Memo #
33730

UK Investment Firms Prudential Regime Remuneration Requirements: FCA Issues Policy Statement 21/9 with Near Final Rules and Third Consultation Paper
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[33730]

August 17, 2021

TO: ICI Global Members SUBJECTS: International/Global RE: UK Investment Firms Prudential Regime Remuneration Requirements: FCA Issues Policy Statement 21/9 with Near Final Rules and Third Consultation Paper

 

The UK Financial Conduct Authority (FCA) continues its work to finalize the implementation of the investment firms prudential regime (IFPR), a new regime for investment firms authorized under the Markets in Financial Instruments Directive (MiFID). ICI Global's advocacy efforts have focused on the remuneration aspects of the new regime.

As we previously informed you,[1] on July 26, the FCA issued PS21/9, which summarizes the feedback the FCA received to CP21/7[2] and sets out near-final rules for implementing the IFPR.[3] Summarized below are key changes and clarifications to the remuneration requirements based on the feedback to CP21/7. 

In addition, in early August, the FCA published CP21/26,[4] consulting, among other things, on its proposed approach to the public disclosure of remuneration under the IFPR. Comments are due by September 17. We are considering whether to submit a response.

The FCA intends to publish a policy statement and final rules for the whole regime in autumn and expects the IFPR to take effect in January 2022. 

PS21/9 - Clarifications and Changes to the Remuneration Requirements

  • Timing: The FCA has confirmed that the new rules will apply to performance periods beginning on or after January 1, 2022, and that this also applies in the case of firms that have performance periods shorter than one year.
  • Application to consolidation groups: The policy statement reflects comments made by ICI Global and others on this point and provides that
    • the extended remuneration requirements (including the payout process rules) do not apply on a consolidated basis; and
    • in the case of entities that are subject to more than one remuneration code (or if a firm is subject to the extended rules on a solo basis but the standard rules on a group basis), the firm must apply the most stringent of the requirements on a provision-by-provision basis. 
  • Material risk taker (MRT) identification: The FCA has made some small, but helpful, changes with respect to the identification of MRTs based on qualitative criteria, specifying that the name of an individual's function or role is not decisive, but rather that analysis is based on the authority or responsibility held by that person.[5] The FCA further notes that the goal is to identify staff with managerial responsibility, rather than all staff with operational responsibilities in a particular area.
  • Remuneration committee: The FCA made changes to its provisions on remuneration committees, in line with that requested by ICI Global, revising the rules to permit a not small and not interconnected firm (non-SNI firm) within a prudential consolidation group to rely on a group level remuneration committee without having to obtain a waiver from the FCA under certain conditions. 
  • Proportionality threshold calculation: The FCA provides further information on how to calculate whether a non-SNI firm is subject to standard or extended rules. 
  • Payout process rules for non-SNI firms: The FCA has made helpful adjustments or clarifications regarding a number of payout process rules, including
    • providing that MRTs are permitted to accrue interest and dividends on deferred remuneration in the form of non-cash instruments, subject to certain conditions; and
    • confirming that shares in a firm's parent entity may be used as variable remuneration to meet the requirements on payment in non-cash instruments when the value of those parent shares moves in line with the value of an equivalent ownership interest in the relevant investment firm. 
  • Ratio of fixed to variable remuneration: The FCA provides additional guidance on setting the ration of fixed to variable remuneration, specifically noting that firms should consider the highest possible amount of remuneration that could be paid and be able to explain their approach in setting the ratio to the FCA.
  • Annual review: The FCA clarifies that firms are permitted to use an outsourced function to undertake the annual review, provided that the firm's supervisory function (its board or remuneration committee) is still responsible for the review. 

CP21/26 - Remuneration Disclosure

The FCA takes the position that all investment firms must make some disclosure on their remuneration policies and practices, which will be both qualitative and quantitative, and proportionate to the size and nature of the firm.

The FCA explains that it will consult specifically on ESG disclosures in a subsequent consultation paper next year; therefore, it is not proposing additional disclosure for firms in this regard in this consultation. It notes, however, that firms should be aware that they may be in scope of other FCA consultations on climate-related disclosure.

The FCA seeks feedback on the remuneration disclosure provisions in Q3, which asks "Do you have any specific suggestions on our proposed disclosures on governance arrangements and on remuneration?"

The key elements of the proposed remuneration disclosures are described below.

  • Some level of remuneration disclosure will apply to all MIFIDPRU investment firms, including SNI firms, but the minimum level of disclosure that is required will vary by category. 
  • Disclosures consist of both qualitative elements (describing the firm's remuneration policies and procedures) and quantitative elements (disclosing information on remuneration for the year). Sections 3.53 - 3.69 (pages 17-20) specify the disclosures required for all investment firms, all non-SNI firms, and the largest non-SNI firms. 
  • The FCA proposes that each firm may comply with the qualitative disclosure requirements in a manner appropriate to its size, internal organization, and the nature, scope, and complexity of its activities, qualifying that this means that firms must disclose all the information required but have a degree of discretion over the level of detail.
  • The FCA does not propose to require firms to disclose their ratio of fixed to variable remuneration.
  • The FCA proposes that, in a group situation, remuneration disclosures should be made on an individual basis by each MIFIDPRU investment firm and, for UK parent entities that are non-SNI investment firms, also on a consolidation group basis. 

 

Eva M. Mykolenko
Associate Chief Counsel - Securities Regulation

 

endnotes

[1] See ICI Memorandum No. 33702, dated July 26, 2021, available at https://www.ici.org/memo33702. ICI Global submitted a comment letter to CP21/7, which is available at https://www.ici.org/system/files/2021-06/33565a.pdf.

[2] In April 2021, the FCA consulted in CP21/7 on the second set of proposals to introduce the IFPR. That consultation addressed: (1) remuneration requirements; (2) remaining aspects on own funds requirements (such as the fixed overheads requirement); (3) the basic liquid assets requirement; and (4) risk management - the Internal Capital and Risk Assessment (ICARA) process.

[3] PS21/9 is available at https://www.fca.org.uk/publication/policy/ps21-9.pdf.

[4] CP21/26 is available at https://www.fca.org.uk/publication/consultation/cp21-26.pdf.

[5] ICI Global has requested that the proposed list of criteria set out in draft rule SYSC 19/G/3R be provided only as guidelines.