This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.

Bookmark Email Print page

FSA Consultation Paper on AIFMD implementation - remuneration


On Wednesday 14 November, the FSA issued a Consultation Paper (CP12/32: Implementation of the Alternative Investment Fund Managers Directive) on the proposed rules and guidance for transposing the Alternative Investment Fund Managers Directive (AIFMD) into UK law.

The Consultation Paper covers many key areas in relation to AIFMD requirements (such as general scope), however this briefing note specifically covers only the remuneration aspects of AIFMD.

Key points on remuneration are:

  1. Draft AIFM Remuneration Code (to be inserted into FSA Handbook)
  2. Proportionality principles
  3. Interaction between new AIFM Remuneration Code and existing FSA Remuneration Code (for firms which will be subject to both)
  4. Disclosure requirements

Key points

Draft AIFM Remuneration Code

The FSA intends to transpose the AIFMD remuneration rules and principles into a new section of the Handbook – SYSC 19B.  The draft Handbook text is provided in Appendix 1 to the Consultation Paper for information.

The draft text includes nine principles, which are summarised in the table below.  The exact requirements will depend to a large extent on the principle of proportionality for which there is only limited detail at present (see section 2 below).

Risk management

  • Remuneration policy should be consistent with and promote sound and effective risk management.

Supporting business strategy and avoiding conflicts of interest

  • Remuneration policy should be in line with the business strategy, objectives, values and interests of AIFM and AIFs it manages.
  • Policy should include measures to avoid conflicts of interest.


  • Governing body of AIFM should adopt and periodically review remuneration policy.  An AIFM that is “significant” must establish a remuneration committee consisting of non-executive directors.

Control functions

  • Employees engaged in control functions should be compensated in line with achievement of objectives linked to their function, and independent of the performance of the business areas they control.
  • Remuneration of senior risk/compliance officers should be directly overseen by the remuneration committee (or equivalent).

Remuneration structures

  • Total remuneration should be based on assessment of AIFM, business unit/AIF and individual performance.  When assessing individual performance, financial and non-financial criteria should be taken into account.
  • Guaranteed variable pay should not be awarded unless it is exceptional, in the context of hiring new staff and limited to the first year of service.
  • Fixed and variable pay should be appropriately balanced.
  • Termination payments should not reward failure.
  • At least 40% of variable pay should be deferred over a three to five year period (unless AIF life cycle is shorter), with vesting no faster than pro-rata.  If variable component particularly high, at least 60% must be deferred.
  • At least 50% of variable remuneration should be in the form of units/shares in the AIF (or equivalent).  This applies to both the deferred and non-deferred elements of variable pay.
  • Variable pay should be “considerably contracted” in the event of subdued or negative financial performance, including through malus/clawback provisions.

Measurement of performance

  • The measurement of performance used to calculate variable remuneration components must include a comprehensive adjustment mechanism to integrate current and future risks.

Pension Policy

  • Pension policy should be in line with the AIFM’s business strategy, objectives, values and long-term interests of the AIFs it manages.
  • Any discretionary pension benefits should be paid to the employee in the form of AIF units/shares and subject to a five-year retention period.

Personal investment strategies

  • Employees should undertake not to use personal hedging strategies to undermine risk alignment embedded in remuneration arrangements.

Avoidance of the remuneration code

  • Variable remuneration should not be paid through vehicles/methods that facilitate the avoidance of AIFM Remuneration Code requirements

There are still a number of questions which remain outstanding:

  • How proportionality will apply (see section 2 below).
  • Which AIFMs will need to establish a remuneration committee.
  • Whether the requirement for an AIFM to ensure that staff engaged in control functions are compensated “independent of the performance of the business areas they control” will limit the use of AIF units/shares, in particular for individuals with dual roles.
  • There is only limited detail in the draft AIFM Remuneration Code on the scope of “remuneration”, in particular whether certain forms of co-investment in the AIF would be considered “remuneration”, as ESMA have outlined.
  • For private equity, ESMA guidelines issued in June deemed certain carry arrangements to be sufficient to meet certain requirements for variable remuneration.  There is no such reference in the draft AIFM Remuneration Code.  It is also still unclear how carry will be valued.


The AIFMD states that the remuneration principles will apply to AIFMs ‘in a way and to the extent that is appropriate to their size, internal organisation and the nature, scope and complexity of their activities’.

The FSA have provided limited guidance on this point:

  • The extent to which proportionality may be applied to AIFM remuneration policies is still being considered by ESMA.   The FSA intends to establish an AIFM specific ‘proportionality framework’ once the ESMA guidelines are finalised.
  • This proportionality framework is likely to differ from the existing Remuneration Code (for those within the scope of CRD 3), although it is stated that it will ‘take account of’ the Remuneration Code.

Further guidance will be required on this point in due course.

Interaction between new AIFM Remuneration Code and existing FSA Remuneration Code, for firms which will be subject to both

A number of Alternative Investment Fund Managers (AIFMs) will be within the scope of the AIFMD and other Directives.  The Consultation Paper states that:

  • AIFMs which are subsidiaries within a group to which the existing FSA Remuneration Code applies will need to adhere to the rules of the AIFMD (i.e. the new AIFM Remuneration Code), subject to proportionality.  In doing so, they will be deemed to have complied with the FSA Remuneration Code.
  • For existing Level 3 FSA Remuneration Code firms also subject to AIFMD, certain firms may have to comply with more requirements than they currently do (depending on how proportionality will apply).

Disclosure requirements

The Consultation Paper reiterates the AIFMD requirement for certain information relating to aggregate staff remuneration to be reported (including the total amount of carry paid, if relevant). This requirement will be implemented by the FSA within FUND 3.3.5R.

Deloitte View

It is encouraging that the FSA is bringing in rules which are closely aligned to (and not more stringent than) the AIFMD Level 1 text and ESMA June 2012 guidelines.  However, there remain a number of significant outstanding questions, in particular the application of proportionality.

Regarding carry, it is disappointing that the Consultation Paper does not provide further context on the valuation of such instruments and clarity on whether carry is sufficient to meet certain variable remuneration requirements.  We await further guidance on this important point.

Level 3 firms within the existing Remuneration Code may also be disappointed that the AIFMD provisions will not be automatically disapplied, and therefore may have to comply with more requirements than they currently do (depending on how proportionality will apply in practice).

Next steps

Written representations should be made on this Consultation Paper by 1 February 2013.
ESMA is due to finalise its guidelines on sound remuneration policies under the AIFMD in Q1 2013, and this will enable the FSA to finalise the proposed AIFM Remuneration Code and framework for proportionality.

The FSA then intends to publish one Policy Statement in June 2013, which should contain the final Handbook text for the AIFM Remuneration Code, as well as further guidance on proportionality.

Share this page

Email this Send to LinkedIn Send to Facebook Tweet this More sharing options

Get in touch

More on Deloitte