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FCA Investment firms: are you ready for the new remuneration regime?

Posted on 21 September 2021

Investment firms are turning their focus to the coming year and the new Financial Conduct Authority (FCA) remuneration regime. Having published initial draft rules and guidance for a single remuneration regime for MiFID investment firms (the 'RemCode') in April 2021, the FCA has now produced near final rules and guidance which are not expected to materially change. As firms prepare for the new regime, they will want to take into account the changes made to the draft RemCode rules and guidance, as well as comments by the FCA in its accompanying consultation response. We have set out the major changes and FCA comments below. 


We will be hosting a webinar on Tuesday 19 October to discuss the impact of these changes to the new RemCode. If you are interested in attending please click here.

Scope and application of the new RemCode – a brief reminder

Firms are classified as either:

  • Small and Non-Interconnected firms ('SNI firms'), which pose a lower risk of harm to customers and markets, or
  • non-SNI firms, which are larger, more complex firms.

SNI firms need only apply the 'basic remuneration requirements'. Non-SNI firms must apply the 'standard remuneration requirements' as well as the 'basic remuneration requirements', while the largest non-SNIs must also apply the 'extended remuneration requirements'. In the last part of this article we set out a summary of the relevant RemCode requirements for each type of firm.

For general background on the RemCode, including how firms are categorised, please refer to our earlier article.  

Key changes and FCA comments
  • Timing of application: the new RemCode applies to performance periods on or after 1 January 2022. The wording has been deliberately changed to accommodate firms who have performance periods shorter than a year, for example quarterly periods. The RemCode applies to each performance period regardless of its length. So, for example, firms with quarterly performance periods should ensure they apply the rules on performance assessment and risk adjustment to each performance period.
  • A bigger MRT population: in non-SNIs, specific remuneration rules in the standard (and, if applicable) extended remuneration sections apply to material risk takers (MRTs). Considerable feedback on the original draft RemCode was given to the FCA by firms asking for more clarity on how to identify MRTs, not least because the new RemCode places a stronger emphasis on qualitative criteria, which may well result in a larger cohort of individuals being identified as MRTs. The FCA re-emphasises in their consultation feedback that it expects firms to treat the new RemCode list of criteria for identifying MRTs as just a starting point, with firms being required to identify other individuals who have a material impact on the firm's risk profile/managed assets. Accordingly, if they haven't already done so, firms should review their MRT populations to ensure that they have identified all those who count as MRTs under the new RemCode arrangements.
  • De minimis exemption for lower paid MRTs: as is the case with other financial services RemCodes, there is a de minimis exemption for MRTs subject to the extended remuneration requirements, who have variable remuneration of £167,000 or less and whose variable remuneration makes up one-third or less of their total remuneration. MRTs who meet these criteria will be exempt from rules on deferral and pay out in shares, and some of the rules regarding discretionary pension benefits. The FCA refused requests for higher thresholds that would have brought more MRTs within the exemption.
  • Application to consolidation groups: the FCA has confirmed that non-SNI firms should calculate the financial thresholds which determine whether an entity falls within the standard or extended remuneration requirements on an individual entity basis, even though they may be part of a prudential consolidation group. The FCA has clarified that the extended remuneration requirements do not apply on a consolidated basis, so those requirements, such as deferral into shares, only apply in relation to the individual entity that exceeds the relevant financial thresholds. However, in relation to determining whether a consolidation group should apply the rules as if it were a SNI or a non-SNI firm, it only requires at least one non-SNI entity to be present in the group for the non-SNI rules to apply on a consolidated basis.    
  • Remuneration committees: the rules have been changed so that a non-SNI firm that is part of a prudential consolidation group and is required to have a remuneration committee may rely on a group level remuneration committee rather than establish one of its own, provided the group level committee meets the MIFIDPRU criteria. 
  • Profit-share / carried interest / co-investment: the guidance has been changed to help clarify the circumstances where these types of arrangement count as remuneration for RemCode purposes. A 'reasonable portion' of the profit share of a partner or LLP member will be considered remuneration when they work full-time. Carried interest counts as remuneration and must be valued at the time of its award. The returns on a co-investment arrangement will be remuneration only where the investment was made using a loan provided by the firm or group and that loan was not provided on commercial terms or had not been repaid in full by the time the return on the investment was paid.
  • Weighting of financial / non-financial criteria when assessing performance: the FCA has clarified that firms may apply a different split to an exact 50/50 weighting of financial and non-financial KPI.
  • Standard remuneration requirements:
    • Minimum clawback periods where no deferral: the guidance now clarifies that a three year minimum clawback period is an appropriate starting point in this context.
    • Severance pay: severance payments count as variable remuneration. Where a firm is required to make a severance payment as a result of a legal obligation (for example a tribunal judgment) which would cause the firm to exceed the fixed/variable remuneration ratio it has set, the firm can exclude from the variable component the difference between the maximum severance pay foreseen in its remuneration policy and the severance pay it has become obliged to pay.
  • Retention awards: firms may (but do not have to) link retention awards to performance criteria.
  • Buy-out awards: the original strict draft RemCode requirements have been relaxed to provide that the duration of the retention, deferral, vesting and ex-post risk adjustment arrangements must be no shorter than the duration applied, and remaining, under the previous employer. The malus and clawback arrangements for the buy-out award must be aligned with the long-term interests of the firm.
  • Extended remuneration requirements:
    • Minimum deferral periods for senior MRTs: it may be appropriate, rather than it being an expectation in all instances, to apply a deferral period longer than three years for the most senior MRTs. 
    • Interest and dividends on deferred variable remuneration can be paid to a MRT: this is a marked reversal of the FCA's original position.  Such interest/dividends must be paid out at the point of vesting, not before. The interest rate/level of dividends must not be higher than that which would have been paid to an ordinary holder of the instrument. This change will be welcomed by many firms who were considering how to compensate their staff for the 'loss' of interest and dividends.


Summary of the MIFIDPRU Remuneration Code requirements

Basic Remuneration Requirements - all firms    

1. Remuneration policy must:

  • be proportionate to the firm's size, internal organisation, and the nature, scope and complexity of activities
  • be gender neutral (that is, based on equal pay for equal work or work of equal value)
  • be consistent with and promote sound and effective risk management
  • be in line with the firm's business strategy and objectives
  • contain measures to avoid conflicts of interest, encourage responsible business conduct and promote risk awareness/prudent risk-taking

2. Governance and oversight:

  • Management body must periodically review the remuneration policy and is responsible for overseeing implementation
  • Control functions staff must be independent
  • Remuneration of risk and compliance senior staff must be directly overseen by remuneration committee/management body

3. Fixed and variable remuneration:

  • Clear criteria must define what is fixed and variable remuneration
  • Fixed/variable remuneration components must be appropriately balanced
  • Individual performance must take account of both financial and non-financial criteria

4. Restrictions on variable remuneration:

  • Variable remuneration must not impact the firm's ability to ensure a sound capital base
  • Firms receiving extraordinary public financial support must not pay any variable remuneration to the management body
Standard Remuneration Requirements (in addition to Basic Remuneration requirements) - All non-SNI firms 

1. Performance assessment:

  • Performance-related variable remuneration of MRTs must take into account individual, business unit and overall firm performance
  • Performance assessment must be over a multi-year period

2. Restrictions on non-performance-related variable remuneration:

  • Guaranteed variable remuneration
  • Retention payments
  • Buy-out awards (taking into account previous employer pay-out terms)
  • Severance pay (no reward for failure)

3. Ex ante and ex post risk adjustment:

  • Take into account all types of current and future risks when measuring performance to calculate bonus pools, and when awarding / allocating bonuses
  • Have in-year adjustments, malus and clawback arrangements in place
  • Set minimum malus and clawback periods
  • Determine triggers for malus and clawback (in addition to those expected by the RemCode)

4. Other requirements:

  • Set a ratio of fixed / variable remuneration for MRTs (but no maximum 'bonus cap')
  • Ensure remuneration policy is annually reviewed by control functions
  • Discretionary pension benefits must be in line with firm's business strategy, objectives, values and long term interests
  • Take all reasonable steps to ensure MRTs do not undermine remuneration rules
  • Don't pay variable remuneration through vehicles/methods that facilitate non-compliance
Extended Remuneration Requirements (in addition to Basic and Standard Remuneration requirements) - Larger non-SNI firms only

1. Pay-out of variable remuneration for MRTs:

  • At least 50% paid out in shares/other instruments
  • Must be subject to an appropriate retention policy

2. Deferral and vesting for MRTs:

  • At least 40% variable remuneration deferred for at least three years
  • At least 60% deferred where particularly high amount, and always if it is £500,000 or more
  • Must not vest faster than pro rata and only after the first year
  • Dividends or interest accrued during deferral period can be paid out on vesting

3. Discretionary pension benefits for MRTs:

  • Where MRT leaves the firm before retirement, firm must hold pension benefits for 5 years
  • Where MRT retires, firm must pay out the pensions benefits and MRT must retain them for 5 years

4. Remuneration committees:

  • Chair and at least 50% of members must be non-execs of management body
  • Modification of requirement possible for group level committees


If you would like to discuss the impact of the new RemCode in more detail, please get in touch with Neil Sharpe, David Cummings or Adam Turner.

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