Financial Services Reward

Update 2018

In our Update, we provide a round-up of recent UK and EU developments impacting reward in the financial services sector and an assessment of key issues currently faced by financial services firms.

Key UK Developments

MiFID II – new remuneration code

  • Firms in scope: UK MiFID investment firms, financial advisers and UK operations of non-EEA investment firms.
  • Timing: 3 January 2018.

As highlighted in our previous update, the Financial Conduct Authority’s (FCA) new Remuneration Code, SYSC 19F, took effect on 3 January 2018. The new Code codifies existing FCA guidance in relation to remuneration and performance management for client-facing staff. All firms should therefore ensure that they are compliant with this guidance in relation to sales incentives and performance management and the provisions of SYSC 19F.

A link to the new Code can be found here.

Insurance Distribution Directive - UK implementation

  • Firms in scope: Insurers, reinsurers, insurance brokers and firms such as banks or retailers which provide insurance alongside their primary business activities.
  • Timing: 1 October 2018.

In January 2018, the FCA published a further Policy Statement in respect of the UK's implementation of the Insurance Distribution Directive (IDD).

The remuneration rules deriving from the IDD are being implemented in the UK FCA Handbook as an addition to the new SYSC 19F Remuneration Code (specifically, SYSC 19F.2) which covers the remuneration and performance of client-facing staff. These new provisions are expected to take effect from 1 October 2018.

In particular, insurance distributors must ensure that remuneration or assessment of performance of employees must not conflict with customers’ best interests. In addition, an insurance distributor must not facilitate any remuneration or sales target that incentivises employees to recommend a less suitable insurance contract in place of a more suitable contract when considering the needs of the customer.

A link to the FCA Policy Statement can be found here.

Extension of Senior Managers and Certification Regime to FCA solo regulated firms

  • Firms in scope: All Financial Services and Markets Act 2000 (FSMA) authorised firms, including asset managers, investment firms, insurers and consumer credit firms.
  • Timing: Rules expected to apply from mid-to-late 2019 for solo-regulated firms and to apply from 10 December 2018 for insurers.

In December 2017, the PRA and FCA issued a suite of Consultation Papers providing further guidance on how they plan to transition firms and individuals to the Senior Managers and Certification Regime (SMCR). These latest papers follow the publication in July 2017 of FCA Consultation Papers containing proposed rules for extending the SMCR to all FSMA authorised firms, including asset managers, investment firms, insurers and consumer credit firms.

The FCA and PRA have confirmed in their latest Consultation Papers that, as with the approach to SMCR for Banking firms, firms in the SMCR extension will not have to apply for re-approval of their existing approved individuals whose roles map across into the SMCR (with one exception – Core firms with a non-executive Chair must submit a Form K, notifying the FCA that they wish to convert an approved Non-Executive Director to the SMF9 – Chair function).

The FCA has confirmed its plan to implement the rules for Certification gradually, so that firms can become used to applying the new regime. Whilst firms will have to identify Certified staff from day one under the SMCR, HM Treasury intends to commence the requirement for firms to certify relevant employees as fit and proper for the first time 12 months after the start of the main SMCR.

The FCA has also confirmed that the Conduct Rules will apply to Senior Managers and Certified staff from the date of the commencement of the SMCR for all firms. This means that firms will need to identify all of their Certified staff from day one of the regime. These staff must meet the Conduct Rules straight away, but firms will have 12 months to complete their fitness and propriety assessments and to ensure that all appropriate certification paperwork is in place.

Timing and next steps
Whilst the commencement date has not yet been set for solo-regulated firms, for the purpose of its latest publication, the FCA has assumed that the rules will take effect in mid-to-late 2019. The FCA has confirmed that it will publish its rules, and final approach to transition and conversion, in a Policy Statement in summer 2018. HM Treasury has confirmed the implementation date for the SMCR for insurers is to be 10 December 2018.

The FCA Consultation Paper can be found here and the PRA’s Consultation Paper implementing the extension of the SMCR to insurers can be found here.

Senior Insurance Managers Regime

  • Firms in scope: Solvency II insurance firms and large non-directive firms (i.e., those insurers outside the scope of the Solvency II Directive).
  • Timing: 10 December 2018.

In February 2018, the PRA released a new Policy Statement announcing changes to the Senior Insurance Managers Regime (SIMR). The PRA’s Supervisory Statement was also altered to reflect these policy changes and to clarify certain Senior Insurance Management Function (SIMF) responsibilities.

These changes are designed to bring the SIMR more closely into line with the SMCR as the PRA moves to a more integrated regime. The PRA will implement these rules alongside the implementation of the extension of the SMCR to insurers on 10 December 2018.

These changes will be relevant to clients who are Solvency II insurance firms and large non-directive firms.

A link to the PRA Policy Statement can be found here.

Key EU developments

EU Commission’s proposals for new prudential regime for investment firms

  • Firms in scope: All MiFID investment firms including those brought into scope through the extension of MiFID II (including large asset managers, commodity trading firms, and firms that hold client money and assets).
  • Timing: Implementation is therefore not expected to take place before 2020.

In December 2017, the European Commission adopted proposals for a Directive and Regulation to amend the prudential rules for EU investment firms.

The new draft legislation is aimed at introducing a simpler, more proportionate and more risk-sensitive alternative to the Capital Requirements Directive (CRD IV) and the Capital Requirements Regulation (CRR) for investment firms. Currently the vast majority of investments firms in the EU are subject to rules that were originally designed for banks. Under the proposals, smaller investment firms would become subject to a more appropriate prudential regime, while the largest and most systemic EU investments firms posing similar risks as banks would be regulated and supervised as banks.

The proposals are broadly in line with the EBA’s recommendations regarding the new regime published in September 2017 (as highlighted in our previous update), including in relation to governance and remuneration. Most significantly, the Commission does not propose to introduce a bonus cap requirement for smaller investment firms akin to that currently provided for in the CRR and CRD IV.

New categorisation of investment firms and impact on remuneration
The Commission proposes to split investment firms into three categories according to their size, activities and business model. The proposals for pay rules under the new regime are as follows:

Class 1 firms – deemed to be systemic investment firms, or investment firms which are exposed to the same types of risks as credit institutions, should continue to be subject to CRD IV pay rules.

Class 2 firms – the largest category of firms which will include any firm which is not in Class 1 or 3, should be subject to a partial application of CRD IV pay rules. The proposals indicate that:

  • The bonus cap will not apply and firms should set appropriate ratios of fixed to variable pay themselves
  • Firms will be free to choose between the types of instruments used to pay out part of the variable remuneration
  • The deferral and payment in instruments requirements would not apply to firms with total assets below EUR 100 million over the four-year period immediately preceding the given financial year, and in relation to staff whose annual variable remuneration does not exceed EUR 50,000 and does not represent more than 1/4 of this individual's total annual remuneration
  • As under CRD IV, firms will still need to disclose information in respect of the EBA’s high earners and remuneration benchmarking reports

Class 3 firms – with less than EUR 1.2bn AuM and no client money holdings/no administration of client assets, these firms are expected to be subject to MiFID remuneration rules only.

The proposed regulation will now go through the EU legislative process. Once the legislation has been agreed, an implementation period of 18 months is envisaged by the Commission. Implementation is therefore not expected to take place before 2020.

A link to the proposals can be found here.

CRD V/CRR II – ongoing negotiations

  • Firms in scope: Banks, building societies and at investment firms (subject to the introduction of the new prudential regime above).
  • Timing: Rules expected to be finalised in Q2/Q3 2019, with implementation thereafter.

Back in November 2016, the European Commission published proposals for amendments to the Capital Requirements Directive and Capital Requirements Regulation as part of a package of reforms designed to complete and fine-tune the reform of the financial services sector.

Some further amendments to the text of CRD V have been proposed as part of the Council negotiations and relate to the remuneration proportionality thresholds which were initially proposed last year. We summarise these proposed amendments below, but please note that the text is still the subject of negotiations and so is subject to change:

  • The inclusion of the bonus cap in the proportionality provision for the first time (which, if included in the final text, would allow the disapplication of the bonus cap below the specified level)
  • The rules on deferral and payment in instruments (as well as the rule on discretionary pension benefits) would also be able to be disapplied (as was provided for in earlier drafts)
  • Higher thresholds for the purposes of individual proportionality (a level of EUR 100,000 of variable remuneration, not exceeding 1/3 of the individual’s total annual remuneration – up from EUR 50,000 and 1/4 respectively in previous drafts)
  • Also, new proposed scope for local regulators to increase the asset threshold for firm-level proportionality, other than in the case of large institutions

In addition, on 16 November 2017, the EU Parliament Committee on Economic and Monetary Affairs (ECON) published a draft report on legislative proposals for amendments to CRD V. It proposes that large institutions should be obliged to set and disclose a figure for the salary of each individual board member representing a proportion of the median salary of the institution’s employees.

Later than initially expected, we understand that it is likely that the European Council will conclude its internal negotiations on CRD V/CRR II in the first half of 2018. As ECON has also been delayed in its parallel negotiations on CRD V/CRR II, these developments, taken together, will push back when the Council and Parliament can begin negotiations with each other on a final CRDV/CRR II text to Q3 2018 (talks which are expected to take up to one year to complete). As a result, CRD V/CRR II is expected to be finalised some time in Q2/Q3 2019, with implementation thereafter.

Key themes and broader trends for this quarter

Preparing for updated Pillar III disclosures

2018 is the first year in which firms will be obliged to publish, in relation to the 2017 financial year, the revised Pillar 3 remuneration disclosure requirements, as set out in the report published by the Basel Committee of Banking Supervision (BCBS) in March 2017.

The BCBS’ Pillar 3 remuneration disclosure requirements reflect a number of the enhanced disclosure requirements set out in the EBA Guidelines. Firms should therefore consider how they incorporate the new areas of focus from both the BCBS and the EBA. For example, this includes the requirement to disclose detail as to whether there have been any change to the firm’s remuneration policy during the past year following a review by the Remuneration Committee and the impact of any changes on remuneration. In respect of the quantitative disclosures, firms should review their approach to ensure that the tables capture both of the requirements set out by the BCBS and the EBA.

A link to the BCBS report can be found here. A link to the EBA Guidelines can also be found here.

Risk adjustment and MRT identification

Risk Adjustment
2017 has seen many firms enhance and refine their risk adjustment processes in order to meet regulatory expectations. 2018 is likely to see a continued focus by the regulators on this area across financial services, both at the bonus pool and individual level. Firms that have not already done so may therefore want to focus in 2018 on reviewing their current approach to risk adjustment.

Questions that firms should be asking themselves include:

  • Is your firm comfortable that appropriate risk metrics (including in relation to conduct risk) are being taken into account for the purposes of determining bonus pools and individual award levels?
  • Does your firm have in place mechanisms to ensure that risk events are appropriately captured?
  • What methodology does your firm apply in order to demonstrate how ex ante and ex post risks are reflected in bonus pool setting (e.g. through the use of a “waterfall” diagram or other step-by-step process flow)?

Employee communications are another area for consideration in respect of clearly communicating the impact of ex post adjustments on individual reward decisions. For some firms, this is an area that may need to be enhanced for 2018, both in the interests of transparency and to ensure that individuals are made aware of the specific impact that ex post adjustments have on their individual remuneration.

Material Risk Taker identification
In line with the EBA Guidelines and the guidance on remuneration published by the PRA and the FCA in Spring 2017, we have seen an upward trend in the number of additional roles being identified as posing a potential material risk to firms on the basis of risks beyond those specifically addressed in the EBA’s Regulatory Technical Standards under CRD IV.

There is continued emphasis on firms taking a holistic approach to risk, considering all types of risk that an individual may pose to the risk profile of the firm.

For 2018, firms should therefore ensure that they are comfortable that they have given full consideration to what other types of risk are potentially posed to the firm (e.g. reputational risk, conduct risk or the risks associated with digital technologies).

Gender pay

  • Firms in scope: Employing entities with 250 or more employees who are based in England, Scotland or Wales.
  • Timing: The deadline to report is by 4 April 2018.

With the deadline for disclosing the gender pay gap data fast approaching, firms are preparing to report ahead of the private sector submission deadline of 4 April 2018.

In December 2017, we examined the gender pay gap disclosures of the large private sector employers which were the first to make submissions to the Government’s Gender Pay Viewing Portal. This is based on all main market-listed companies, along with privately-held businesses with 2,000 or more employees, which had disclosed as of 1 December 2017.

Our review explored how the companies which opted to disclose early approached the requirements, and in particular how they have presented their data for the purposes of the narrative on their websites.

A summary of our findings can be found here.

Brexit considerations

For many firms, 2018 will be the year of implementing the planning which took place in 2017 as preparation for Brexit. For other firms, an assessment of the practical impact for the firm and employees of any organisational changes, will need to be urgently undertaken this year.

Key considerations that firms should be thinking about include:

  • Assessing the practical impact that differences in local remuneration rules may have on pay structures within the firm (e.g., the application of different deferral and clawback periods and different interpretations of the bonus cap requirements)
  • Analysing local rules / regulator guidance in relation to identifying MRTs
  • Assessing the number of employees that may become subject to the payout process rules on account of there being a lower de minimis threshold in a particular jurisdiction
  • Assessing which particular employees will need to move locations and considering how their arrangements will be structured. This could include specific modelling for individuals moving to confirm new pay arrangements and impact on cash flow
  • Considering the approach to retention and motivation of key individuals/teams during any agreed transition period

With the UK’s future arrangements with the EU still uncertain, keeping abreast of pronouncements from the regulators will also continue to be important for 2018 - for example, relating to the degree to which particular roles or functions (e.g. senior management and control functions) will be expected to be in jurisdiction and the degree of supervision for third country firms.

Deloitte UK contacts


Stephen Cahill, Vice Chairman
+44 (0)20 7303 8801

John Cotton, Partner
+44 (0)20 7007 2345

Olivia Biggs, Partner
+44 (0)20 7007 2819

Nick Hipwell, Partner
+44 (0)20 7007 8647

Clare Edwards, Director
+44 (0)20 7007 1997

Sonia Jenkins, Director
+44 (0)20 7007 2115

Shona Thomson, Director
+44 (0)20 7303 4965

Lucy Boyle, Associate Director
+44 (0)20 7303 4453

Patricia Bradley, Associate Director
+44 (0)20 7007 0124

Emily Buzzoni, Associate Director
+44 (0)20 7303 2710

Susannah Hill, Associate Director
+44 (0)20 7303 8289

Iqbal Jit, Associate Director
+44 (0)20 7303 4101

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