelines should also allow for the application of proportionality on the basis of:

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(a) he type of investment strategies pursued by the relevant UCITS, in particular the

extent to which the UCITS may employ leverage and / or invest in derivatives for

investment purposes;

(b) the complexity of the assets in which the UCITS invests, their liquidity, credit quality

and risk profile;

(c) The extent to which an individual, if a member of staff of a delegate, is engaged in

portfolio management activities which have a material impact on the risk profile of the

UCITS.

The Guidelines also require that when delegating investment management either:

(i) the entities to which investment management activities have been delegated should

be subject to regulatory requirements on remuneration that are equally as effective

as those applicable under the Guidelines; or

(ii) appropriate contractual arrangements with entities to which investment management

activities have been delegated should be put in place in order to ensure there is no

circumvention of the Guidelines.

The Guidelines also state that if staff of delegates who are identified staff for the purpose of

the Guidelines are subject to the AIFMD or CRD IV Rules, that those delegates are subject

to regulatory requirements on remuneration that are equally as effective as those applicable

under the Guidelines. We are of the view that the Guidelines should name other

remuneration rules or regulatory requirements on remuneration that may be deemed to be

equally as affective as those applicable under the Guidelines.

In summary, we believe that the principle of proportionality is a cornerstone of EU legislation

and its continued application in the context of UCITS remuneration rules is essential in

continuing to ensure that the best investment managers globally continue to offer their

expertise to investors through UCITS products.

4. Consistency of Treatment for Management Companies managing both UCITS and AIFs

We strongly support the concept of alignment with the AIFMD Remuneration Guidelines,

particularly with regard to proportionality and can see no merit or demand for a different

approach. Regard must be had not only to costs, administrative burden and investor

protection, but also to a requirement for certainty, particularly for management companies

that hold both a UCITS licence and a separate AIFMD licence.

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Q1: In this consultation paper ESMA proposes an approach on proportionality which is in

line with the AIFMD Remuneration Guidelines and allows for the disapplication of certain

requirements on an exceptional basis and taking into account specific facts.

Notwithstanding this, ESMA is interested in assessing the impact from a general

perspective and more precisely in terms of costs and administrative burden that a different

approach would have on management companies. For this reason, management

companies are invited to provide ESMA with information and data on the following aspects:

1) All management companies (i.e. those that hold a separate AIFMD licence and those that

do not) are invited to provide details on the following:

a) compliance impacts and costs (one-off and ongoing costs, encompassing

technological/ IT costs and human resources), and

b) difficulties in applying in any circumstances the remuneration principles that could

otherwise be disapplied according to the provisions under Section 7.1 of the draft

UCITS Remuneration Guidelines (Annex IV to this consultation paper).

2) Management companies that also hold an AIFMD licence and benefit from the

disapplication of certain of the remuneration rules under the AIFMD Remuneration

Guidelines are asked to provide an estimate of the compliance costs in absolute and

relative terms and to identify impediments resulting from their nature, including their legal

form, if they were required to apply, for the variable remuneration of identified staff:

a) deferral arrangements (in particular, a minimum deferral period of three years);

b) retention;

c) the pay out in instruments; and

d) malus (with respect to the deferred variable remuneration).

Wherever possible, the estimated impact and costs should be quantified, supported by a

short explanation of the methodology applied for their estimation and provided separately,

if possible, for the four listed aspects.

IF does not have the level of detail as regards costs and administrative burden that would apply to

management companies. However, we have reviewed and endorse the response of EFAMA in

relation to this question.

Q2: Do you agree with the proposal to set out a definition of “performance fees” and with

the proposed definition? If not, please explain the reasons why and provide an alternative

definition supported by a justification.

IF agrees with the definition given in the draft Guidelines to “performance fees”.

Q3: Do you see any overlap between the proposed definition of ‘supervisory function’ in

the UCITS Remuneration Guidelines and the definition of ‘management body’ in the UCITS

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V Level 1 text? If yes, please provide details and suggest how the definition of ‘supervisory

function’ should be amended in the UCITS V Guidelines.

IF does not see an overlap in the sense suggested by this question.

Q4: Please explain how services subject to different sectoral remuneration principles are

performed in practice. E.g. is there a common trading desk/an investment firm providing

portfolio management services to UCITS, AIFs and/or individual portfolios of investments?

Please provide details on how these services are operated.

The approach will vary depending on the individual investment manager and reflects the fact that

there is a lack of homogeneity of business models and investment processes. We expect that

individual managers will be able to provide information in their responses to the Consultation.

We have received feedback from at least one manager that many of its staff involved in the

management of UCITS funds are also involved in managing other fund types such as segregated

mandates and US mutual funds. Often the manager will offer the same strategy in a variety of legal

structures: UCITS, US 1940 Act mutual funds, offshore funds and segregated mandates. The

investment research, portfolio management and risk management would be carried out collectively

across all funds. When shares are purchased / sold, allocations would then be made according to

investment allocation policy on how to allocate the purchases / sales to the different portfolios.

Q5: Do you consider that the proposed ‘pro rata’ approach would raise any operational

difficulties? If yes, please explain why and provide an alternative solution.

For avoidance of doubt, we understand under “sectoral rules” in the title of Section 9 of the ESMA

draft Guidelines, the application of either one or more sets of remuneration principles belonging to

either the UCITS, AIFMD or MiFID regimes to an individual based on his/her activities.

IF notes that where the objective of the future UCITS Guidelines is to achieve the outcome of

“discouraging excessive risk-taking and aligning the interest of the relevant individuals with those of

the investors of the fund they manage” - as per paragraph 32 letter b) of the draft Guidelines - we

consider that sectoral remuneration, as currently applied, is more effective at achieving ESMA’s

stated outcomes.

The possibility envisaged under paragraph 32 letter a) of the draft Guidelines of a pro-rata allocation

of an individual’s time between activities falling under separate sectoral regimes may depend on

whether the delegate is an EU investment manager or a non-EU investment manager. In the case

of EU investment managers, it may be more likely that categories of staff managing UCITS portfolios

on a daily basis on behalf of their third-party clients – inclusive of investment, allocation and risk

management decisions – are dedicated to a full time activity that is seldom exercised in conjunction

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with non-UCITS related activities. On the other hand, it would be rare for a US (or other non-EU)

investment manager to have dedicated categories of staff managing UCITS funds only and instead,

as mentioned above, it is more likely that those categories of staff will employ a particular investment

strategy or philosophy across a range of different vehicles such as US 1940 Act mutual funds,

Cayman funds, UCITS and managed accounts.

Nevertheless, when considering the concomitant application to the same individual of remuneration

from different sectoral regimes, IF supports the ESMA’s choice in favour of optionality.

When looking to determine the individuals exerting a material influence on the risk profile of a UCITS

management company or of a UCITS for the purpose of circumscribing “identified staff”, IF would

also welcome the guidance provided in the response under Question 5 (Section I) of the ESMA’s

Q&A on the Application of AIFMD (as updated to 21 July 2015)1.

Q6: Do you favour also the proposed alternative approach according to which management

companies could decide to voluntarily opt for the sectoral remuneration rules which are

deemed more effective in terms of avoiding excessive risk taking and ensuring risk

alignment and apply them to all the staff performing services subject to different sectoral

remuneration rules? Please explain the reasons behind your answer.

Again, we would support the view of EFAMA in response to this question whereby EFAMA note that

the alternative approach as per option b) of paragraph 32 of the draft Guidelines already applies in

many instances and is their preference. Furthermore, we would wish to reiterate that the framework

of the UCITS Directive contains specific measures designed to prevent against “excessive risk

taking” or of circumvention via arbitrage by including specific constraints in terms of portfolio

diversification, counterparty exposure limits, limits on leverage, asset eligibility criteria, liquidity

requirements and prohibitions on borrowing except for temporary purposes. AIFMD, on the other

hand, does not impose such constraints on the AIFs managed by AIFIMs and accordingly, AIFIMs

have greater flexibility in terms of investment strategies, potentially giving rise to greater rewards for

higher levels of investment risk. In this regard, IF would also note that excessive risk-taking is

additionally discouraged by the enhanced and active role of the depositary under the revised “UCITS

V” rules in the exercise of its oversight functions. ESMA should finally also bear in mind the important

role of the risk management and compliance functions internal to the asset management company

(e.g. in their exercise of designing and enforcing pre- and post- trade controls respectively) in line

1 Accordingly, when assessing whether a portfolio manager exerts material influence over a fund, the following

questions would be relevant: 1) is the percentage size of the AIF portfolio being managed small? 2) is the portfolio manager required to meet (and outperform) a performance benchmark? 3) is the percentage deviation from that benchmark which is tolerated by the AIFM small? 4) does the AIFM monitor the performance of the portfolio manager daily? Where the answer to all of these questions is affirmative, then the person is not to be considered “identified staff” for the purpose of the AIFM Guidelines.

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with the UCITS product limits, or alternatively, with those specified by clients in investment

mandates.

The notion of “excessive risk-taking”, as per the wording of letter b) of the same paragraph 32 of the

draft Guidelines, should therefore not be part of ESMA’s considerations around the appropriate

remuneration structures for our industry, especially for the UCITS industry.

Q7: Do you agree that the performance of ancillary services under Article 6(3) of the UCITS

Directive or under Article 6(4) of the AIFMD by personnel of a management company or an

AIFM should be subject to the remuneration principles under the UCITS Directive or AIFMD,

as applicable? Or do you consider that that MiFID ancillary services do not represent

portfolio/risk management types of activities (Annex I of the AIFMD) nor investment

management activities (Annex II of the UCITS Directive) and should not be covered by the

rules under Article 14b of the UCITS Directive and Annex II of the AIFMD which specifically

refer to the UCITS/AIFs that a UCITS/AIFM manages? Please explain the reasons of your

response.

IF is in favour of the second approach, as expressed by ESMA in the question above. Remuneration

requirements under UCITS and AIFMD rules are tailored to collective portfolio management, where

individual investors are generally not able to influence remuneration structures to any real extent. As

a result, the relevant remuneration rules affecting the variable component of remuneration for these

two frameworks are necessarily more prescriptive in achieving a proper alignment of managerial

incentives with investors’ interests. By comparison, portfolio management performed on a

discretionary, client-by-client basis – as per Article 6(3) of the UCITS Directive and Article 6(4) of the

AIFM Directive – is still an investment management service, albeit not collective. In this instance,

investor monies are managed in the interest of large, typically institutional, third-party clients who

are able to exert greater control over their investments and affect the way in which the management

company as a whole (not an individual portfolio manager) – regardless of the type of licence it holds

- is remunerated for its services. Such control is apparent where the client is for instance able to

negotiate the investment mandate, influence the structure of fees (including performance ones), be

informed of and verify individual transaction, as well as withdraw its monies and appoint a competitor

as its new manager. For these reasons, ESMA’s June 2013 Guidelines on remuneration policies and

practices (MiFID) are rightly less prescriptive and do not categorise “identified staff” as in the other

concurrent frameworks. We would therefore agree with ESMA in maintaining that those carrying out

MiFID ancillary services under a UCITS or AIFM license should not be counted as identified staff

and continue to fall under the applicable MiFID remuneration regime unless the entity elects to

comply with the higher AIFMD/UCITS standard.

Finally, with regard to disclosures, a separate remuneration regime under MiFID Guidelines is

justified for those that are not identified staff under the UCITS/AIFM frameworks.

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Q8: Do you agree with the proposal to look at individual entities for the purpose of the

payment in instruments of at least 50% of the variable remuneration or consider that it

would risk favouring the asset managers with a bigger portfolio of UCITS assets under

management? Should you disagree, please propose an alternative approach and provide

an appropriate justification.

IF would note that current practices amongst our Members do not foresee that one individual is

remunerated entirely for the variable part of his/her compensation in shares/units of one single

UCITS. In our view, such an opportunity could potentially distort an individual’s incentives by tying

his/her remuneration too closely to the fortunes of one single fund. In reality, as anticipated in our

reply to Question 5 above, individuals managing a UCITS portfolio are remunerated via a broader

blend of fund units/shares (among which those of the managed UCITS), as well as via the

management company’s shares (where listed) or synthetic shares that replicate the overall

performance of the latter relative to industry peers or benchmarks over a given period. As for the

equivalent clause under Annex II, paragraph 1, letter m) of the AIFM Directive, in practice, payments

in instruments and the size of the underlying portfolio are therefore unrelated.

IF is of the view that, from a policy perspective, it would be more consistent for the UCITS

remunerations rules to follow the spirit of the AIFMD remuneration provisions and therefore, if UCITS

account for less than 50% of a manager’s total AUM, the payment in kind rules should not apply.

UCITS V refers to “total portfolio managed by the management company”. The most natural

interpretation of this wording is that it refers to all assets under management, not just UCITS assets.

UCITS V is clear in other provisions where it intends to apply a particular provision to UCITS assets

only.

We would also submit that the reference to “the UCITS” in this provision could refer to a sub-fund of

a UCITS. This is in line with provisions in UCITS IV which take a similar approach (see for example

Articles 37, 49 and 91 of UCITS IV).

Q9: Do you consider that there is any specific need to include some transitional provisions

relating to the date of application of the UCITS Remuneration Guidelines? If yes, please

provide details on which sections of the guidelines would deserve any transitional

provisions and explain the reasons why, also highlighting the additional costs implied by

the proposed date of application. Please be as precise as possible in your answer in order

for ESMA to assess the merit of your needs.

We believe that it will be essential to provide for a transitional period from the publication of final

UCITS guidelines and would recommend a period of at least one year (ie, to 18 March 2017).

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In this regard, we note that industry participants had a period of up to 17 months from the date of

publication of the final report on the ESMA guidelines in February 2013 to implement appropriate

remuneration policies in the context of their AIFMD authorisation. It is worth recalling that the

implementation of the AIFMD regime itself required the investment of significant time, cost and effort

by AIFMs and their delegates. This included a significant internal spend on fundamentally recasting

remuneration structures, repapering of employee contracts and investment in IT and other systems

upgrades to ensure initial and ongoing compliance with what are quite prescriptive remuneration

requirements. This resulted in a significant draw upon the time and capacity of compliance units

within asset managers at a time when they were also tasked with implementing a wide range of other

legislative initiatives, both at European and global level. As part of this process, AIFMs were also

obliged to expend considerable amounts in implementation projects involving external legal counsel

and consultants.

In light of the detailed nature of the Consultation and the volume of work which UCITS management

companies will have to complete in order to implement the remuneration guidance (particularly those

UCITS management companies that have not implemented equivalent procedures as part of an

AIFMD authorisation), we believe that a transitional period of at least one year would be appropriate.

While it will be possible for many UCITS managers with AIF ranges to leverage this experience in

implementing UCITS V, there are many UCITS managers who do not have AIFs under management

and are now engaging in this process for the first time. While we do not have aggregate figures at

industry level, we believe that industry members who are responding to ESMA directly will be able

to provide information on this spend in their responses and engagement with ESMA.

Q10: Do you agree with the assessment of costs and benefits above for the proposal on

proportionality? If not, please explain why and provide any available quantitative data on the

one-off and ongoing costs that the proposal would imply.

For reasons previously outlined IF does not have sufficient quantitative data available to offer

informed comment on the cost / benefit assessment. However, IF fully agrees with the logic of

aligning UCITS remuneration rules with the pre-existing ones under the AIFM Directive (and related

ESMA Guidelines) underpinning the preferred Option 2 in the ESMA’s cost/benefit analysis section.

As mentioned in our introductory remarks, such alignment is to mark a key step in ensuring greater

consistency for remuneration practices across the European asset management sector.

Q11: Do you agree with the assessment of costs and benefits above for the proposal on the

application of different sectoral rules to staff? If not, please explain why and provide any

available quantitative data on the one-off and ongoing costs that the proposal would imply.

14

For reasons previously outlined IF does not have sufficient data available to offer informed comment

on the cost / benefit assessment. However, for the reasons explained in our reply to Question 5

above, IF fully agrees with the rationale for supporting the preferred Option 2.