Norton Rose presentation - Financial services: Regulation tomorrow

Buy-side seminar 2014:
An update on tax, incentives and structuring issues for 2014
Imogen Garner, Andrew Roycroft, Kennedy Masterton-Smith, Louise Dent, Mike
Newell and Claire O’Donnell
Norton Rose Fulbright LLP
24 June 2014
Imogen Garner
• Partnership tax changes 2014
• Remuneration rules: AIFMD & UCITS V
• The pay-out process
• Limited Liability Partnership agreements
Partnership tax changes 2014
Andrew Roycroft
Impact of partnership tax changes: Salaried members
• HMRC’s 21 February “informal view”
• UK LLPs only, but non-UK entities raise different issues
• Conditions A, B or C: Allows a “pick and mix” solution
• Focus on capital contributions:
– 2/3 month grace period
– Impact of the “TAAR”
• Other solutions:
– Closely-held LLPs, and senior members: “Significant influence”
– Variable profits:
 Individual performance/“eat what you kill”
 Extraneous events, and hindsight
 Performance over the long run
• The Supreme Court decides – Bates van Winkelhof was a
‘worker’ (not an employee)
Mixed partnerships: Deferral and tax rate arbitrage
• All types of partnership, but with both individual and nonindividual (i.e. corporate) members
• Deferred profit arrangements
• Power to enjoy the CM’s “excessive” profits:
– CM who formed the LLP (recent conversions to LLP)
– Outside investors, through CM (impact on profit share paid to executives?)
• Personal service companies, and feeder structures
• “Relief” for:
– Compensating payments (to the individual member)
– AIFM firms, in respect of relevant restricted profit
• Corporate members as vehicles for succession planning
Remuneration rules: AIFMD & UCITS V
Kennedy Masterton-Smith
New rules
• Global focus on remuneration – new legislation
• What rules apply?
– Pay-out process rules
• Who is caught?
– Full scope EU AIFMs/Small AIFMs/Non EU AIFMs
– UCITS management companies or self-managed UCITS funds
– Delegates
• Delegate portfolio management or risk management activities –
new requirement regarding remuneration:
– AIFM must ensure that entities which have been delegated to are subject to
“regulatory requirements on remuneration that are “equally as effective” as
those applicable to the AIFM”
– Contractual arrangements are put in place with the entities to ensure that there
is no circumvention of the remuneration rules
• UCITS V – Recital 2:
– “Policies and practices should apply, in a proportionate manner, to any third
party which takes investment decisions that affect the risk profile of the UCITS
because of the functions which have been delegated”
• FCA confirmation re AIFMD that delegates subject to CRD rules
generally considered to be subject to rules that are equally as
• Clarification on position of other regulators still needed
• Can the pay-out process rules be applied proportionately?
– Size
– Internal organisation
– Nature, scope and complexity
• Identified Staff
Step process
• Consider whether you are caught directly or indirectly
• If caught, can you disapply pay-out process rules on the grounds
of proportionality?
• Keep an audit trail on disapplication and keep under review
• Identify Identified Staff
• Can the rules be applied proportionately to Identified Staff?
• Undertake performance assessment
• Apply the pay-out process rules (as appropriate) to awards
• Undertake performance adjustment
• Pay-out deferred awards
The pay-out process
Louise Dent
Pay-out process components
Retained units
Return on
Not subject to AIFM
remuneration code
Not subject to payout process rules
All variable
remuneration is at risk
of clawback under
performance adjustment
provisions for one year
post acquisition/vesting
Subject to AIFM
remuneration code
units in
6 month
retention period
Subject to pay-out
process rules
Delivered after 3
years subject to
malus performance
units in
6 month
retention period
What does the pay-out process apply to?
Code staff
• Categories of staff who have a “material impact on the risk profiles
of the AIFM or the AIFs managed”
• Pay-out process rules can be disapplied if an individual’s variable
rem is ≤ 33% of total rem and total rem is ≤ £500k
• Other rules (e.g. guaranteed bonuses) still apply
• Pro-rata return on investment vs remuneration
• Fixed remuneration – no consideration of any performance criteria
• Variable remuneration – additional pay/benefits depending on
performance or other criteria
Retained instruments: 50%
• Where management of AIFs accounts for
less than 50% of the total portfolio
• “Subject to the legal structure of the AIF
and the instrument constituting the fund”
Which units?
• LLPs – units in underlying funds
• Companies – shares or fund units
• 6 months
• Upfront and deferred elements
• Post-vesting for deferred element
Deferral structure: 40% - 60%
LLP structures
• Period “appropriate in the life
cycle/redemption policy of fund”
• Vest no faster than time pro-rated
• Net of tax if using proposed special
rules for AIFMs
• Net or gross of tax
Performance adjustment
Instruments or
Upfront and
Limited Liability Partnership agreements
Mike Newell & Claire O’Donnell
Limited Liability Partnership agreements
• The LLP agreement – where it can go wrong:
– Default regime
– Profit and losses
– Group structure
– Management
– Non-performing members/exit
– Duties
– Liabilities
• F&C Partners LLP judgement – where it did go wrong..?
Key contacts in London
Imogen Garner
Financial services - London
Andrew Roycroft
Tax - London
Norton Rose Fulbright LLP
+44 (0)20 7444 2440
[email protected]
Senior Associate
Norton Rose Fulbright LLP
+44 (0)20 7444 2262
[email protected]
Imogen Garner is a partner in the financial services group, where
she advises a broad range of clients on the UK and EU financial
services regimes.
Andrew is a senior associate in the London office’s tax
department. He specialises in the UK tax aspects of structuring
and implementing corporate transactions for both public and
private companies, with a particular emphasis on international
issues (residence, branch profits, CFC rules, etc.). The taxation
of executive remuneration is another area of expertise.
Imogen’s areas of practice include advising on perimeter issues,
the regulatory aspects of acquisitions and disposals and clients’
on-going compliance with anti-money laundering and other
financial services law and regulation.
She also frequently drafts and negotiates investment
management and other client agreements. Imogen has particular
experience advising asset managers, and has also worked with a
number of asset management industry trade bodies. She spent
nine months on secondment to the FSA’s (as it then was)
General Counsel’s Division, where she advised the FSA’s CIS
Policy Team and HM Treasury on the AIFMD.
His experience includes structuring equity incentives for
managers, establishing and restructuring partnerships (including
profit-sharing arrangements in Limited Liability Partnerships) and
structuring termination packages. He is a Chartered Tax Adviser
and a member of the International Tax sub-committee of the
Chartered Institute of Taxation's Technical Committee.
Chambers and Partners 2013: “Leading associate Andrew
Roycroft advises clients on domestic and international corporate
transactions and restructurings.”
Key contacts in London
Louise Dent
Tax and incentives - London
Kennedy Masterton-Smith
Financial services - London
Senior Associate
Norton Rose Fulbright LLP
+44 (0)20 7444 2198
[email protected]
Senior Associate
Norton Rose Fulbright LLP
+44 (0)20 7444 5148
[email protected]
Louise Dent is a senior associate specialising in employee
benefits in our London office.
Kennedy is a financial services lawyer based in London and
advises on a wide variety of financial services matters including
advising banks, brokers and buy-side entities.
She advises listed and private companies in the UK and
overseas on all aspects of employee incentives, including the
implementation and operation of share plans, employment taxes
and the incentives aspects of corporate transactions.
She is a member of the Norton Rose LLP Asset and Wealth
Management International Business Group and a co-author of
the Compliance Officer Bulletin in relation to remuneration for
financial services firms.
She regularly advises clients in relation to the remuneration
regime in the UK, including in relation to the rules under CRD IV
as they apply to a broad range of entities including banks,
brokers and asset managers across the proportionality levels.
Kennedy also advises on the remuneration rules under AIFMD
and the proposed rules under UCITS V.
She has spoken at a number of conferences on the
remuneration regime.
Key contacts in London
Mike Newell
Corporate - London
Claire O’Donnell
Corporate - London
Norton Rose Fulbright LLP
+44 (0)20 7444 5572
[email protected]
Of Counsel
Norton Rose Fulbright LLP
+44 (0)20 7444 3759
[email protected]
Mike Newell is a corporate lawyer in our London office. He has
extensive experience of advising on the establishment and
reorganisation of onshore and offshore collective investment
Claire O’Donnell is a corporate lawyer in our London office. She
has over 10 years’ experience in UK and international mergers
and acquisitions, joint ventures, capital fundraisings and general
corporate and commercial transactions.
Mike is particularly experienced in advising in relation to hedge
funds, private equity, real estate funds, retail mutual funds, UK
listed investment companies and structured products. He also
advises asset managers in relation to general corporate,
investment management and regulatory matters.
She has written a number of submissions to HM Treasury and
articles for legal publications.
Mike is described as “practical and effective” in Chambers and
Partners 2009. In Chambers UK 2010 he is noted for having “a
well-established reputation in the structuring and reorganisation
of onshore and offshore collective investment vehicles” and for
being especially “renowned for his real estate funds expertise” in
Chambers UK 2011.
Claire has particular experience in advising in relation to Limited
Liability Partnership matters, including establishment, sale of
interest and relations between members.
She works for a range of clients, including a number of
multinationals as well as government entities.
AIFMD expert: Our guide to the AIFMD
Global coverage
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