The Remuneration Code for alternative investment managers

February 4, 2011

Originally published on

Following lengthy discussion and debate, the Financial Services Authority's Remuneration Code, for better or worse, now has an extended reach that includes alternative investment managers. Reflecting on the months of discussion and lobbying, the remuneration picture could have been much worse for the alternatives industry. In this article, we set out how the code will affect alternative fund managers and discuss the main practical steps that need to be taken.

Paying the price ... proportionally

The genesis of the code, which now forms part of the FSA's senior management, systems and controls requirements, was the perceived need to stem excessive risk taking by linking variable pay to the long-term success of the firm as opposed to short-term profit. This is to be achieved partially by requiring remuneration to be aligned with the overall principle of prudent risk management. The Capital Requirements Directive codified the requirements with the aim of aligning remuneration principles across the European Union. Although initially it seemed there would be no flexibility in the application of the rules following discussions at the Committee of European Banking Supervisors in December, the original remuneration rules were diluted for fund managers such that the FSA was able to adopt a "tiered" approach to the applicability of the code, which incidentally, does not apply to exempt CAD firms.

Tiers one and two include large banks, building societies and broker dealers that undertake a significant level of proprietary trading activity. The majority of smaller to medium-sized alternative fund managers fall within the lowest proportionality tier (tier four) as they do not generally put their own balance sheet at risk. This allows them to disapply many of the more proscriptive requirements of the remuneration principles, on the basis that they are not proportionate to the nature, scale and complexity of the firm. Such fund managers will, therefore, not have an obligation to constitute a remuneration committee; nor will they need to adopt certain rules regarding remuneration structures if they apply a proportionate-based exemption. This includes the requirements that at least 50 per cent of applicable bonuses must be paid in shares and 40 per cent of applicable bonuses must be deferred for three to five years (although this is encouraged).

Avoiding the former of these requirements removes a significant problem for smaller firms, especially those that are limited liability partnerships or limited companies, where paying a proportion of bonuses in shares would present many structural issues. Additionally, the thresholds of £500,000 total remuneration and a 33 per cent limit on variable remuneration of the total remuneration, which were originally seen as significant in determining the code's application, are likely to hold little importance for a tier four firm because the impact of those thresholds is limited to determining the applicability of the proscriptive remuneration structure rules (e.g., deferred payment via shares) to code staff who exceed those thresholds ? rules from which tier four firms are exempt anyway on a proportionate basis.


Despite the permissible proportional adoption of the code, tier three and four firms must still meet certain obligations imposed by the code. Overall, an appropriate remuneration policy statement must be written and implemented to establish, in compliance with the minimum expectations relevant to the firm's proportionality tier, how the firm applies the remuneration principles in a proportionate manner. The RPS must also satisfy other applicable requirements, including:

  • Identification of code staff ? these include those who are risk takers, senior managers (and individuals whose total remuneration takes them into the same remuneration bracket) and staff engaged in control functions, e.g., the compliance oversight officer. Note, therefore, that a compliance oversight officer based overseas (for example, a US-based CCO) is likely to fall within the definition of code staff. Likewise, an individual based overseas who is a significant risk taker for the UK-regulated firm would also be caught within the remit of the code.
  • Having identified code staff, the RPS must consider which of the principles apply to that individual's remuneration. If the firm concludes that certain principles do not apply to a person who is deemed to be code staff, the firm should record the reason why; for example, because the person is not a risk taker or does not exercise a management function. Code staff will need to be informed that they are code staff and what the implications are.
  • UK-headquartered groups will be required to apply the code to their staff globally and the UK subsidiaries of third-country firms will be expected to apply the code to all entities within the sub group. The RPS should consider the application of the code to such entities.
  • The amended pillar three disclosure requirement to include remuneration must be made by December 31, 2011 (and then updated at least annually thereafter). Although the detail is significantly decreased for tier four firms, the disclosure statement will still need to include specific information such as the link between pay and performance.

Additionally, the FSA has stated that it will introduce a remuneration data return item later in 2011 to conduct further baseline monitoring. Aggregated data and certain key information such as the extent of guaranteed bonuses or retention payments are likely to be detailed. Retention payments can only be made in exceptional circumstances and must be supported by prudential, not commercial, justifications which potentially give a poaching employer a competitive advantage over the existing employer. Guaranteed bonuses must also be exceptional and would apply to code staff and via the associated FSA guidance to non-code staff as well.

The RPS should be signed-off and reviewed by senior managers at least once a year and the document, and the firm's adherence to it, will form a part of future FSA ARROW and themed visits.


The rules came in as of January 1, 2011, but firms which were newly within the scope of the code have a transitional period until July 1, 2011, by which date a compliant RPS must be adopted and implemented. For all alternative managers, however, this may not be the end of the story, as the Alternative Investment Fund Managers Directive also contains provisions on remuneration. Exactly what those will look like is not yet clear, detailed level two talks are ongoing, but it is possible that alternative fund managers will need to re-address the issue of remuneration in 2013 when the provisions of the AIFMD are adopted as FSA rules.

Author Biographies:

Adam Palmer and Richard Timms are director and associate director respectively of ACA Compliance (Europe) Limited, the compliance consultancy firm for wholesale financial services companies with a client focus of hedge fund managers, fund of funds managers and private equity fund managers and institutional brokers. Contact -