FCA consultation on the reform of solo-regulated firms’ remuneration requirements

The FCA want to consolidate the three current remuneration codes (the AIFM Remuneration Code (SYSC 19B), the UCITS Remuneration Code (SYSC 19E) and the MIFIDPRU Remuneration Code (SYSC 19G) into a single new code for in-scope solo-regulated firms (SYSC 19AA). The new code would provide a common framework across all in-scope firms reducing duplication for groups which are subject to multiple overlapping regimes.

The FCA propose a shift from highly prescriptive rules to an outcome-focused framework, which would permit firms greater discretion in remuneration design and operation but place greater reliance on firm governance and management body judgement to mitigate risk. 

The FCA propose to remove all small and non-interconnected (SNI) MIFIDPRU firms from the remuneration requirements. The new code would therefore apply only to non-SNI MIFIDPRU investment firms. The current tiered structure (basic, standard, and extended) and the concept of “large non-SNI firms” would also be removed.

The FCA also expect a significant proportion of AIFMs to be removed from scope as a result of planned reforms to the AIFM regime. Under these reforms, smaller firms will be reclassified and excluded from remuneration requirements. 

The FCA estimates this proposal would remove over 2,000 firms (1,665 SNI MIFIDPRU firms and 463 AIFMs) from any remuneration regulatory requirements.

The FCA proposes to apply remuneration requirements to individuals at two levels.

• Core requirements which will apply to all staff. This will cover all individuals working for a firm, including employees, partners or members, secondees and where relevant group employees providing services to the firm.
• Additional targeted requirements which will apply to material risk takers (MRTs).

The FCA propose a narrower definition of a material risk taker to whom more targeted “remuneration principles” will apply, as their activities have a more significant impact on firm outcomes, as compared to core requirements which would apply to all staff.

MRTs will be staff members whose activities or remuneration incentives have a material impact on: i) the firm’s conduct in relation to its clients and investors; ii) the interests of the investors; the AIFs and the UCITS schemes; or iii) its compliance with regulatory obligations. 

The FCA have provided examples in their draft Handbook Text of where they consider staff members are likely to be MRTs and these will include: i) staff who have the authority to take decisions that can materially affect investors' outcomes; the treatment of clients or market integrity; ii) those who are responsible for significant revenue or material assets under management or for approving transactions; and iii) those who can commit the firm, its clients or investors to risk exposures or business strategies that may cause material harm.

This will mean that some individuals who cease to be MRTs will also no longer be certification staff where they are only in the scope of that regime as a result of being MRTs and do not perform another certification function.

MRTs' remuneration would be subject to six remuneration principles relating to: 

• the design and structure of fixed and variable components of remuneration;
• the assessment of performance;
• guaranteed variable remuneration;
• severance pay;
• deferral; and
• performance adjustments.

One of the most important proposals from the FCA which would have a significant impact on remuneration design is the simplification of deferral requirements for variable remuneration payable to MRTs (including share incentives, carried interest and phantom carry or incentive arrangements).

The FCA has proposed two different approaches. The first, which the FCA favour, is a principles-based deferral rule. The FCA also recognise that firms may not wish to move entirely to a principles-based deferral rule and have proposed in the alternative a threshold-based deferral rule.

Under the principles-based approach, the management body would be responsible for determining the situations in which it would be appropriate for variable remuneration to be deferred; the proportion of variable remuneration that must be deferred; the length of the deferral period; the speed of vesting of the variable remuneration to be deferred; and cash to instrument ratios. This approach would permit the design of deferral arrangements which align with the specific activities and responsibilities of the MRT. This approach will be welcomed in relation to the design and payment of carried interest.

Under the threshold-based approach, mandatory deferral would apply to firms above specified thresholds, together with a minimum deferral period. For firms below the threshold, the principles-based approach would apply. The FCA has initially proposed thresholds based on those currently used for banks and dual-regulated firms under which firms with total assets below £4bn may disapply requirements relating to deferral, payment in instruments and retention and firms with total assets between £4bn and £20bn may disapply these requirements on a proportionate basis. The FCA recognises however that such asset-based thresholds may not be appropriate, particularly for firms where assets under management, revenue or business models are more relevant risk indicators, and welcomes views on alternative metrics and thresholds.

The requirement to apply malus and clawback and in-year performance adjustment mechanisms to MRTs' variable remuneration would be removed in favour of a requirement “to consider” the inclusion of these mechanisms in remuneration arrangements. This would be a significant change and the FCA expect these tools would be retained for some cases. 

Currently there is a restriction on the payment of guaranteed variable remuneration under the various remuneration codes unless it is exceptional, occurs only in the context of hiring, and is limited to the first year. Under the new proposals, guaranteed variable remuneration awards must be time-limited but are not restricted to the first year. They must also be subject to performance adjustment, reduction or recovery under the firm’s remuneration policies and practices, including in cases of misconduct or where misaligned incentives may cause material harm.

The FCA is proposing to remove the requirement for mandatory remuneration committees and annual remuneration reviews. These reforms will allow greater flexibility but may not in practice ease the burden on all firms. Firms will still need to ensure that they have sufficient systems and controls in place to demonstrate accountability and effective oversight. 

In addition, the FCA proposes to remove the MIFIDPRU remuneration reporting required in the MIF008 reporting template and the MIFIDPRU 8.6 disclosure requirements. Firms would be expected to continue to maintain good record-keeping that demonstrates how remuneration policies operate in practice.

The FCA proposes to remove non-Handbook guidance which would no longer support the new framework and may then introduce new guidance to support the implementation of the new code.

The consultation period will run until 16 September 2026. The FCA then anticipates that the new rules will come into effect in Q1 2027 and would apply from that date to remuneration relating to performance periods beginning on or after the commencement date only. This means that the new rules would not apply to in-flight remuneration and firms will initially need to operate the current and new rules in parallel.