By Katrina Cockram, Senior Compliance Consultant, UK
The remuneration code disclosure requirements for MIFIDPRU investment firms are set out in MIFIDPRU 8 of the FCA Handbook, replacing the Pillar 3 requirements of BIPRU 11. They are now in effect for remuneration periods starting in January 2022. In this article, we’ll examine the scope and detail of the MIFIDPRU Remuneration Code disclosure and how to balance its requirements with those of other remuneration codes.
Purpose and scope of the MIFIDPRU Remuneration Code disclosure
The purpose of the disclosure remains broadly the same, requiring firms to disclose certain information to key stakeholders and counterparties, but requirements have been expanded to include disclosures on each firms’ own funds (financial strength), behaviour (investment policy) and culture (risk management, governance and remuneration).
That being said, most of the new disclosure requirements apply only to firms that are not Small and Non-Interconnected (non-SNI), with the key exception being disclosures on remuneration policy/practices. SNI firms with additional Tier 1 instruments must also make disclosures with respect to risk management and own funds.
Most private equity (PE) and venture capital (VC) firms, which are subject to the MIFIDPRU code, are generally advisors or collective portfolio management investment (CPMI) firms, both of which are classed as SNI firms.
What happens when a firm is subject to more than one remuneration code?
The FCA states in SYSC 19G that where a firm is subject to the MIFIDPRU Remuneration Code and another, different, remuneration requirement, where only one can be complied with, a firm must use the most stringent of the relevant provisions.
This is relevant to firms subject to the various requirements of the MIFIDPRU Remuneration Code as well as the AIFM Remuneration Code and/or the UCITS Remuneration Code.
The issue is not relevant where a firm can comply with both sets of remuneration requirements applied to them in tandem; for instance, where a staff member’s work is entirely focused on a CPMI firm’s alternative investment funds, in which case only the AIFM Remuneration Code would apply to that staff member.
What are the most stringent provisions and how should they be applied?
Every firm should use its judgement to achieve a level of disclosure that is appropriate to its size and internal organisation and to the nature, scope and complexity of its activities.
The key issue with deciphering the “most stringent” requirements is that the different remuneration code provisions are not directly comparable. While AIFMD supersedes most provisions for SNI firms, a non-SNI firm may have further qualitative provisions that need to be satisfied under MIFIDPRU 8.
One way to assess the two remuneration codes is to compare the key requirements set out in each.
AIFMD Remuneration Code requirements
MIFIDPRU Remuneration Code requirements
Practical application of the MIFIDPRU Remuneration Code and our observations
- Approaches to multiple remuneration codes:
- Separation: Firms undertaking both MiFID and AIFMD investment activities on a large enough scale can separate their code staff. This means that staff undertaking solely MiFID investment business can be subject to the MIFIDPRU code, and those undertaking only AIFMD investment activities can be subject to the AIFMD remuneration code. However, in our view, Senior Management cannot be segregated in this manner, as they will have obligations from a governance perspective with respect to all aspects of a firm’s business
- Most stringent application: Where full separation of staff is not possible due to the firm’s size or structure, the most stringent remuneration provisions must be applied, as per the rules. In our experience, for SNI firms, this will result in the application of many of the provisions in the AIFMD Remuneration Code. For non-SNI firms, however, the MIFIDPRU requirements have a number of provisions that could be considered more stringent
- Practical application for most PE and VC firms:
- The disclosures are new to many PE and VC firms, which were previously classified as Exempt CAD and were not required to publish a Pillar 3 disclosure. However, as many of these firms are classed as SNI, they therefore only need to consider the MIFIDPRU disclosures for SNI firms, as set out above
- Bonuses, partnership interest and draws – the MIFIDPRU Remuneration Code provides useful additional guidance in this regard:
- The distribution of residual profits of a partnership or LLP based on ownership shares is not considered to be remuneration, as such distributions are not linked to performance
- Drawings by partners or members where applicable, in the form of fixed profit shares, constitute fixed remuneration
- The receipt of discretionary profit shares, dependant on the performance of an individual or their business unit, are likely to constitute variable remuneration
- Carried interest as remuneration:
- AIFMD considers carried interest schemes to be remuneration as set out in SYSC 19B. However, this is not the case where the returns arise solely from an individual’s return on a co-investment arrangement, which would constitute a return on investment
