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Directors Remuneration & Board Composition

Analysis of Directors Remuneration & Board Composition

Analysis of Directors Remuneration & Board Composition

Irish UCITS continue to be the most popular choice of Irish domiciled fund, with the market currently estimated at €1.9 trillion assets under management. 

In 2018, KPMG analysed 2017 publicly available financial statements of over 200 UCITS companies including 2,200 subfunds and assets under management of €1.2 trillion. Our guide offers a broad overview on board composition and directors remuneration of Irish UCITS companies. 

Remuneration Regulation Landscape

The financial services sector continues to experience a plethora of changes to the regulatory requirements around remuneration in the various sub sectors. 

Below is a snapshot of some of the key regulatory requirements affecting Irish UCITS plcs.

UCITS V

In the aftermath of the financial crisis, the European Commission believed remuneration and incentive schemes for fund managers led to short-term decision making and encouraged excessive risk taking. In its view, remuneration of UCITS managers based on performance provides an incentive for those managing UCITS to increase risk in order to increase potential returns. Therefore, the Commission sought to introduce sound remuneration principles in UCITS V. The Directive was transposed into Irish law on 21 March 2016 and became effective from 1 January 2017.

UCITS V focuses on 3 key areas, namely, the requirement to establish a remuneration policy which aligns with the interests of the UCITS and, in particular, how variable remuneration should be paid to certain “identified staff” of the UCITS’ management company and delegates whose activities have a material impact on the risk profile of the UCITS or the UCITS management company.

Furthermore, UCITS V introduced a requirement that the total remuneration paid by the management company and by the UCITS, to its staff, be disclosed in the annual report of the UCITS (similar to the requirement under AIFMD). In a Q&A in May 2018,ESMA stated that an UCITS managers can ensure compliance with delegateremuneration disclosures by means of (a) equivalent local disclosure requirements onthe delegate or (b) by appropriate contractual arrangements.

For UCITS management companies that are considered significant in terms of their size are required to establish a remuneration committee, which is required to directly oversee the remuneration of the senior officers in the risk management and compliance functions.

CRD IV

The European Union also attempted to reduce excessive risk taking within financial institutions fuelled by inappropriate remuneration policies, with the introduction of Capital Requirements Directive IV (“CRD IV”). CRD IV impacts EU banks, building societies and investment firms as defined under MiFID II (i.e. those with an initial capital requirement of €730,000).

CRD IV includes enhanced requirements for:

  • The quality and quantity of capital.
  • A basis for new liquidity and leverage requirements.„„Rules for counterparty risk.
  • Macroprudential standards including a countercyclical capital buffer and capital buffers for systemically important institutions.
  • Makes changes to rules on corporate governance, including remuneration.
  • Introduces standardised EU regulatory reporting, referred to as COREP and FINREP. These reporting requirements will specify the information firms must report to supervisors in areas such as own funds, large exposures and financial information.

The corporate governance requirements for all firms include:

  • Separation of role of Chair and Chief Executive Officer (“CEO”).
  • Members of the management body are to be of sufficiently good repute, and should possess sufficient knowledge, skills and experience.
  • Members of the management body are required to commit sufficient time to perform their functions.

Additional requirements for “significant” firms include:

  • Establish an independent remuneration committee composed of Non-Executive Directors (“NEDs”).
  • Establish a separate independent risk committee composed of NEDs.
  • Establish an independent nomination committee composed of NEDs.

MIFID II

Markets in Financial Instruments Directive II (“MiFID II”) entered into effect on 3 January 2018 and is one of the most significant regulatory initiatives undertaken by the European Union. MiFID II updates the existing MiFID framework and addresses issues in relation to transparency, investor protection and market infrastructure as well as introducing new corporate governance requirements for investment firms.

Investment firms subject to MiFID II may already be subject to remuneration requirements under CRD IV and/or UCITS V. Such firms are already under an obligation to have remuneration policies in places which are implemented and overseen by management bodies. They are also required to incorporate measures to avoid conflicts of interest and require an appropriate balance between fixed and variable remuneration. Any incentive payments should be calibrated on the basis of bothquantitative and qualitative criteria.

In addition, MiFID II focuses on staff who might have a material impact directly orindirectly on investment or ancillary “services” provided to clients and any conflictsof interest that might arise on the basis of that staff members remuneration and theinterests of the client.

Companies Act 2014

The Companies Act 2014 (“the Act”) increased disclosure requirements in relation to directors remuneration.

Section 305 of the Act provides for the requirement that the directors’ remuneration disclosure in the financial statements. A considerable change under the Act required that Company accounts disclose not only the remuneration received by the Director but also reflect any payments to or receivables by third parties for services of directors of the company or any of its subsidiaries or otherwise in connection with the management of the company (or its subsidiaries).

Irish UCITS plcs have to assess if any of their payments to an administrator, investment manager or third party service provider were payments for services of directors

We hope that our report is a beneficial benchmarking tool in terms of directors composition and directors’ remuneration.