The proposed new IFPR Remuneration Code

August 10, 2021

In July, the Financial Conduct Authority (FCA) published its policy statement PS21/09 in relation to the implementation of the new Investment Firms Prudential Regime (IFPR) which becomes effective from 1 January 2022.

PS21/09 is the second in the series of policy statements that summarises the feedback that the FCA has received in respect of their consultation paper CP21/7. The FCA published its final consultation paper CP21/26 on 6th of this month and a third policy statement (which should provide the final rules) is expected to be published later this year sometime after the consultation closes on 17th September.

IFPR will apply to investment firms in the UK that are authorised to carry on investment services or activities under MiFID and regulated by the FCA, collective portfolio management investment firms and regulated and unregulated holding companies of groups that contain any of the aforesaid.

In addition to the rules dealing with risk management and prudential capital rules, the IFPR would also include a new single remuneration code (MIFIDPRU Remuneration Code in SYSC 19G of the FCA handbook (New Remuneration Code)) which would replace IFPRU Remuneration Code (SYSC 19A) and the BIPRU Remuneration Code (SYSC 19C).

This article provides an overview of the proposed New Remuneration Code.


The FCA takes the view that remuneration is a key driver of behaviour for all firms and individuals and accordingly suitable remuneration policies and practices support the management of risks for firms. The objectives of the FCA’s approach are to:

(a) promote effective risk management in the long-term interests of the firm and its customers;
(b) ensure alignment between risk and individual reward;
(c) support positive behaviours and a healthy firm culture; and
(d) discourage behaviours that can lead to misconduct and poor customer outcomes.


In PS21/09, FCA states that the New Remuneration Code will apply to performance periods beginning on or after 1 January 2022.

Note that the Code’s focus is on the performance period, not the date on which remuneration is awarded or paid out. Accordingly, firms with quarterly performance periods should apply the New Remuneration Code to the performance period beginning on or next following 1 January 2022. The existing IFPRU Remuneration Code and the BIPRU Remuneration Code will continue to apply to performance periods which began before 1 January 2022.

Scope of application of the New Remuneration Code

The New Remuneration Code divides firms into the following three categories:

(a) Small and non-interconnected firms (SNI)
(b) Non-SNI firms; and
(c) Larger Non-SNI firms.

SNI firms, broadly speaking, are firms that fall within certain size tests (eg AUM is less than £1.2 billion) which do not hold client money or assets and are not permitted to deal on their own account.

All other firms will be classified as Non-SNI.

Non-SNI firms are regarded as Larger Non-SNI, if broadly speaking:

(a) the value of their on-balance sheet assets and off-balance sheet items over the preceding forty-eight months is a rolling average of more than £300 million; or
(b) the value of their on-balance sheet assets and off-balance sheet items over the preceding forty-eight months is a rolling average of more than £100 million (but less than £300 million) and they have a trading book business of over £150 million and/ or a derivatives business of over £100 million.

Basic remuneration requirements

The ‘basic remuneration requirements’ apply to all investment firms and in relation to all staff. SNIs are required to comply only with the basic remuneration requirements.

A firm should have a remuneration policy for all staff which should:

(a) be proportionate to its size, internal organisation, nature and scope of activities:
(b) be gender neutral;
(c) be consistent with and promote sound and effective risk management;
(d) be in line with the firm’s business strategy and objectives; and
(e) contain measures to avoid conflicts of interest, and promote risk awareness and prudent risk-taking.

The remuneration policy must make a clear distinction between the criteria applied to fixed and variable pay. The two components must be appropriately balanced. When assessing individual performance, both financial and non-financial criteria must be taken into account (although not necessarily weighted 50/50).

The remuneration policy must be periodically reviewed and its implementation overseen by the firm’s management body. Staff with control functions must be independent from the business units that they oversee and be remunerated by reference to objectives linked to their functions.

Variable pay must not affect the firm’s ability to ensure maintenance of a sound capital base. Unless justified, variable pay should not be made available to members of the management body where the firm benefits from exceptional government intervention.

In PS21/09, the FCA has indicated that ‘remuneration’ would mean ‘any form of remuneration, including salaries, discretionary pension benefits and benefits in kind. So far as partners of a partnership or members of an LLP (who also fall within the meaning of ‘staff’) are concerned, the FCA expects ‘a reasonable portion’ of the profit share is to be considered remuneration where the partner works full-time for the firm.

Carried interests – In respect of ‘carried interests’, the FCA has indicated that the New Remuneration Code will apply to carried interests and that ‘carried interest must be valued at the time of its award.

A new rule has been added to the effect that the requirements on pay-out in non-cash instruments, deferral, retention and ex-post risk adjustment do not apply to carried interest arrangements where:

(a) the value of the carried interest is determined by the performance of the fund to which the carried interest relates
(b) the period between the award and payment of carried interest is at least 4 years
(c) carried interest is subject to forfeiture or cancellation for material risk takers (MRT) who are responsible for conduct which resulted in significant losses to the firm and for situations in which the MRT failed to meet appropriate standards of fitness and propriety.

Co-investment arrangements – So far as co-investments arrangements are concerned, returns on such arrangements would be regarded as remuneration only where the investment was made out of loans provided by the firm (or a member of its group) and the loan was not provided on commercial terms or had not been repaid in full by the time the return on the investment was repaid.

Standard remuneration requirements

In addition to complying with the ‘basic remuneration requirements’, Non-SNIs and Larger Non-SNIs are required to comply with the ‘standard remuneration requirements’.

Non-SNIs are required to identify MRTs on an annual basis. MRTs are persons whose professional activities can have a material impact on the risk (to prudential, operational, market, conduct or reputation) profile of the firm or the assets under management. While the ‘standard remuneration requirements’ would apply to MRTs (except those who qualify for exemption, see below) a firm may choose to apply some or all of the ‘standard remuneration requirements’ to members of staff who are not MRTs.

The FCA has proposed that in line with the existing codes, MRTs who have variable remuneration of £167,000 or less and have variable remuneration which makes up one-third or less of their total remuneration may be exempt from some of the remuneration requirements.

The total performance-related variable remuneration of an MRT must be assessed based on a combination of the performance of the MRT, the relevant business unit and the firm. The performance assessment must be based on a multi-year period which takes into account the business cycle of the firm and its risks.

In calculating and measuring performance for bonus pools and awarding bonuses, firms must take into account all types of current and future risks.

There must be provisions for ex-post adjustments to variable pay in the remuneration policy. Such adjustment mechanisms should include in-year adjustments and malus and clawback. The criteria for the application of malus and clawback provisions should set out. Moreover, these provisions should apply for a long period of time to ensure that they can be applied until the award has vested in its entirety and which spans at least the combined length of the deferral and retention periods (if applicable).

Non-performance-related variable remuneration – With regard to non-performance-related variable remuneration, the FCA has proposed that:

(a) guaranteed variable remuneration such as a ‘sign-on bonus’ or a ‘golden handshake’ should be awarded to MRTs only rarely, in the context of hiring, in the first year of service and where the firm has a strong capital base;
(b) retention awards are permitted but should be used rarely and may be linked to performance criteria;
(c) buying out previous contracts (on recruitment of an MRT) should be aligned with the long-term interests of the firm and should be subject to the same pay-out terms as the previous employment;
(d) the provision of and criteria for any severance pay should be set out in the remuneration policy and all severance pay must reflect the individual’s performance over time and must not reward failure or misconduct.

The other requirements on a Non-SNI are:

(a) to set a ratio between variable pay and fixed pay after considering all relevant factors;
(b) the design, implementation and effects of remuneration policy must be subject to annual independent internal review by staff engaged in control functions;
(c) discretionary pension benefits (i.e. pension benefits that are linked to performance) should be in line with the business strategy, objectives and long-term interests of the firm, be subject to malus and clawback provisions and should be awarded in shares or FCA approved instruments
(d) reasonable steps must be taken to ensure that MRTs do not undermine the remuneration rules; and
(e) variable pay should not be paid to MRTs through vehicles or methods that facilitate non-compliance with the rules.

Extended remuneration requirements

In addition to complying with the ‘basic remuneration requirements’ and the ‘standard remuneration requirements’, Large Non-SNIs (estimated to be around 101 UK firms) are also required to comply with the ‘extended remuneration requirements’.

The FCA has proposed that at least 50% of any variable pay should be satisfied in shares or share-linked non-cash instruments. Firms such as LLPs or partnerships, who do not have shares should apply to the FCA for a modification of the rule on payment in shares so that alternative arrangements may be approved by the FCA in these cases. Variable pay should be subject to an appropriate retention policy.

With regard to deferral and vesting of variable pay for MRTs, the FCA has proposed that:

(a) at least 40% of variable pay should be deferred for at least 3 years (longer than 3 years for MRTs who have a considerable impact on the risk profile of the firm);
(b) at least 60% of the variable pay should be deferred where the variable pay is high or it is at least £500,000;
(c) vesting should not be faster than on a pro rata basis (i.e. if the deferral is over three years, no more than 1/3rd should vest each year);
(d) interest and dividends in respect of shares and other non-cash instruments relating to the period prior to vesting should not be paid to MRTs.

Discretional pension benefits – In respect of discretionary pension benefits to MRTs, the FCA proposes that where an MRT:

(a) leaves the firm before retirement age, the firm should hold the pension benefits for a period of 5 years in the form of shares, instruments and other FCA approved instruments; and
(b) leaves upon reaching retirement age, the firm pays out the pension benefits in shares, instruments and other alternative arrangements, which should be retained by the MRT for a period 5 years.

The FCA proposes that Large Non-SNIs should have a remuneration committee. We shall cover the rules on governance in our article next month.

We will analyse the formal rules when the formal rules are published later in the year; hopefully they will provide more detail and clarity on this complex subject. In the meantime, for more information or to discuss how the new IFPR code might affect remuneration policy in your firm, please contact Nigel Mills or JD Ghosh.

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