MiFID2 remuneration regulations

FCA policy statement 17/5 highlights that the overarching policy objective of MiFID II remuneration regulations is that firms should not remunerate or assess the performance of their staff in a way that conflicts with the staff’s duty to act in the best interests of their clients (see pages 64 to 67 of the policy statement).

The main points to note are:

• The FCA confirms that the remuneration provisions in MiFID2 and in Article 27 of the MiFID delegated regulation will be implemented through a new remuneration code in SYSC 19F, which will apply from 03 January 2018.
• While the FCA acknowledges that the additional remuneration code adds complexity to an already complex area, it considers this to be necessary because the MiFID rules cover a broader population of staff than the other remuneration codes (which focus more on material risk takers).
• The MiFID remuneration rules will apply to all “relevant persons with an impact, directly or indirectly, on investment and ancillary services provided by the investment firm, or on its corporate behaviour, regardless of the type of clients, to the extent that the remuneration of such persons and similar incentives may create a conflict of interest that encourages them to act against the interests of any of the firm’s clients”. The FCA has confirmed that this includes partners and directors of firms.
• Firms will be required to operate the MiFID remuneration rules alongside the Capital Requirements Directive (CRD) and BIPRU codes where they apply.
• SYSC 19F has been amended to apply to a firm’s "investment services" rather than its "Investment activities" to ensure the code does not apply more broadly than Article 24(10) of MiFID2.
• SYSC 19F will apply to Article 3 firms (ie firms benefitting from certain exemptions from MiFID) and to UK branches of EEA firms which are not AIFMD/UCITS firms (in relation to activities conducted from an establishment based in the UK).

MiFID firms should consider whether variable pay is assessed in a way which prevents employees being conflicted with a client’s best interests, including whether:

• variable pay is assessed appropriately to avoid conflicts of interest
• conflict of interest policies cover remuneration aspects
• compliance manuals cover sales practices
• any other internal documents or procedures need to be revised to discourage conflicts
• existing bonus deferral plans meet regulatory requirements or should be amended (or new plans put in place)
• existing remuneration disclosures cover conflicts in respect of client interests and are robust and consistent with any other regulatory disclosures, or
• Remuneration Policy Statements cover conflicts in respect of client interests and are robust and consistent with any other regulatory reports.

Our Employee Incentives/Remuneration Regulatory team is currently working with a number of MiFID firms using gap analysis templates to help assess and sign off on compliance with the MiFID2 remuneration requirements and advising on revised incentives structures where necessary.