The European Parliament voted on the text of the draft UCITS V directive on 3 July 2013. A number of contentious proposals that were proposed by the European Parliament’s Economic and Monetary Affairs Committee (ECON) on 24 April 2013 have been dispensed with. These include:

• A cap on fund manager bonuses at 100% of fixed salary
• A prohibition on performance fees save in the case of UCITS that are marketed exclusively to MiFID professional investors 
• A requirement that underperformance of a benchmark should result in deductions from the fund manager’s fee equal to the level of performance fee paid for equivalent outperformance

Instead the text adopted by the Parliament provides that variable remuneration should be considerably contracted in the event of subdued or negative financial performance of the management company or the UCITS concerned (including, specifically, through the use of claw back arrangements).

The following rules applicable to both fixed and variable remuneration have been retained in the text approved by the European Parliament:

• UCITS management companies must establish and apply remuneration policies and practices that are consistent with, and promote, sound and effective risk management and do not encourage risk-taking which is inconsistent with the risk profiles, rules or instruments of incorporation of the UCITS they manage.
• At least 50% of any variable remuneration must consist of units of the UCITS concerned, or equivalent ownership interests or share-linked instruments or equivalent non-cash instruments, unless the management of the UCITS accounts for less than 50% of the total portfolio managed by the management company, in which case the minimum of 50% does not apply.
• At least 25% of any variable remuneration must be deferred over a period which is appropriate in view of the life cycle and redemption policy of the UCITS concerned and is correctly aligned with the nature of the risks of the UCITS in question. The draft UCITS V text clarifies that this period shall be at least three to five years unless the life cycle of the UCITS concerned is shorter.
• In the case of a variable remuneration component of a particularly high amount, at least 60% of the variable remuneration shall be deferred.

It is also important to note the other material amendments made by the European Parliament to the draft UCITS V Directive originally proposed by the Commission:

• The Parliament’s draft UCITS V text includes a more detailed list of staff whose remuneration should be subject to the remuneration requirements. They include any employee and any other member of staff at fund or sub-fund level who are decision takers, fund managers and persons who take real investment decisions, persons who have the power to exercise influence on such employees or members of staff, including investment policy advisors and analysts, and senior management.
• ESMA is expressly required to provide guidance on how the different sectoral remuneration principles, such as those in the AIFMD and CRD IV, are to be applied where employees perform services subject to different principles.
• The draft UCITS V text also introduces a new requirement for UCITS management companies to disclose details of remuneration policies in their Key Investor Information Document (KIID). 
• UCITS management companies which are significant in terms of size, the size of the UCITS they manage, their internal organisation or the nature, scope and complexity of their activities are required to establish a remuneration committee. The remuneration committee members must be members of the management body who do not perform executive functions and the remuneration committee must include employee representatives, even in cases where national law does not require employee representation.
• Guaranteed variable remuneration should be exceptional because it is not consistent with sound risk management or the pay-for-performance principle and should not be a part of prospective compensation plans.
• Remuneration paid from the fund to management companies should, like the remuneration paid by management companies to their staff, be consistent with sound and effective risk management and with the interests of investors.

Next Steps

The European Parliament will shortly start negotiations on the text of their proposed UCITS V Directive with the Council and Commission. We will keep you updated of developments in this regard.

Contributed by Niall Crowley