UK Consults on Its AIFM Remuneration Code

September 26, 2013


  • Article 13 of the Alternative Investment Fund Managers Directive (2011/61/EU) (the “Directive“) imposes restrictions on the amount and the form of remuneration that an alternative investment fund manager (“AIFM“), within the scope of the Directive, can pay to its staff. Article 13 is applicable to EU-AIFMs regardless of whether they are managing an EU or non-EU alternative investment fund (“AIF“).
  • The European Securities and Markets Authority (“ESMA“) guidelines on sound remuneration policies (the “ESMA Guidelines“) provide guidance on the application of Article 13 of the Directive.
  • The Alternative Investment Fund Managers Remuneration Code SYSC 19B (the “Remuneration Code“) implements the requirements of Article 13 in the United Kingdom.

The Basics

  • The FCA has published1 its consultation on proposed guidance in respect of the Remuneration Code as part of its Quarterly Consultation Paper No.2 (CP13/9).
  • The consultation arises in response to the publication of the ESMA Guidelines.
  • The FCA propose to provide guidance to be included in the FCA Handbook at SYSC 19B alongside further non-handbook guidance.
  • The consultation deals with (amongst other things) the following key points: (i) the timing and applicability of the Remuneration Code, (ii) the concept of proportionality, (iii) the application of the Remuneration Code to LLPs, and (iv) the applicability of the Remuneration Code to delegates.

Timing and application of the Remuneration Code

  • The Remuneration code applies to full scope UK-AIFMs.
  • The Remuneration Code does not apply to small authorised UK AIFMs, small registered UK AIFMs, non-EEA AIFMs or small non-EEA AIFMs. Although one of these firms may nevertheless elect to implement some or all of these remuneration rules, it is not required to comply with the AIFM Remuneration Code nor the guidelines.
  • The FCA will apply the Remuneration Code in the first full performance period after the AIFM becomes authorised. If an AIFM becomes authorised during its current performance period, the requirements of the Remuneration Code will not apply until the beginning of the next performance period.


The Directive and the Remuneration Code refer to the concept of proportionality. The application of the Remuneration Code should be proportionate to the AIFM’s size, internal organisation and the nature of its activities. An AIFM may choose not to apply parts of the Remuneration Code where the application of the Remuneration Code would be disproportionate.

In particular, an AIFM may be excused from restrictions in relation to (i) the proportion of variable remuneration that must consist of retained interests in the AIF concerned, (ii) the deferral of variable remuneration, and (iii) the processes by which performance is assessed for the purpose of variable remuneration awards (the “Pay Out Process Rules“), (iv) in relation to staff that receive variable remuneration of no more than 33% of their total remuneration (such total remuneration not to exceed £500,000), the ‘guaranteed variable remuneration rule’, and (v) the requirement to have an independent remuneration committee.  In order to avoid the application of these onerous requirements the AIFM in question must determine that the relevant rules should not apply to them on the basis of the proportionality principle and positively opt-out of compliance with them.

The draft guidance suggests a number of factors that should be considered in assessing whether the Pay Out Process Rules should apply:

Assets under management  (“AuM“)

The FCA has tentatively suggested a number of size thresholds:

  • £4bn to £6bn for AIFMs managing portfolios of AIFs that are unleveraged and have no redemption rights for a period of 5 years; and
  • £500m to £1.5bn for other AIFMs.

The above thresholds form part of a wider set of criteria to be applied in assessing proportionality (see below) and their satisfaction will not, in itself, automatically excuse an AIFM from the application of the Pay Out Process Rules.

The above figures are indicative and will be revised following on the FCA’s further analysis and  receipt of responses to the consultation.

Additional factors

In addition to considering its AuM an AIFM must also consider the following factors:

  • its size by reference to the number of individuals involved in the business;
  • the internal organisation of the AIFM (including the nature of its ownership);
  • the nature, scope and complexity of its operations (including delegation arrangements); and
  • its remuneration structures (including carried interest arrangements).

Note that the FCA also propose to include a number of worked examples to aid firms in the application of the proportionality concept.

Application of the Remuneration Code to LLPs

Under the ESMA guidelines, dividends, distributions and other payments to owners of an AIFM are excluded from the scope of the remuneration requirements. The FCA have provided some additional information to address the application of this to owner-managed partnerships and owner-managed LLPs in the UK.

The application of the Remuneration Code varies according to the manner in which the earnings of owner/managers are classified. If remuneration is classified as (i) profit share it falls out of the scope of the Remuneration Code, (ii) fixed remuneration it is subject to a lighter set of restrictions, and (iii) variable remuneration it is subject to more onerous provisions.

The FCA have attempted to provide some guidance as to the classification of remuneration for these purposes:

  • profit share paid to senior or founding members/partners will likely be classed as a return on investment and will fall outside the Remuneration Code;
  • drawings taken in advance may be classed as fixed remuneration; and
  • discretionary profit share paid to all members/partners may be considered variable remuneration.

Tax treatment of LLPs and Partnerships

The classification of monies paid to partners/members as remuneration under the code will give rise to some tax complications that the FCA are attempting to address. The allocation of remuneration in cash or units/shares in the relevant fund would give rise to a tax charge in the base year in accordance with partnership tax rules. Consequently, partners/members could be subject to a tax charge before they have actually received the remuneration that they are being taxed on.

The FCA is in discussion with Her Majesty’s Revenue and Customs and Her Majesty’s Treasury in order to address this issue and defer the tax point until actual distribution. Further tax guidance is to be published in the autumn alongside the draft Finance Bill 2014.


The FCA have stated that the Remuneration Code will not have to be applied to delegates of the AIFM (i.e. firms to whom the AIFM has delegated portfolio or risk management functions under the Directive) where that delegate is subject to “remuneration requirements that are equally as effective” as the Remuneration Code (this includes delegates who are subject to remuneration rules under the Markets in Financial Instruments Directive (“MiFID“) and the Capital Requirements Directive (“CRD“)).

 In addition, the proportionality test described above can also be applied to delegates and may relieve them from the burden of compliance with the Pay Out Process Rules (particularly if the delegate has limited investment discretion).

Issues to consider

  • Clients should consider, either unilaterally or in conjunction with trade bodies, officially responding to the consultation in order to make clear their position vis-a-vis proportionality, AuM thresholds and any other relevant parts of the consultation.
  • Clients should make sure that the proportionality concepts referred to above are considered in detail and applied in full in order to avoid unnecessary application of the Remuneration Code.
  • Consider the future applicability of the Remuneration Code and the consequent tax implications in order to decide if the impact of its implementation can be mitigated by way of amendments to existing remuneration policies and alternative structuring.

Consultation responses should be received by 6 November 2013



Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issuesFor further details, please contact the Gibson Dunn lawyer with whom you usually work or the authors in the firm’s London office:

Authors of this alert:

James Barabas (+44 20 7071 4253, [email protected])
Alex Lloyd (+44 20 7071 4257, [email protected])

Other key contacts:

James Barabas (+44 20 7071 4253, [email protected])
Selina S. Sagayam (+44 20 7071 4263, [email protected])

Markus Nauheim (+49 89 189 33 122, [email protected])

Benoît Fleury (+33 1 56 43 13 00, [email protected])  

New York:
Edward D. Nelson (+1 212-351-2666, [email protected])
Edward D. Sopher (+1 212-351-3918, [email protected])

Washington, D.C.:
C. William Thomas, Jr. (+1 202-887-3735, [email protected])

Los Angeles:
Jennifer Bellah Maguire (+1 213-229-7986, [email protected])

Chézard F. Ameer (+971 4 704 6814, [email protected])

© 2013 Gibson, Dunn & Crutcher LLP

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