UK 'pragmatic' on AIFMD pay rules

On Friday, UK securities regulator the Financial Conduct Authority (FCA) released welcome guidance around remuneration provisions contained within the Alternative Investment Fund Managers Directive (AIFMD). 

The guidelines, part of an FCA consultation paper, focus primarily on the concept of proportionality, which allows smaller GPs and other certain firms to ignore some of the pay rules. Private equity firms have until November 6 to provide feedback on the guidelines.

“The FCA has generally taken a pragmatic approach, and the guidance recognizes that some requirements may not be workable for certain types of firm,” said Stephanie Biggs, a funds lawyer at Kirkland & Ellis.

For instance, many GPs feared that under the remuneration rules some firms would be required to set up remuneration committees, and that some pay would have to be given to partners and employees as shares of the fund or management firm. 

The FCA has used assets under management to set the threshold for firms to ignore certain pay rules.

For instance, private equity managers managing less than £4-6 billion of unleveraged funds can disapply payment in instruments, deferral of pay and setting up a remuneration committee automatically under the principle of proportionality. The FCA also permits firms above this threshold to avoid these rules under proportionality, as long as they can justify why. 

The threshold to disapply these rules for private equity managers of leveraged funds is £500 million-£1.5 billion.

The guidance also deals with the issue of whether or not distributions paid to founding partners of firms will be treated as remuneration under the directive. “The FCA’s guidance on distributions to LLP [limited liability partnership] members usefully confirms that residual profit distributions to senior partners should not be treated as remuneration,” said Biggs.