Investment Firms Prudential Regime remuneration - FCA and EBA updates

Latest position 

• The FCA has recently updated its website to say that it will shortly be publishing a Discussion Paper on the new regime.
• The EBA has published draft regulatory technical standards (RTS) on Material Risk Taker (MRT) identification and draft RTS on classes of instruments.
• The EBA has published a roadmap outlining its timetable for delivering its governance and remuneration mandates under the regime.

Background on UK implementation

The Investment Firms Regulation (IFR) and the Investment Firms Directive (IFR) establish a new EU Investment Firms Prudential Regime (IFPR) that is likely to start coming into force for UK firms on 26 June 2021. Assuming the Brexit transition period finishes in December 2020, the IFPR will not apply automatically in the UK. However, the FCA has updated its website to say that it will be publishing a Discussion Paper this summer as part of its engagement on the new regime. Therefore, firms should be preparing to implement the changes under the IFPR by June 2021 and engage with the remuneration changes under the regime at the earliest opportunity.

New remuneration requirements under IFPR

Class 2 investment firms under the IFPR (firms that are not small and non-interconnected firms) will have to comply with new staff remuneration requirements. While the full impact of the regime on UK firms depends on FCA implementation, as a minimum, impacted firms will have to:

• apply a new financial threshold test to determine whether they can apply proportionality to disapply pay-out process rules affecting the structure and form of variable remuneration;
• revisit their governance arrangements;
• amend their MRT identification practices (potentially significantly, see below); and
• comply with new remuneration disclosure requirements.

A summary of the remuneration requirements under the regime is below.

MRTs - On 4 June 2020, the EBA published its draft RTS on criteria to identify categories of staff whose professional activities have a material impact on an investment firm’s risk profile or assets it manages. The draft proposals could mean significant changes for firms on MRT identification. We will provide a more detailed summary of the RTS shortly.

Ratio between fixed and variable remuneration - Firms must fix an appropriate ratio, but there is no bonus cap.

Timing of variable remuneration - ≥ 40% of MRT variable remuneration must be deferred for 3-5 years. If remuneration is “particularly high”, this rises to ≥ 60%.

Payment in instruments -≥ 50% of MRT variable remuneration must be paid in any of four categories of instruments listed in the IFD: shares or equivalent ownership interests; share‐linked or equivalent non‐cash instruments; additional Tier 1 or Tier 2 instruments, or instruments which can be fully convertible to Common Equity Tier 1 or written down; or non‐cash instruments reflecting the instruments of the portfolios managed. Competent authorities may approve alternative arrangements fulfilling the same objectives. The EBA has published a draft RTS on classes of instruments, including appropriate alternative arrangements. We will provide a more detailed update on the RTS shortly.

Retention policy - Instruments must be subject to an appropriate retention policy. This means they must be subject to a post-vesting lock-up period, the length of which is yet to be defined.

Malus/clawback - Variable remuneration paid to MRTs must be subject to malus or clawback arrangements in certain circumstances.

Disapplication of pay-out process rules - The rules on deferral, payment in instruments and retention can be disapplied if the firm’s on and off-balance sheet assets do not on average exceed €100 million over the prior four years (Firm Proportionality), or if an MRT’s annual variable remuneration does not exceed €50,000 and is not more than 1/4 of their total remuneration. Member States may decrease or increase the Firm Proportionality threshold to up to €300 million, subject to certain conditions being satisfied.

Remuneration committee - Firms that are unable to apply Firm Proportionality must establish a remuneration committee, which can be established at group level where applicable, and a risk committee, each composed of non-executive directors.

Gender neutrality - Firms must have a gender neutral remuneration policy, a gender balanced remuneration committee and provide information on their gender pay gap.

Pillar 3 disclosures - More detailed Pillar 3 type disclosures in respect of MRT remuneration.

Prudential consolidation - The remuneration rules apply on a consolidated basis if firms are required to apply full prudential consolidation.

EBA roadmap

The EBA has recently released a roadmap relating to its various mandates to prepare RTS and guidelines in the areas of governance and remuneration, supplementing the IFR and the IFD. The EBA proposes to deliver each of its remuneration and governance mandates by December 2021, according to the timetable set out below.

Guidelines on governance arrangements - Q1 2021
RTS specifying criteria to identify MRTs - October 2020
RTS to specify instruments for variable remuneration - October 2020
Guidelines on benchmarking of remuneration practices and the gender pay gap and guidelines on data collection regarding high earners - Q4 2021
Guidelines on the application of sound remuneration policies - Q4 2021
Supervisory information on high earners - Q4 2021