The proposed new IFPR – Governance and Remuneration issues

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 the 6^th 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 17^th 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.

This article provides an overview of the proposed rules on internal governance arrangements that apply to FCA investment firms.

Overview

The FCA considers that internal governance arrangements are essential for a firm to achieve its strategic objectives, management and mitigation of risks.

Internal governance and control

The FCA has proposed that all FCA investment firms, including SNI firms must have robust governance arrangements that include:

• a clear organisational structure with lines of responsibilities which are well defined, transparent and consistent
• an effective identification, management, monitoring and reporting process relating to risks
• an adequate internal administration and control mechanism.

Firms have the flexibility to adopt the internal governance arrangements as they seem appropriate to their legal and ownership structure, business model, activities and risks as long as firms comply with rules of risk management, the remuneration code and all other relevant requirements in the Senior management arrangements, Systems and Controls sourcebook (SYCY) of the FCA Handbook.

It is worth noting that a UK parent entity of a group must apply these rules on a consolidated basis as if the group is a single FCA investment firm, including any unregulated member of the group.

Risk, remuneration and nomination committee

The FCA has proposed that large non-SNI firms (who meet the requirements described below) should establish risk, remuneration and nomination committees who should make recommendations to the management body having overall responsibility:

• the value of their on-balance sheet assets and off-balance sheet items over the preceding 4-year period is a rolling average of £300 million or more, or
• 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.

In a group situation, the FCA’s view is that:

• each group member or entity should have a risk committee to assess the risks and exposure of the group member or entity. However, a firm may apply to the FCA for the modification of this rule if setting up such a committee in each group entity would be unduly burdensome and provided that they explain to the satisfaction of FCA how having a risk committee at the group level will not adversely affect the FCA’s operational objectives
• it would be acceptable to have one remuneration committee at the parent level for the whole group where it is an FCA investment firm group to which the prudential consolidation applies and where the remuneration committee (a) meets the composition requirements (see below) are met, (b) has the powers to comply with the other obligations in MIFIDPRU 7.3 (i.e rules relating to risk, remuneration and nomination committee) on behalf of the non-SNI firm, and (c) its members have the appropriate knowledge, skills and expertise
• each group member or entity should have a nomination committee (however, FCA has not set out in details the role of a nomination committed and has left it to the decision of the management body). However, a firm may apply to the FCA for the modification of this rule.

So far as the composition of committees are concerned, the FCA has proposed that at least half of the members of each of the three committees are non-executive members and the chairperson of each such committee should be a non-executive member.

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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