Last month we looked at Own Funds Requirements with respect to the consultation paper CP21/7, here we look at how the MIFIDPRU Remuneration Code will apply to all firms whether classified as small & non-interconnected (SNI) or not.
The incoming Remuneration Code under SYSC 19G consolidates the currently separate IFPRU and BIPRU requirements, replacing the non-handbook guidance notes issued in prior years. The new requirements are scheduled to come into force alongside the rest of the IFPR from January 2022.
The FCA sees remuneration as a key driver of behaviours for both individuals and firms and hope to promote long term risk management within firms whilst continuing to discourage misconduct and poor outcomes for clients.
At its most basic, the code requires all firms, even those previously out of scope, to design and implement policies and procedures in relation to all staff corresponding to a range of principles including proportionality and gender neutrality, in order to promote sound and effective risk management in line with the firm’s business strategy. Firms will need to form a Remuneration Committee (if they do not have one already) and to demonstrate strong governance and oversight, including ensuring staff in control functions are sufficiently independent from the business units they oversee. The regulator has also proposed changes to the restrictions around variable remuneration, broadening the scope of financial and non-financial performance criteria and restructuring the variable pay exemptions.
These ‘basic remuneration requirements’ will apply to all firms, whilst a non-SNI firm will see extended restrictions in the areas of variable remuneration, non-cash instruments and retention periods. Where previously Collective Portfolio Management Investment firms (CPMIs) have fallen outside of the MiFID remuneration code instead relying on AIFM or UCITS guidelines, now both rulebooks will apply.
SNI’s not meeting the enhanced requirements will have to meet only the ‘standard remuneration requirements’ in addition to the basic code outlined above. These standard requirements apply only to material risk takers (MRTs) although the FCA specifically note that they would ideally see the principles carried across all staff. Much of the language used in the consultation paper is consistent with outlined changes to the UK’s governance regime which seeks to tackle executive directors seemingly being ‘rewarded for failure’ and is likely to require annual resilience statements outlining how a firm is mitigating long and short-term risks.
Firms in scope of the standard remuneration provisions will need to have mechanisms for ensuring that bonusses and variable remuneration awards are assessed across the firm’s performance, the relevant business unit and the individual themselves. Retention, buy-outs, severance and guaranteed variable remuneration see restrictions and even pension benefits must be in line with the business’ strategy, objectives and long-term interests. The regulator expects firms to implement malus and clawback provisions, such that where performance results over a multi-year period are below the original defined target previously awarded, payments may be revised or refused.
Given that all firms in scope of IFPR/MiFIDPRU will need to comply with the new governance requirements and in some cases will need to redraft employee contracts as well as establish new committees, we anticipate this is an area many directors and compliance officers will need help in seeking to understand. Governance and risk management are core pillars of any investment firm’s strategy and Objectivus have a track record of assisting firms to efficiently and effectively implement proportionate measures.
If you would like help understanding this or any other issues, please contact Dan, Ben, Simon or one of the team.