New remuneration code MIFIDPRU for all FCA investment firms

Overview

There will be a new remuneration code applicable to investment firms authorized under the Markets in Financial Instruments Directive: the remuneration code MIFIDPRU (the “MIFIDPRU code”).

The MIFIDPRU code will replace the current IFPRU and BIPRU remuneration codes into a single, consolidated regime. In the FCA Handbook, a new SYSC 19G therefore replaces the current SYSC 19A (IFPRU Remuneration Code) and SYSC 19C (BIPRU Remuneration Code).

When will the MIFIDPRU code apply?

Companies must apply the new MIFIDPRU code from the start of their next performance period beginning on or after January 1, 2022. Please note that it is the period of performance that is relevant, rather than the date on which compensation is actually awarded or paid. As such, the existing BIPRU and IFPRU compensation codes will continue to apply to any compensation paid in 2022 that relates to a service or benefit period that began in 2021 (or earlier).

How will the MIFIDPRU code apply?

The MIFIDPRU code will apply to the majority of MIFID investment firms. However, the new rules aim to impose requirements commensurate with the size and complexity of different businesses and the degree of risk they pose to customers and markets.

To this end, the new regime divides companies into two main categories:

1. Small Non-Interconnected Businesses (SNIs), i.e. businesses that pose less risk to clients and customers; and

2. Non-SNI companies, being larger and more complex companies. Non-SNI companies are further subdivided into regular non-SNI companies and large non-SNI companies.

Depending on the classification of your company, it will then have to comply with either “basic”, “standard” or “extended” remuneration rules:

  • SNI companies are only required to apply the basic rules;
  • regular non-SNI firms are required to apply the basic rules and standards; and
  • large non-SNI companies are required to apply the basic, standard and extended rules.

For FCA investment firms that are part of a larger group, the FCA may allow the group to apply a group capital test. In this case, no prudential consolidation is required and each FCA investment firm within the group will have to apply its appropriate remuneration rules on an individual basis. When prudential consolidation is required, the remuneration rules will have to be applied both at the level of the individual entity and at the level of the consolidated group.

To find out which rules apply to you, please see our MIFIDPRU Remuneration Code: Employer’s Guide 2022.

What are the new requirements of the MIFIDPRU Code?

Although the basic rules should be a continuation of what companies are already doing in terms of remuneration, the main changes concern the standard and extended remuneration rules. The titles are:

  • All non-SNI companies will be required to identify their material risk takers (‘MRT’) on an annual basis;
  • Regular non-SNI companies will have to comply with the standard rules regarding the payment of performance-related variable compensation to MRTs, and large non-SNI companies will also have to comply with the extended rules governing the deferral, retention and payment of stock bonuses or equivalent instruments and new rules on discretionary pension benefits (although an exception is available);
  • Non-SNI companies will have to apply malus and clawback provisions to variable compensation;
  • Non-SNI companies will have to set an appropriate ratio between the variable and fixed components of total remuneration and define this ratio in the remuneration policy of the company;
  • The FCA proposes to require large non-SNI companies to establish risk, nomination and remuneration committees (replacing existing requirements for “significant IFPRU” companies);
  • There are new rules regarding the payment of “signing bonuses”, retention bonuses, buyout bonuses and severance pay;
  • The MIFIDPRU code contains guidance to help determine which types of payments to partners and members of LLPs should be treated as compensation versus return on equity;
  • The FCA has confirmed that MIFIDPRU will apply to deferred interest, although there is a new rule that payment instrument, deferral, retention and ex post adjustment requirements do not apply. not to deferred interest when certain conditions are met;
  • From now on, returns on co-investment agreements will only be considered remuneration if the investment is made by means of a loan granted by the company or a member of the group to which the company belongs (provided that the loan is not granted to the individual on commercial terms or is not fully repaid at the time the return on investment is paid);
  • The FCA has proposed that all investment firms have in place a gender-neutral remuneration policy for all staff to cover key elements of the MIFIDPRU code and that non-SNI firms further ensure that their compensation policies and practices are subject to annual review by staff engaged in control functions;
  • All FCA investment firms must continue to disclose information about their compensation practices. The extent of required disclosure varies between basic, standard, and extended rules.

For more details on these requirements and their application, please see our MIFIDPRU Remuneration Code: Employer’s Guide 2022.

What to do next?

1. Download our employers guide for a breakdown of how the MIFIDPRU code applies to you and for a more in-depth look at the key requirements. An action point checklist is also included to help you prepare for implementation.

MIFIDPRU Remuneration Code: Employer’s Guide 2022

2. Assess your company’s categorization to determine which of the “Basic”, “Standard” and “Extended” compensation rules apply.

a. Are you an SNI or non-SNI company?

b. Are you classified as regular non-SNI or greater?

3. Identify when you will be required to start applying the MIFIDPRU Code and review your existing compensation policies and practices to identify any gaps.