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Cordium continues its series of AIFMD Surgery Webinars, which allows fund managers to put their questions forward on key AIFMD areas in a real time question and answer session, with a session on the Remuneration Code. Once a firm is authorised under the AIFMD, it will be subject to the Remuneration Code as set in SYSC 19B of the FCA handbook. However, the full AIFMD remuneration regime (and specifically the pay-out process rules) only applies to full performance periods. Thus, it will first apply to awards of variable remuneration to relevant staff following the first full year after authorisation. For most, this is likely to affect awards paid in 2016. Although 2016 seems a long way off for most, firms should be considering now, how they structure remuneration payments. Please join the team at Cordium, as they discuss the various options open to AIFMs as well as the tax implications.The webinar will cover; The AIFMD Remuneration code – an overview - Bobby Johal, Cordium - Who, what, where - FCA guidance - a measured approach - The remuneration challenge Remuneration and tax - Laurence Parry, Cordium - When it’s simple – employee - When it’s more complicated – LLP members - When it gets interesting – when it’s not remuneration at all Malta and Remuneration - Adam de Domenico, Cordium Malta - Remuneration in accordance with MFSA - Malta as a possible solution for the Remuneration Code Panel discussion - What doesn't the Remuneration Code say? - moderated by Jonathan Wilson, Cordium Questions and Answer session
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April 13, 2023CORDIUM POWERPOINT MASTER 1
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AIFMD Surgery Webinars - Remuneration Code; Regulatory and Tax Implications
The webinar will begin shortly…
You can join either by VoIP or dial in by telephone
Follow call in details if you select to use Telephone audio
Questions
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You can submit your questions using the Questions area in the GoToWebinar console
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AIFMD Surgery Webinars - Remuneration Code; Regulatory and Tax Implications
AGENDA
Introduction Jonathan Wilson, Director of Project Consulting, Cordium
The AIFMD Remuneration code – an overview Bobby Johal, Managing Consultant – Technical, Cordium
Remuneration and tax Laurence Parry, Private Client Partner, Cordium
Malta and Remuneration Adam de Domenico, CEO Cordium Malta
Panel discussion - What doesn't the Remuneration Code say? - moderated by Jonathan Wilson, Director of Project Consulting, Cordium
THE AIFMD REMUNERATION CODE – AN OVERVIEW
BOBBY JOHAL, MANAGING CONSULTANT– TECHNICAL, CORDIUM
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The AIFMD Remuneration code – an overview
o Remuneration (Art. 13) & (Annex II)o Closely follows CRD and allude to MIFID and UCITS V
o Remuneration policies and practices must be “… consistent with and promote sound and effective risk management and do not encourage risk-taking…”
o Apply from July 2013 – but subject to transitionalo FCA rules feature in SYSC 19B – proportionality o Not apply to sub-threshold AIFMs o ESMA and FCA Guidelines add flesh to skeleton
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Remuneration – In outline
o FCA Nine Principles o Detailed Governance arrangements (sec. X / Principle 3)
o Management oversight - ‘Supervisory function’o Remuneration committee (Part X.II)o Independent review
o Risk alignment, general (Part XII / Principle 1)o Remuneration policy
o In line with business strategyo Not encourage risk takingo Alignment of interestso Cover: Pension; Severance; Personal Hedging
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Remuneration – In outline
o Risk alignment, Specific (Part XII / Principle 5)o Quantitative and qualitative over a multi year frameworko Structural provisions
o deferral of between 40% and 60% of variable remuneration for three to five years;
o payment of at least 50% of variable remuneration must be units/shares in AIF or equivalent;
o Clawback/maluso Limits on guaranteed bonuses
o Provisions can be dis-applied for an individual where o Bonus is no more than 33% of total remuneration; and o Total remuneration is no more than £500k
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Remuneration - instruments
o What Remuneration?o All forms of payments and benefits paid by the AIFMo Any amount paid by the AIF, including carried interest (but not return
on investment) o Any transfer of units or shares in the AIF in exchange for professional
serviceso Fixed or variable and both components may include
o Casho Shareso Optionso Pension contributionso Remuneration directly from AIF – (carried interest models; or non-cash – discounts,
allowances)
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Remuneration - instruments
o What Remuneration?o Excluded…o Dividends or similar distributions received by owners of AIFM
o BUT – only if they do not circumvent the rules!o Ancillary non-discretionary payments/benefits which are part of
AIFMD-wide policyo Pro-rata returns on investment
o actual disbursement required o Loans made to facilitate co-investment not covered within exemption if
loan has not been reimbursed before return is paid
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Remuneration - Scope
o Apply to staff whose professional activities have a material impact on the risk profiles of the AIFM or the AIFs
o ‘Identified Staff’ aka Remuneration Code staff o Executive and Non-Executive Directorso Senior Management o Business unit heads – Portfolio Management, Marketing, HR o Control functionso Staff who exert a material influence on risk profile of AIF/AIFMo Staff remunerated in same bracket
o Control functions variable remuneration based on function-specific objectives not solely by AIFM-wide performance
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Remuneration – Delegation
o Delegation o requirements extended to those to whom functions of risk
or portfolio management have been delegatedo Delegates must be regulated under comparable rules; oro requirements stipulated in contractual arrangements that cover
any payments made to the delegates’ identified staff as compensation
o Obligations effective as soon as an AIFM is authorised
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Remuneration – FCA Guidance
o FG 14/2 published in Jan 2014o Pay-out process rules apply to remuneration in respect of first full year
following authorisation under AIFMD o Principle 5(e): Retention o Principle 5(f): Deferralo Principle 5(g): Adjustment
o Will Comply in a way that is proportionateo AuM threshold – a rebuttable presumptiono Final Threshold
o AuM of £5bn AIFMs managing AIFs that are unleveraged with a 5 year lock-in; o AuM of £1bn for all other types of AIFMs.
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Remuneration – FCA Guidance
Other proportionality factors…o number of Code staff; organisation and ownership structure of the
firm, including whether the AIFM is listed and traded on a regulated market;
o number of funds managedo strategies deployed, including use of leverage and volatility;o FCA prudential categorisation;o the nature of any delegation arrangements between the AIFM and a
delegate performing portfolio or risk management;o the nature of certain fee structures such as carried interest; ando what peer firms are doing
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Remuneration – FCA Guidance
o Supplemental guidance – seven worked exampleso AUM presumption rebutted – small but complex
o Example 3 – 3 Global Macro funds, AuM £800 o Fewer staff than competitorso Internal organisation includes external stakeholders (as part of a group
that is listed)o It is a CPMIo Strategy deemed complex and AIFs volatile o 10x levered
o Conclusion = Pay-out process rules to be applied as activities and organisation deemed complex
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Remuneration – FCA Guidance
o AUM presumption rebutted o example 4 – AUM 2bn but large but simple
o Fewer staff than competitorso Owner managed o Limited leverage x1.5o Strict investment restrictions with low volatility strategy o Also manages UCITS o No performance fees
o Conclusion = Pay-out process rules can be disapplied due to simple organisation, non-complex activities and conservative strategies.
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Remuneration – FCA Guidance
o Delegation o Code to be applied to delegated performing AIFM management
functionso Either by contract oro local regulatory obligation that is ‘equally effective’
o Rules do not require direct equivalence but equal effectivenesso CRD and MIFID remuneration rules deemed equivalent o Scenarios 5 and 6 show application to third country delegates
o Where AIFMD may prove onerous, apply CRD rules (scenario 5)o Apply overall code but dis-apply Pay-out process (Scenario 6 - where delegated
mandate has strict investment guidelines)
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Remuneration – FCA Guidance
o Drawings attribution ‘Approaches’o ‘Approaches’ for the attribution of drawings between in scope, fixed
and variable remuneration and potentially out of scope, profit shareo Existing payments to partners approach
o Distributions to the owners may be excluded, to the extent that such are a return on an investment
o Discretionary profit share “likely to be remuneration”o additional profit share paid to founding or senior partners that is over and above what is
paid to other partners for services rendered, may be out of scope
o Benchmarking approacho encourages, consideration of the remuneration structures of others performing similar
tasks amongst the peer group
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Remuneration – FCA Guidance
o General considerationso Amount of time spent on the AIFMo Fixed and variable components must be appropriately balanced
o Payment in Units requirement subject too Structure of AIFs; Instruments constituting fund; and time spent
managing AIF(s) o Optional consideration of
o Shares in AIFM or group companyo Shares in other AIFs managed or shadow vehicle
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Remuneration – Disclosure
Disclosure o Annual Report per relevant AIF;
o a general statement on remuneration policy;o Information on rewards paid by the AIFM to its staff;
o Total remuneration; split between fixed and variable; number of beneficiaries; carryo Amounts attributable to “risk takers” and Senior Management
o Overall proportionality principle applies o Data protection laws, confidentiality
o There is no requirement for public disclosure (Art 22. 1) - regulators, investors, staff
o FCA CP14/4 proposes to exclude delegates from Disclosure
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Remuneration – next steps
o Review existing remuneration policieso Consider need for external review
o Scope - Identify o affected staffo Delegation agreementso in and out of scope remuneration
o Governanceo Does the firm need to establish a remuneration committee? o Are there confidentiality issues o Composition of the management body
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Remuneration – next steps
o Commercial issueso Will investors come to expect implementation of pay-out process rules? o Staff retention
o Managers outside thresholds should be planning for the pay-out process ruleso Seek tax adviceo Seek legal advice regarding employee/LLP member contracts
REMUNERATION AND TAX
LAURENCE PARRY, PRIVATE CLIENT PARTNER, CORDIUM
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AIFMD remuneration
o Taxation of deferral depends on structure of managero Concept of ‘remuneration’ important
o Return on capital not ‘remuneration’o Deferral in form of fund units
o Might be actual units or shares, o If not in fund, may be options over shadow fundo Different tax consequences
Corporate manager
o All individuals caught by employment related securities (ERS) rules
o Taxation consequences well known (if complicated)
o Difference between actual units or options
Units v Options
o Units – tax consequences at issueo But if reporting fund, or non-dom taxpayer, potential
longer term benefitso Options – tax issues generally deferred until exercise
o No risk of wasted taxo But all gain taxable in UK at marginal income rates
Units
o If pay market value at award then no tax issueso ERS rules look at both ‘restricted’ MV and
‘unrestricted’ MV at issueo Immediate tax issue – if less than RMVo Tax issues longer term - if less than UMV
o Unlikely to be a problem for AIFMs as will be issued at same value as external investors
o ‘Fee free’ class for managers – need some special rightso Easily achieved
On vesting (and sale)
o No further tax on vesting
o Tax on gaino Maybe income or capital depending on status of fund
(reporting fund)
o Losses o Capital loss, irrespective of fund type
Corporate manager effect
o CT deduction for cost of shares issued (and cost of options)
o E’ers NIC payable on remuneration and value of options
LLP (or partnerships generally)
o LLPs transparent for taxo Not a tax paying entity
o All profits must be allocated to partners
o Following anti-abuse rules cannot use corporate member to facilitate deferral
Problem
o If profits allocated, then taxable
o May pay tax on more than receive
o Solution: can elect for LLP to be allocated members’ profito LLP will pay tax at 45% on this (no reliefs or allowances)
On vesting
o If vests at value, then tax paid by LLP is available as a credit
o To the extent there is a loss on the units, then tax paid is also lost
o Not available against other member’s tax billo If other member receives deferral (eg because
member left), no tax on recipient
MALTA AND REMUNERATION
ADAM DE DOMENICO, CEO, CORDIUM MALTA
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Maltese Regulatory Regime on Remuneration
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o Part BIII of the Investment Services Rules for Investment Service Providers
o Appendix 13 to the Rules – Remuneration Policy
oMFSA Guidance on the proportionality principle in relation to the ESMA Guidelines on sound remuneration policies under AIFMD.
Malta vs UK - Similarities
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o Remuneration policies and procedures
o Remuneration committee
o Identified Staff
o Type of Remuneration covered
o Fixed Remuneration and Variable Remuneration
o Not artificially evading the requirements (dividends)
o Excluded: Dividends and Pro-rata Return
o Proportionality Principle: o Remuneration Committee and
o Pay-out process requirements
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Malta vs UK : Dissimilarities
o Application of Proportionality principle – Size Criteriao Automatic disapplicationo Disapplication considered on the grounds of
proportionalityo Full application of ESMA Guidelines
o Performance related remuneration - the requirements to be satisfied by an employee for the disapplication of the pay-out processes rules;
o Delegation – no look through
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Scenario: UK Manager
o AIFM – Malta Man COo Risk Managemento Delegating Portfolio Management
o Delegate: UK Manager providing portfolio management o No look through from an AIFMD perspective o MiFID service - MiFID Remuneration Code
o Profits through dividends
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Scenario : US Manager
o AIFM – Malta Man COo Risk Managemento Delegating Portfolio Management
o Delegate: US Manager providing portfolio management o No look through (hence dissimilar to the UK regulatory
framework) o Profits through dividend
Panel discussion
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What doesn't the Remuneration Code say?
Moderated by Jonathan Wilson, Director of Project Consulting, Cordium
Questions
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You can submit your questions using the Questions area in the GoToWebinar console
For more information or sales enquiries please contact [email protected] for UK [email protected] for Malta.
