Comment Letter on Remuneration Aspects of FCA's DP20/2: Prudential Requirements for MiFID Investment Firms
[32791]
September 29, 2020 TO: ICI Global Members SUBJECTS: MiFID, EMIR, AIFMD, UCITS V RE: Comment Letter on Remuneration Aspects of FCA's DP20/2: Prudential Requirements for MiFID Investment Firms
On June 23, the UK Financial Conduct Authority (FCA) published a discussion paper on the implementation of the Investment Firms Directive (IFD), which includes a chapter on remuneration requirements.[1] On September 25, we submitted the attached letter commenting on certain aspects of the remuneration provisions. Included as an appendix to our letter is our September 4 response to the European Banking Authority’s consultations on the IFD’s remuneration requirements (EBA Response).
Below is a summary of our comments and recommendations.
Compliance Date of New FCA Remuneration Code
In the letter, we expressed support for the FCA’s position that all UK investment firms should continue to comply with their existing remuneration regime before any new IFPR remuneration code comes into force (rather than complying with CRD V). We further requested that the requirements contained in the United Kingdom’s (UK’s) new investment firms prudential regime (IFPR) apply no earlier than the start of a firm’s first performance year to commence on or after the date the new code comes into force.
Definition of Material Risk Takers (MRTs)
We requested that the FCA factor into the UK’s approach our proposals on MRTs in the EBA Response, particularly our recommendations regarding the EBA’s quantitative criteria for identifying MRTs, which, in our view, inappropriately exceeds the requirements under the IFD. We suggested that the criteria be adapted to:
- reduce the chance of individuals being caught who do not have a material impact on the risk profile of the firm or its managed assets; and
- make it less burdensome (in terms of both time and money) to disapply the criteria where necessary.
We also expressed concern with the FCA’s desire to take a broader interpretation of who should be considered an MRT and recommended that the FCA follow the EBA’s approach.
Scope and Application of a New Remuneration Code
Regulatory Consolidation Group
We expressed concern with the FCA’s proposed approach with respect to applying the remuneration requirements to an investment firm group on a consolidated basis, which would appear to result in:
- applying the IFPR remuneration policy rules to all staff of AIFM and UCITS firms within an IFPR regulatory consolidation group irrespective of whether such staff work for an IFPR (non-SNI) firm;[2] and
- applying the IFPR remuneration structure rules to staff of AIFM and UCITS firms within an IFPR regulatory consolidation group who satisfy the IFD MRT quantitative criteria, even if such staff do not work for an IFPR (non-SNI) firm.
We recommended that staff be subject only to the remuneration regime specific to the sector in which they work, an approach that is prudentially sound and ensures staff’s pay and incentives are aligned with the performance and risk management of the firm for which they work.
CPMI Firms
It is unclear if UCITS and AIFM firms with MiFID top-up permissions (referred to as CPMI firms) will be subject to the IFPR remuneration regime. We stated that it would be appropriate for CPMI firms to be only subject to the UCITS and AIFM remuneration regimes (as applicable) because these rules are most suited to CPMI firms and would therefore best promote the long-term interests of the firms and prudent risk management.
Waiver
The FCA proposes to require UK parent entities to apply to it for a waiver if they consider that the remuneration requirements should not apply to their subsidiaries established in third countries because it would be unlawful for the subsidiary to comply with the FCA’s requirements. We requested that the requirement to seek a waiver in this circumstance be removed. We proposed that the FCA could, alternatively, require firms to maintain documentation of a determination that applying certain IFPR remuneration requirements is unlawful in a third country, and to provide such documentation to the FCA upon request.
Proportionality
In our response, we expressed support for FCA’s proposal to increase the four-year average on-and-off balance sheet assets threshold from EUR100 million to EUR300 million for the application of proportionality, and further stressed that in no circumstances do we believe the threshold for applying proportionality should be lower than EUR100 million. We also encouraged the FCA to take a more general approach to the application of proportionality and to ensure the proportionality regime remains as flexible as possible and appropriate for the wide range of firms that will be subject to the IFPR.
Interaction of Regulatory Requirements and Commercial Decisions on Remuneration Policies
We requested that the FCA confirm that if, under the IFPR, a firm decides to impose additional arrangements as part of its remuneration policy in excess of the level which is required by the regulatory rules and the firm’s assessment of the need to ensure effective risk management and prudent capital management, then those additional arrangements may be implemented without being required to comply with the regulatory remuneration rules.
Disclosure
Section 15 of DP 20/2 does not address the application of the disclosure requirements (and in particular for this purpose, the remuneration disclosure requirements) in a group context. We requested that the FCA ensure that the requirement that is currently in place – for remuneration disclosures to be required to be made only at the highest level of consolidation within a consolidation group – remains the case under the IFPR where there is consolidation under the IFPR or, indeed, where one or more investment firms fall within a CRR (banking) consolidation group.
Eva M. Mykolenko
Associate Chief Counsel - Securities Regulation
endnotes
[1] DP20/2: Prudential requirements for MiFID investment firms, is available at https://www.fca.org.uk/publications/discussion-papers/dp20-2-prudential-requirements-mifid-investment-firms. Chapter 13 addresses remuneration.
[2] The term “SNIs” refers to small and non-interconnected investment firms; “non-SNI investment firms” refers to firms that are not SNIs.