No images? Click here ![]() Executive briefing – April 2021FCA consultation on Investment Firm Prudential Regime: Remuneration requirementsOn 19 April 2021, the FCA issued a consultation document regarding its proposals to implement the new UK Investment Firm Prudential Regime (IFPR), including the remuneration requirements. This is the second of three detailed consultation documents that the FCA plans to publish regarding IFPR. This consultation is open for comments until the end of May and the final rules will be updated following completion of the consultation process (expected later this year). Once finalised, firms will need to apply the new rules from the start of their next performance year beginning on or after 1 January 2022. It is worth noting that the FCA has reserved its position to amend the rules based on feedback and subsequent developments regarding “EU market access”. The proposed remuneration requirements are similar in substance to those envisaged under the EU-version and, therefore, should not present any major surprises to firms which have been monitoring development of the new regime. That said, there are a few areas where the UK regime is slightly different to the EU approach (e.g. proportionality thresholds, deferral periods). We recommend that all relevant firms consider the details of the proposed rules and the practicalities of implementation. Background Before the UK left the European Union, it was part of a process to design and establish a new prudential framework for European investment firms. The new EU regime is due to come into force from June 2021. That regime was designed to recognise that the risks faced by investment firms are often different to credit institutions. The UK supported the overall goals of the EU prudential regime for investment firms and now proposes to introduce a UK regime which will achieve similar intended outcomes as the EU regime, whilst taking into consideration the specifics of the UK market. Please see our previous briefings here and here for further background to the development of the UK and EU regimes. Overview The new prudential regime for FCA investment firms will be brought into a single rulebook known as MIFIDPRU. This will replace the existing IFPRU and BIPRU rulebooks, including the associated guidance, which will be deleted. Although the new rulebook will apply to all FCA investment firms, the remuneration requirements provide for a proportionality framework that distinguishes between 3 different classes of investment firm. This reflects stakeholder feedback resulting from the earlier FCA discussion paper and is consistent with the general regulatory philosophy of the UK government. The following diagram (taken from the consultation document) provides an overview of the three levels of remuneration requirements that may apply to investment firms: ![]() The categorisation of investment firms under IFPR is complicated and uses a number of factors to determine the status of a firm. However, the principal metric referenced by the FCA is the on-and-off balance sheet total of the firm. As a general rule of thumb, smaller and non-interconnected (SNI) firms will typically have a balance sheet total under £100m. The middle category will be made up of non-SNI firms with a balance sheet total somewhere between £100 – 300m (although firms can be elevated to the top category based on the nature of their underlying business). The top category will be made up of larger non-SNI firms typically with a balance sheet total in excess of £300m. Basic remuneration requirements The ‘basic remuneration requirements’ set a minimum standard which will apply to all FCA investment firms. Larger ‘non-SNI’ firms will also need to apply the ‘standard’ and possibly the ‘extended’ remuneration requirements, as described below. This approach reflects the FCA’s view that it would be disproportionate to require “smaller, less complex firms to comply with all aspects of the IFPR given they are less likely to cause significant harm to customers and markets”. The ‘basic’ requirements include the following:
The basic requirements will apply to all staff in FCA investment firms, i.e. not just MRTs. The nature of remuneration arrangements at investment firms will vary considerably, depending upon the type of firm. The FCA has therefore also provided guidance on what is considered remuneration. For example, carried interest arrangements will normally be considered remuneration, whereas co-investment arrangements would normally be considered a return on equity and not remuneration. Standard remuneration requirements The ‘standard remuneration requirements’ will apply to all non-SNI firms (in addition to the ‘basic’ requirements) and will only apply to MRTs (see below regarding identification of MRTs). The ‘standard’ requirements include the following:
Extended remuneration requirements The ‘extended remuneration requirements’ will only apply to the larger non-SNI firms and will be in addition to the basic and standard requirements. Based on current data, the FCA expects about 100 firms to be in scope of the extended remuneration requirements. As with the standard requirements, the extended requirements will only apply to MRTs. The ‘extended’ remuneration requirements include:
Identification of MRTs The FCA has provided draft guidance for the identification of material risk takers (MRTs) as part of the consultation document. Those criteria are similar to the substance of the qualitative criteria issued by the EBA in their draft regulatory technical standards (RTS), published earlier this year. However, unlike the EBA RTS, the FCA has decided not to include quantitative criteria as it does “not view this as a reliable indicator of the level of risk involved in a role in an FCA investment firm”. This will potentially narrow the number of individuals that fall within the scope of the standard and/or extended requirements (compared to the EU-approach). Firms are recommended to closely review the MRT identification criteria to establish which staff will potentially be affected by the standard and extended requirements. Individual proportionality The FCA proposes to exempt those MRTs who earn below a certain amount from the extended remuneration requirements (if they are working at a firm that would otherwise be caught by those requirements). In order to qualify for the exemption, the MRT would need to have:
Although a similar exemption applies under the EU regime, the thresholds under the UK IFPR are somewhat higher than the EU equivalents (€50,000 and 25%). Reporting The FCA aims to “significantly reduce” the amount of information that investment firms need to report about their remuneration arrangements. It plans to introduce a new MIFIDPRU Remuneration Report which will be tailored depending on whether a firm is subject to basic, standard or extended remuneration requirements. The FCA also plans to provide updated template documentation (based on existing IFPRU and BIPRU templates), e.g. Remuneration Policy Statements. Further details regarding the public disclosure requirements will be set out in the third consultation which is expected to be published in Q3 2021. FIT comment: As we anticipated in our briefing last year, the substance of the remuneration aspects of MIFIDPRU (especially the ‘extended’ requirements) is closely aligned to the EU-version. There are a few instances where the UK regime has proposed a different approach, e.g. higher proportionality thresholds, shorter deferral periods, etc. However, the overall position is not materially different to the position envisaged under the EU regime. Firms will need to carefully consider the effect of the new UK regime and the detail set out in the MIFIDPRU rulebook and associated guidance. The substance of the ‘extended’ requirements were already reflected in the IFPRU/ BIPRU rulebooks, but the new regime is likely to bring those requirements into scope for a larger number of firms and individuals (due to the reduced proportionality thresholds). For 31 December year end firms, the new rules are due to apply from the start of next year. This means that firms will need to start considering the impact of the new rules during 2021 so that any necessary adjustments are made in readiness for the start of the new regime. This analysis is likely to be more involved where the firm is part of a group with non-UK operations and/or subject to multiple remuneration codes (e.g. CRD V, AIFMD, EU-equivalent regimes). If you wish to discuss anything arising from this briefing, please ask your usual contact at FIT or call us on 020 7034 1111 or email us at Info@fit-rem.com. Rory Cray Darrell Hare Matt Higgins John Lee Sahul Patel Iain Scott Katharine Turner Matthew Ward This paper is intended to be a summary of key issues but is not comprehensive and does not constitute advice. No legal responsibility is accepted as a result of reliance on the contents of this paper. This email is confidential. If you are not the intended recipient, please delete the email and do not use it in any way. FIT Remuneration Consultants LLP (FIT) does not accept or assume responsibility for any use of or reliance on this email by anyone, other than the intended addressee to the extent agreed in the relevant contract for the matter to which this email relates (if any). Consistent with data protection regulations, if you would like to review our records relating to your contact details or to request their removal from our systems, please contact us at info@fit-rem.com. While all reasonable care has been taken to avoid the transmission of viruses, it is the responsibility of the recipient to ensure that the onward transmission, opening or use of this message and any attachments will not adversely affect its systems or data. No responsibility is accepted by FIT in this regard. FIT is a limited liability partnership registered in England under registered number OC364396, with its registered address at 1 Duke Street, London, W1U 3EA. |