March 3, 2014

FCA Issues Final Remuneration Guidance for AIF Managers

The UK Financial Conduct Authority’s new guidance on AIFMD remuneration requirements has now provided some clarity for EU and non-EU managers, including relief from many of the requirements for small UK managers.

The Financial Conduct Authority ("FCA") has published its final guidance on the Remuneration Code requirements applicable to managers ("AIFMs") of alternative investments funds ("AIFs").  We now have a complete picture as to the requirements applying to different managers, both based in the UK, and outside the EU but who market funds to UK investors.

The AIFMD Requirements

Article 13 of the Alternative Investment Fund Managers Directive (the "AIFMD") requires AIFMs to have remuneration policies and practices for those categories of staff whose activities have a material impact on the risk profiles of the AIFM itself or the AIFs which it manages.  These policies and procedures, in very general terms, restrict the ability of the manager to pay variable bonuses by imposing limits on bonuses relative to fixed remuneration, requiring vesting to be made over a period of time and by requiring a proportion of variable remuneration to be in the form of units or shares in the fund, rather than cash.

In February 2013, the European Securities and Markets Authority ("ESMA") produced final guidelines on the drafting of such procedures.

Small UK AIFMs

The remuneration requirements do not apply to small AIFMs[1], although these firms may nevertheless elect to implement some or all of the remuneration rules where it is prudent to do so.

Full Scope AIFMs

The FCA believes that it is reasonable for certain AIFMs to disapply what it calls the "pay-out process" rules:

  • Retained units, shares or other instruments (FCA rule SYSC 19B.1.17R) – the requirement that at least 50% of variable remuneration is in the form of units;
  • Deferral (SYSC 19B.1.18R); and
  • Performance adjustment (SYSC 19B.1.19R and SYSC 19B.1.20G) 

The FCA believes that it may be reasonable for the following types of AIFMs to disapply these rules:


Type of Firm




Assets Under Management Threshold 




AIFMs which manage portfolios of AIFs that are unleveraged and have no redemption rights exercisable during a period of 5 years following the date of initial investment in each AIF 



Less than £5 billion

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



Less than £1 billion

The FCA notes that the size of the fund assets under management is not the only criterion but that firms must also take into consideration the following issues:

Proportionality Element

Specific Factor


Number of the AIFM's partners, members, employees and consultants performing services for the AIFM

Internal Organisation

Whether the AIFM is listed and traded on a regulated market

Ownership structure - whether a significant portion of the firm's equity or such other appropriate legal and/or economic interests is held by investors not working in the business

Nature, Scope and Complexity of Activities

Number of investment strategies/styles and number of AIFs

Risk management and monitoring

Level of risk

The nature of any delegation arrangement between the AIFM and its delegate

The nature of certain fee structures such as performance fees or carried interest


This FCA guidance will be welcomed by small managers, especially those managing low risk funds.

Non-EU Managers

The remuneration requirements do not apply to non-EU managers, although there are two issues that such firms need to consider.

  • Where a European AIFM delegates portfolio management or risk management to a third-party portfolio manager (or, in U.S. terms, an investment adviser), that manager must be subject to local regulatory rules on remuneration broadly equivalent to European rules or must enter into a contract with the AIFM that will, in effect, impose the AIFMD standards on that delegate.  Non-EU managers are rarely subject to any form of restrictions on remuneration so the only issue relates to the contractual restrictions.  The contract will need to impose the requirements of the Remuneration Code, although (in the FCA's view) the payout process rules referred to above may be disapplied in circumstances where the delegate’s activities have little or no scope to affect the risk profile of AIFM.  This, presumably, may occur in circumstances where the delegate’s investment authority is strictly limited or where the size of the delegate’s mandate is, as a proportion of the total assets, small.

    Presumably also a delegate that is managing AIFM assets under the thresholds referred to above (even if the AIFM itself is not below the threshold) may also disapply the contractual requirement, although the FCA is not clear on this point.
  • Non-EU managers should remember that, where they are marketing funds to European investors, even if the Remuneration Code rules do not apply, they are still required to make certain disclosures regarding their remuneration in the annual report. 

[1]               Broadly, those managing AIFs with total assets under management of less than €500 million or €100 million if leverage is involved.