Who is this relevant to?• This will be of interest to all UK firms with MiFID

permissions, including asset managers, wealth managers and brokers. It is relevant to investment firms in banking groups and also fund management companies under AIFMD and UCITS V that have MiFID ‘top up’ permissions.

Where can I find it?• The FCA Consultation Paper can be found here.

What is the timing?• The IFPR applies from 1 January 2022. The remuneration

requirements will come into effect for the first full performance period starting on or after this date (i.e. for firms with calendar financial years, it will come into effect from 1 January 2022 and impact bonuses paid in Q1 2023).

What should I do next?• Consider whether to respond to the questions posted in the

Consultation Paper in advance of 28 May 2021.• Responses to the CP can be provided using this form or

can be submitted in writing to:Paul Rich or Hillary Neale

Financial Conduct Authority

12 Endeavour Square London E20 1JN

• Consider how the Consultation Paper and draft rules will impact your firm and your implementation plans.

Who can I contact?Further details and contact details can be found at the end of this document.

At a glanceWhat is it?• The FCA has published its Consultation Paper (‘CP’) on

the prudential regime for UK investment firms (‘IFPR’) following on from the Discussion Paper released in June 2020. This is a significant step forward in the UK’s implementation of a bespoke regime for investment firms, broadly aligned to the Investment Firms Regime which will apply across the EU. The CP includes draft Handbook text setting out the specific rules that the FCA plan to implement under a new Remuneration Code (SYSC19G- the MIFIDPRU Remuneration Code). There are a number of notable deviations from the regime planned across the EU.

What are the key developments from the Discussion Paper?• The CP sets out the specific rules that are proposed to

apply to firms and explanation as to how the FCA expects the rules to apply in practice. In particular there is more detail on how firms will be categorised and which requirements will apply to each category of firm, together with useful clarity on the scope of individuals who will be captured by the regime and the application of proportionality. The remuneration policy provisions themselves are broadly in line with expectations following the Discussion Paper.

On 19 April 2021, the FCA published their second Consultation Paper setting out their proposed implementation of the Investment Firms Prudential Regime. The Consultation Paper sets out draft rules for the remuneration requirements of the regime and explanation as to how the FCA envisages that the rules will apply in practice.The consultation period will run until 28 May 2021.

21 April 2021

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FCA consultation on the implementation of the Investment Firms Prudential Regime in the UK

Remunerationregulation update

In detailContextIn 2017 the European Commission proposed a review of the existing prudential regime for investment firms based on the premise that it was not appropriate to apply the same requirements to banks and investment firms given the fundamental differences between the sectors.

Following a long consultation process IFR was published in the European Journal in December 2019 and will come into force in Europe from June 2021.

Given IFR will came into force after the end of the transition period for the UK leaving the EU, IFR will not apply in the UK. However, the FCA was a key driver in the development of IFR and therefore are implementing a similar regime in the UK (IFPR).

The FCA launched a Discussion Paper in June 2020 to set the scene on how a new prudential regime for investment firms might look in the UK. The content of the Discussion Paper was broadly aligned with the EU regime with hints of a few points of application where the FCA may be more flexible than their EU counterparts.

The Consultation Paper demonstrates that the FCA are prepared to deviate further from the EU standard, particularly in terms of the scope of the regime and the application of proportionality. The content of the remuneration rules themselves are more akin to the EU requirements and are broadly aligned with expectations following the Discussion Paper although useful clarity has been provided on points of detail.

Overview of requirementsThe key headlines from a remuneration perspective are:

Application, scope and firmwide proportionalityThe rules will be set out in a new MIFIDPRU Remuneration Code, SYSC 19G, which will replace both the IFPRU and BIPRU remuneration codes and come into effect for performance periods starting on or after 1 January 2022.

The Code will divide firms into 3 categories, with remuneration requirements dependent upon classification. These categories are as follows:

● Small and non-interconnected (SNI) firms. These firms will only be subject to ‘basic’ requirements such as adopting a remuneration policy, enhanced governance of pay, an appropriate ratio of fixed to variable pay and ensuring that pay is determined in a way that balances financial and non financial performance, maintains control function independence, and is sustainable and affordable for the firm. SNI firms are not required to identify MRTs.

● Non-SNI firms that are not significant. This category of firm will be subject to the ‘basic’ requirements and additional ‘standard’ requirements. These standard requirements are aligned with most aspects of the current IFPRU and BIPRU regimes and also incorporate malus and clawback and the requirement to disclose the maximum ratio of fixed to variable pay.

● Finally, significant firms will be subject to ‘enhanced’ requirements in addition to the ‘basic’ and ‘standard’ requirements. Enhanced requirements include the application of deferral and payment in instruments for variable pay for Material Risk Takers (MRTs) together with the requirement for a Remuneration Committee and requirements for discretionary pension arrangements.

Full details of the definition of each classification and a summary of the associated requirements are set out in Appendix 1. The definition of Non-SNI firms has not changed since the DP and includes those who breach any of a number of thresholds including AUM of £1.2bn, annual revenues of £30m or client money held greater than £0.

The introduction of minimum requirements for SNI firms is a significant deviation from the EU implementation where these firms will not be subject to any requirements, however the requirements themselves are relatively light touch.

The definition of ‘significant’ firms has changed to distinguish between those firms that trade on their own account and/or use derivatives and others to recognise the greater level of risk that these activities present to firms, clients and markets. The FCA have confirmed that the total on and off balance sheet asset threshold will be £300m (based on a 4 year average) or £100m where firms have trading book business in excess of £150m and/or derivatives business of over £100m.

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Crucially, it has also been clarified that these thresholds will only apply on a solo regulated entity basis. This will significantly decrease the number of firms caught compared to an assessment on a consolidated basis.

Material Risk Taker (MRT) identificationThe starting point for the FCA’s approach to MRT identification is the qualitative criteria in the European Banking Authority’s Regulatory Technical Standard (RTS). The draft rules expand these criteria, however, to set out clear expectations that a number of other roles are also expected to be captured. These are mainly front office roles such as desk heads and individuals responsible for material revenues. These additional criteria broadly align to roles that historically would have been captured under the quantitative criteria where the FCA would not allow exclusions. This reflects the fact that the FCA has said that it will not require MRTs to be identified based on quantitative or remuneration-based criteria. This is a significant divergence from the EU regime and will be welcomed by firms, however firms will need to interpret the criteria in many places and justify their approach (e.g. ‘material’ is not defined). The full qualitative criteria are set out in Appendix 3.

Another significant deviation in the CP is that although MRTs must be identified on a solo and consolidated basis, individuals in ‘third countries’ will only be identified if they have an impact on UK business activities. Firms will welcome the additional flexibility where they have a significant global footprint.

Where firms have UK and EU entities in scope of IFPR and IFR respectively, the differing approaches will need to followed under each regime, which will add operational complexity. Where individuals are identified in respect of more than one entity or regime, the more onerous requirements apply. Consolidated group MRTs will be subject to the most onerous IFPR requirements that apply to any single entity in the group.

StructuresThe structural requirements for MRTs of significant firms are broadly as expected following the Discussion Paper. In most cases the proposed implementation is aligned with the EU requirement however there are some differences on points of detail. The FCA has also stated that the EBA Guidelines will not apply. This will create additional complexity for firms with EU operations where decisions will have to be made around applying the minimum requirement in each jurisdiction vs achieving consistency across the business.

The requirements include: ● Minimum 40% deferral of variable pay

increasing to 60% for individuals where variable pay is equal to or greater than £500,000;

● The minimum period specified for deferral is 3 years, however the FCA expects individuals who have a considerable impact on the risk profile of the firms and the funds it manages (for example senior management), to be subject to longer deferral. The FCA have not gone as far as to specify that this should be 5 year deferral (as the EBA have done) which means firms will need to consider which individuals should be subject to enhanced deferral and for how long;

● 50% of all variable pay in instruments must be subject to a post-vesting retention period however there no specific duration has been set out; and

● Payment of interest, dividends or dividend equivalents on variable pay delivered in instruments will be prohibited on remuneration deferred in order to meet the regulatory requirements.

As expected, the FCA has also included requirements around the use of guarantees, retention awards, buy-outs and severance payments as well as risk adjustment, malus and clawback which are applicable to all non-SNI firms.

Guidance has also been provided on how partnership pay should be treated for the purposes of the distinction between fixed and variable remuneration (with the structural requirements applying to the latter).

Individual proportionality (De-minimis)The rules allow for firms to disapply the requirements on deferral, retention, payment in instruments and discretionary pension where an MRT meets both of the following criteria:● Annual variable remuneration not

exceeding £167,000; and● Annual variable remuneration of not

more than one third of total annual remuneration.

This effectively simplifies the original proposal of total compensation of £500k of which no more than a third is variable without significantly impacting who is caught.

Governance Under the IFPR, firms will be required to maintain ‘gender neutral’ remuneration policies (as previously defined by the FCA for credit institutions which broadly defines ‘gender neutral’ as ‘equal pay for equal work’). This policy will need to be subject to periodic review and will need to be overseen and implemented by the appropriate body (management body or Remuneration Committee).

The FCA does not intend for this to go any further than current UK labour laws and therefore the main impact will be that the FCA will now be able to supervise and take action on this aspect which increases the level of risk for firms.

For firms subject to the enhanced requirements to have a remuneration committee at the entity level, at least 50% of the members (including the chair) of the remuneration committee must be members of the management body who do not perform any executive function in the firm.The CP is silent on whether the Committee must be ‘gender neutral’ in line with the EU requirements which is a deviations from the DP.

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Where firms believe it would not be practical to have a remuneration committee at the entity level, an application can be made to FCA to meet this requirement with a group level committee if it can be demonstrated that the group committee performs the functional requirements set out in the rules.

DisclosureAs expected, the FCA has not proposed to limit the maximum ratio between fixed and variable remuneration, with non-SNI firms required to set their own ratio for MRTs as part of their remuneration policies. The rules allow for the ratio to vary both by different categories of staff and from year to year, suggesting the ratio is more of a disclosure requirement, rather than a policy requirement.

The Consultation states that the FCA intend to consult on public disclosure of remuneration information in their third IFPR Consultation Paper expected in Q3.

Next stepsThe consultation period is particularly short and therefore if firms wish to provide feedback on the FCA’s proposals, they will need to do so relatively quickly. Additionally given some of the more unexpected deviations from the Discussion Paper and the EU implementation of IFR firms should: ● Work with risk / finance to understand

which entities (on a solo and consolidated basis) are in scope;

● Determine which of the three categories of firm entities will fall into and therefore the extent to which proportionality can be applied on a solo and consolidated basis;

● Identify MRTs against the new criteria to understand the impacted population;

● Analyse the current remuneration policies and processes against the new requirements to identify any gaps and the scale of change required.

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Appendix 1: Definitions for categorisation of firms

A MIFIDPRU investment firm is an SNI MIFIDPRU investment firm if it satisfies the following conditions:

1) Its average AUM is less than £1.2bn;2) Its average COH is less than:

a) £100m per day for cash trades; andb) £1bn per day for derivatives trades;

3) Its average ASA is zero;4) Its average CMH is zero;5) The on- and off-balance sheet total of the firm is less than £100m;6) The total annual gross revenue form investment services and/or activities of the firm is less than £30m, calculated on an

average on the basis of the annual figures from the 2-year period immediately preceding the given financial year; and7) The firm has not been classified as a non-SNI investment firm due to the effect of MIFIDPRU 10.2.

An investment firm will be classified as a significant firm if:

1) The value of its on- and off- balance sheet assets over the preceding 4-year period is a rolling average of more than £300m; or2) The value of its on- and off-balance sheet assets over the preceding 4-year period is a rolling average of more than £100m but

less than £300m and it has trading book business of over £150m and / or derivatives business of over £100m.

Appendix 2: Requirements for different categories of firm

Basic remuneration requirements - apply to all firms:

Remuneration policy:Must be:

- proportionate to the size, internal organisation and nature, as well as to the scope and complexity of the firm’s activities;- Gender-neutral;- Consistent with, and promote, sound and effective risk management;- In line with the firm’s business strategy and objectives, and take into account the long term effects of investment decisions

taken; and- Contain measures to avoid conflicts of interest, encourage responsible business conduct and promote risk awareness and

prudent risk-taking.

Fixed and variable remuneration:- The remuneration policy must make a clear distinction between the criteria applied to determine fixed and variable

remuneration;- The fixed and variable components of the total remuneration must be appropriately balanced; and- When assessing individual performance, both financial and non-financial criteria must be taken into account.

Governance and oversight:- The management body must adopt and periodically review the remuneration policy, and have responsibility for overseeing its

implementation;- Staff engaged in in control functions must be independent from the business units they oversee, and be remunerated according

to objectives linked to their functions; and- Remuneration of senior staff in risk management and compliance functions must be directly overseen by the remuneration

committee or management body.

Restrictions on variable remuneration:- Variable remuneration must not affect the firm’s ability to ensure a sound capital base;- A firm which benefits from extraordinary public financial support must not pay any variable remuneration to members of the

management body.

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Appendix 2 cont.: Requirements for different categories of firm

Standard remuneration requirements - apply to non-SNI and significant firms (in addition to the basic remuneration requirements):

Performance assessment of MRTs:- Performance-related variable remuneration of MRTs must be based on a combination of the performance of the individual,

the relevant business unit and the firm overall; and- Performance assessment must be based on a multi-year period.

Risk adjustment:- Firms must take into account all types of current and future risks when measuring performance to calculate bonus pools

and when awarding and allocating bonuses;- Firms must:

- Have in-year adjustments, malus and clawback arrangements in place;- Set minimum malus and clawback periods; and- Determine triggers for malus and clawback.

Restrictions on non-performance-related variable remuneration of MRTs:Comply with the specific rules and guidance on the use of:

- Guaranteed variable remuneration;- Retention awards;- Buy-out awards; and- Severance pay.

Other requirements:- Set a ratio between variable and fixed remuneration;- Ensure the remuneration policy is subject to annual review by control functions;- Discretionary pension benefits must be in line with the business strategy, objectives, values and long term interests of the

firm;- Take all reasonable steps to ensure MRTs do no undermine the remuneration rules; and- Must not pay variable remuneration through vehicles or methods that facilitate non-compliance.

Extended remuneration requirements - apply only to significant firms (in addition to the basic and standard requirements):

Pay-out of variable remuneration:- At least 50% to be paid out in shares, instruments or using alternative arrangements approved by the FCA; and- Must be subject to an appropriate retention policy.

Deferral and vesting:- At least 40% of variable remuneration to be deferred for at least 3 years;- At least 60% to be deferred where the variable remuneration is a particularly high amount, and always where it is £500,000

or more; and- Must not vest faster than pro rata.

Discretionary pension benefits:- Where an MRT leaves the firm before retirement, the firm must hold the pension benefits for 5 years; and- Where an MRT retires, the firm must pay out the pensions benefits and the MRT must retain them for 5 years.

Remuneration committees:- The Chair and at least 50% of members must be non-executive members of the management body; and- Modification of requirement possible for group level committees.

Appendix 3: MRT Identification Criteria

The role based / qualitative criteria under the Consultation Paper are as follows:

A staff member must be identified as an MRT if they:

1) Are a member of the management body in its management function;2) Are a member of the management body in its supervisory function3) Are a member of senior management;4) Have managerial responsibility for business units carrying on at least one of the following regulated activities:

a) arranging (bringing about) deals in investments;b) dealing in investments as agent;c) dealing in investments as principal;d) managing investments;e) making investments with a view to transactions in investments;f) advising on investments, except P2P agreements; and/or

g) operating an organised trading facility;5) Have managerial responsibilities for the activities of a control function6) Have managerial responsibilities for the prevention of money laundering and terrorist financing;7) Are responsible for managing a material risk within the firm;8) Work for a firm with permission to carry on any of the regulated activities in 4a) to g), and are responsible for managing any

of the following:a) information technology;b) information security;c) the outsourcing arrangements of critical or important functions;

9) Have authority to take decisions approving or vetoing the introduction of new products.

The FCA expects individuals in the following roles would usually be categorised as MRTs:

1) In relation to portfolio management business, heads of key areas including equities, fixed income, alternatives and private equity;

2) Heads of investment research;3) Individuals responsible for a high proportion of revenue;4) Senior advisors where they can exert key strategic influence;5) Chief market strategists, where media profile is linked to reputational risk and risk to market integrity;6) Heads of a trading or broking desk; and7) All individuals with responsibility for information technology, information security and outsourcing where there is not a single

person with responsibility in all three areas.

The FCA considers that it is important that firms consider all types of roles that may have a material impact on the firm’s risk profile or on the assets it manages. The categories of staff referred to are intended to be a starting point only, and firms are expected to develop their own additional criteria to identify further individuals based on the specific types of activities and risks relevant to the firm.

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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