Mini-budget: The new Remuneration Code

On 23 September 2023, the ex-Chancellor Kwasi Kwarteng announced the removal of the bankers' bonus cap in an attempt to stimulate the UK economy. However, this isn't the first change to hit the financial services sector, or the way that remuneration is regulated, this year.   

From 1 January 2022, a new Remuneration Code, the MiFIDPRU Remuneration Code (the "Code"), was introduced, which replaces the codes that applied previously to IFPRU Investment Firms and BIPRU firms.

The Code applies to the majority of investment firms regulated by the FCA under the Markets in Financial Instruments Directive (Directive 2004/39 on markets in financial instruments (MiFID), including asset managers, hedge funds and investment advisers, for performance periods beginning on or after 1 January 2022.

The Code categorises firms in three tiers:

  1. Small and non-interconnected firms (SNIs).
  2. Small non-SNIs.
  3. Large non-SNIs.

Within these three tiers, there are three levels of regulation:

  • All firms are subject to basic remuneration requirements (principles of effective risk management.  
  • Both types of non-SNI firms are subject to additional standard remuneration requirements (identifying material risk takers, malus and clawback arrangements and a ratio of fixed v variable remuneration).  
  • Large non-SNI firms are subject to extended remuneration requirements (deferral of variable remuneration and requirements in relation to shares or other non-cash instruments).

The effect of the implementation of the Code is that more firms will now be subject to the remuneration rules in the Code.  As such, it's important that firms understand the Code and the effect that it has on remuneration policies and practices within the business to ensure compliance. 

All firms that fall under the Code have to ensure that their remuneration policies are 'appropriate and proportionate to the nature, scale and complexity of the risks … of the firm' (SYSC 19G.2.4R). As the rule suggests, the thrust of the new rule is to make sure firms take a proportionate approach to remuneration. As such, firms will need to take care when formulating a remuneration policy to ensure that they comply with the requirements of the Code, including considering various factors, such as the staff, types of roles and the activities of the firm. The FCA have published template policies for firms to use here.

The FCA have also provided further guidance and expectations on performance adjustments and how adjustments should be made to an individual's variable pay, including the use of malus and clawback. Where applicable, firms must identify those who are 'material risk takers' and adjust their remuneration accordingly. Again, it is important for firms to establish a clear policy for adjustment of remuneration and its application.

Although the bonus cap doesn't apply to MiFID investment firms or UK UCITS management companies, in a bid to make the UK more competitive, the Government may look towards the Code and the limitations on remuneration as a potential area for change (although major changes to the adjustment rules are unlikely given that this could be a vital tool for firms who are looking to award large bonuses when the cap is removed). Given the events of recent months, the Government is likely to be on a "go slow" now to avoid any further backlash, but with the move to start repealing European legislation and regulation more generally, it may be a question of how rather than when.

If you have any questions on this article or want to understand more about the effect of the Code on your firm, please contact Alan Hughes or Claire Holland in Foot Anstey's Retail Financial Services team.