Irish Funds 10th Floor, One George’s Quay Plaza, George’s Quay, Dublin 2, Ireland. t: +353 (0) 1 675 3200 f: +353 (0) 1 675 3210 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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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.
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.
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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.