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FCA publishes its final remuneration disclosure rules under the Investment Firm Prudential Regime (IFPR) and hosts webinars to address practical implementation

December 2021

1. FCA’s final remuneration disclosure rules

Timing

The first reporting year under the new reporting requirements will take place in 2023, in respect of the 2022 performance year. The relevant FS Act statutory instruments have been made and these rules will take effect from 1 January 2022.

Firms in scope
  • Any MiFID investment firm authorised and regulated by the FCA that is currently subject to any part of the Capital Requirements Directive (CRD) and the Capital Requirements Regulation (CRR), including BIPRU and IFPRU firms, specialist commodities dealers, oil and energy market participants. Note that commodity and emission allowance dealers are exempt from the disclosure requirements for five years.
  • Collective Portfolio Management Investment Firms (CPMIs).
  • Regulated and unregulated holding companies of groups that contain an investment firm authorised and regulated by the FCA and that is currently authorised under MiFID and/or a CPMI.
Overview

On 26 November 2021, the FCA published its third in a series of policy statements which includes the final rules on public remuneration disclosure. This follows the publication of its Consultation Paper in August 2021 which set out the draft requirements on remuneration disclosure.

Recap of key requirements

As detailed in the August Consultation Paper, a summary of the key requirements include:

  • All FCA investment firms will be required some disclosure on their remuneration policies and practices. In particular, small and non-interconnected investment (‘SNI’) firms must disclose a small amount of information on their remuneration policies and outcomes which differs from the EU Investment Firm Directive regime, which does not apply any remuneration requirements, including on disclosure, to EU SNI firms.
  • Investment firms are required to disclose qualitative and quantitative information on remuneration which is proportionate to the size of the firm.
  • Significantly there is no requirement to disclose the variable to fixed pay ratio(s) that non-SNI firms are required to set for their population of Material Risk Takers (MRTs) under the MIFIDPRU code. This is a point of difference from the EU requirement under Article 51 of the IFR, which mandates the publication of the ratio(s) for EU non-SNI investment firms.
  • All non-SNI firms are required to disclose the types of staff they have identified as MRTs.
  • All non-SNI firms are required to publish a summary of their policy for promoting diversity on the firm’s management body.
Key changes and clarifications to the final remuneration disclosure requirements

The final remuneration disclosure requirements are broadly consistent with those published in the August Consultation Paper. However, the following represents the main changes and clarifications to the final rules to reflect the FCA’s response to the feedback received from the Consultation:

  • Timing: The new remuneration disclosure requirements will first apply in respect of the 2022 performance year, meaning the first MIFIDPRU remuneration disclosures will be made in 2023. The disclosures in 2022 will be made according to the same requirements as applied to the firm in 2021 (if any).
  • Basis of disclosures: In response to feedback, the requirement to disclose at consolidated level has been removed. The FCA has taken the view that requiring disclosure at both individual and consolidated level is unduly burdensome. Firms are now only required to disclose at individual level. However, firms may still disclose at consolidated level if they wish to (in addition to individual level disclosure).
  • Carried interest: The FCA has clarified that carried interest will be treated as variable remuneration because it is not a pre-determined sum but rather is calculated based on the performance of a fund. This is consistent with the approach taken in the ESMA Guidelines on sound remuneration policies under the AIFMD and UCITS. Firms will therefore be required to include carried interest in pay ratio calculations, and categorise it as variable remuneration in disclosures.

Qualitative information disclosures

  • Carried interest: As above, the FCA has clarified that carried interest will be treated as variable remuneration. This is relevant for firms’ disclosure for the purposes of providing details on fixed and variable remuneration (including carried interest).
  • Financial and non-financial criteria: While there is no requirement to disclose all performance criteria used by each business unit or used in relation to each different category of staff, a summary of the types of criteria generally used across the firm is sufficient. The FCA has therefore made minor clarification to make clear that the summary should include three separate parts summarising the types of financial and non-financial criteria used to assess the performance of:
    • the firm as a whole
    • business units
    • individuals

Quantitative information disclosures

  • Data protection, confidentiality and commercial sensitivity: In response to concerns around disclosure of information of confidentiality and commercially sensitive nature, the FCA has amended its proposals to allow non-SNI firms to:
    • Disclose most items of quantitative remuneration data as an aggregated total of the categories ‘senior management and ‘other MRTs’, where either or both of the categories would contain information on 1 or 2 MRTs for that particular information.
    • Where the aggregated total of the categories would still contain information on only 1 or 2 MRTs, the FCA has included an exemption from that particular disclosure requirement.

The FCA has provided some examples of how the exemptions are intended to operate. Where a non-SNI firm relies on either exemption, it must explain in the main body of its remuneration disclosure which data has not been disclosed and the reason.

A link to the FCA’s Policy Statement can be found here. Please see our previous alert for further information regarding the proposed remuneration disclosure requirements from the August Consultation paper.

 

2. FCA webinars to address practical implementation

On 30 November 2021, the FCA hosted two webinars addressing areas of the new IFPR regime where it has received the most queries to date. The second session focused on the more practical aspects of the regime including important clarifications around remuneration. In particular, the FCA has now confirmed that the variable to fixed remuneration ratio requirement will only apply to MRTs.

A summary of the key points on remuneration include:

(a) Remuneration – consolidation
  • Where a consolidation group exists with both an SNI and a non-SNI, both must apply the standard remuneration requirements at a consolidated level.
  • However, the extended remuneration requirements do not apply on a consolidated basis,
  • So an SNI firm in a prudential consolidation group with a non-SNI firm is not subject to the extended remuneration requirements, only to the standard requirements.
  • In the same way, a non-SNI firm in the group that is subject to the standard remuneration requirements at solo level, is also subject to the standard remuneration requirements at consolidated level.
(b) Remuneration – pay ratios
  • Both SNI and non-SNI firms must ensure that the fixed and variable components of an individual’s remuneration are appropriately balanced.
  • This must be applied to all staff.
  • There is an additional requirement that a firm sets out in its remuneration policies an appropriate ratio between variable and fixed remuneration. This is instead of setting a specific bonus cap. This requirement applies only to non-SNI firms and only in relation to those members of staff identified as MRTs.
  • There are provisions to disapply some quantitative reporting where information would relate to 1 or 2 individuals.
(c) Governance board committees
  • There is no transitional provision which applies to the board committee requirements. A non-SNI firm that is required to have a remuneration, risk and nomination committee must have committees in place which comply with the MIFIDPRU requirements by 1 January 2022.
  • The committee requirements apply at solo entity level only, not on a consolidated basis. This means that an FCA investment firm group subject to prudential consolidation is not required to set up the three committees at group level.
  • A firm subject to the committees requirement may be compliant if it has a risk, remuneration or nomination committee at group level which meets the composition requirements and we have granted it an appropriate rule modification.
    A link to access the relevant webinar can be found here.
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