There will be significant changes to how FCA investment firms manage staff remuneration for performance years starting from 1 January 2022. The changes being introduced by the new Investment Firms Prudential Regime (IFPR) will impact all MiFID investment firms, but the scale of the changes will depend on a firm’s classification.

All investments firms will require to put in place remuneration policies and practices applying to all staff. These will set out minimum standards and ensure sound governance.

In addition, “non-SNI firms” will also be required to identify “material risk takers” and decide on the appropriate ratio of variable to fixed remuneration, applicable to all staff.

For these firms, the new IFPR includes a requirement for variable pay to be subject to malus and clawback and restrictions on the use of guaranteed bonuses, retention awards and severance pay.

The largest of these firms (“significant non-SNI firms”) will also be required to defer variable pay for material risk takers, which may no longer be paid fully in cash. They will also be required to establish a remuneration committee.

Firms will be required to disclose specified key characteristics of their remuneration policies and practices, and the amounts of fixed and variable remuneration awarded to staff as a whole. Non-SNI firms will have to break this down between senior management, material risk takers and other staff.

These changes align with practices already in place in other regulated entities, such as banks. Our employment lawyers are experienced in working together with our regulatory colleagues to build solutions for employee contracts and reward communications. The changes will be unsettling for groups of employees who are not familiar with strict regulation being applied to their reward package. For some employees the changes will bring with them cash flow impacts and employers should get on the front foot before concerns are escalated.

Firms will need to ensure they are contractually entitled to defer, delay or claw back payments when they are required by the new IFPR to do so. This will require employee written consent, which will not currently be in place in every case.