FCA proposes substantial relaxation of remuneration rules for fund managers

Introduction

The Financial Conduct Authority has launched a consultation on considerably simplifying remuneration rules for UK fund managers, although the earliest these changes may have any practical effect may not be until 2028 for many firms.
 

Which firms are affected?

The framework would apply to UK Alternative Investment Fund Managers (“AIFMs”), where regulation generally is separately being reviewed CP26/27: Remuneration: Solo-regulated firms’ rules reform | FCA, UK UCITS management companies (“UCTIS”) and UK MIFIDPRU investment firms who are solely regulated by the FCA (together “Firms”). It would not apply to dual-regulated firms ie those who are also regulated by the PRA.

Currently Firms are covered by the AIFM remuneration code (SYSC 19B), the UCITS remuneration code (SYSC 19E) and the MIFIDPRU remuneration code (SYSC 19G) which have different rules as well as different size categorisation for Firms.

The main proposal is that these regimes are streamlined and replaced with a single consolidated code (SYSC 19AA).
 

Key changes

• The new code will contain general, high-level requirements for remuneration of all staff. Firms will be required to establish, implement and maintain remuneration policies which comply with these principles. However, there will be flexibility for Firms to tailor their policies to their business models rather than a prescriptive approach.

• This code would include headline obligations to:
   
  + Promote good conduct, healthy culture and effective governance
  + Ensure that staff in control functions (e.g. risk management, compliance or internal audit) are remunerated based on objectives linked to their function, independent of the performance of the business areas they control
  + Ensure that the management body of the Firm carries out appropriate governance and oversight of remuneration
  + Implement measures to avoid conflicts of interests
  + Align remuneration with the interests of clients, funds and investors
  + Ensure the Firm's policies and procedures reflect the individual risks created by the Firm and its staff

• SNI (small and non-interconnected) Firms under MIFIDPRU and (subject to the separate regulatory review) smaller AIFMs will be outside the requirement to comply with the new code altogether.

• Additional proposed changes are that there would be no requirement to have a remuneration committee or carry out an annual remuneration review which would result in a considerable reduction in reporting requirements.
    

Changes to variable remuneration rules for MRTs

Where a Firm is caught by the new rules, the main provisions on pay structure will continue only to apply to its material risk takers (“MRTs”). However, the FCA further proposes that the definition of MRT is narrowed so that an MRT is a staff member whose professional activities or remuneration incentives have a material impact on the Firm’s conduct towards clients and investors, their interests, or the Firm’s regulatory obligations.

The FCA is proposing that mandatory requirements affecting MRTs’ payout in instruments, retention periods and malus and clawback are removed, with Firms to be allowed to determine whether and if so how to retain these tools, though Firms are still expected to make proportionate adjustments in the event of an MRT’s misconduct.

On deferral, the FCA is consulting on which one of two alternative approaches to adopt:

The preferred approach:

• The Firm will determine whether deferral is appropriate based on the nature of the Firm’s business, the interests of its clients and investors and the activities of the MRT themselves.

Alternative approach:

• Mandatory deferral would apply above a to be specified threshold

• The FCA has suggested as an example that firms with assets under management of more than £4 billion could be required to consider deferral for their MRTs

• Firms with assets under management of more than £20 billion would then be subject to mandatory deferral arrangements for their MRTs (though the figures themselves are only suggestions at this stage)

Firms will continue to have to ensure that there is an appropriate balance of fixed and variable remuneration (though no maximum ratio will need to be specified) and also ensure that payouts on termination reflect the MRT’s performance and do not reward failure or misconduct.
 

Commentary

The FCA is consulting on these changes until 16 September 2026 with final rules likely in Q1 2027. While the FCA says that the new rules will take effect the day after publication, they will only apply to performance periods (for most Firms, financial years) which begin after that date. This could mean that the reforms will only take practical effect and their benefit be felt in 2028. The proposals do not expressly deal with whether outstanding remuneration from earlier years can also take advantage of the relaxations (as has been the case with banking changes) but the implication is not.

These changes are a natural follow-on from the PRA’s own relaxations of their remuneration rules over the last few years – see Bankers' bonuses - the final rules | Stephenson Harwood and PRA proposes smaller banks will no longer have to operate clawback on key staff bonuses | Stephenson Harwood - which have considerably reduced the number of banks and individuals which are subject to the tougher pay-out rules as well as making the pay-out rules themselves less restrictive. Indeed, this had led to the odd positioning of some UK fund managers now having tougher remuneration provisions than UK banks.

It seems unlikely that fund managers will push back against any of the changes, but many may well press for further relaxation than has been offered and also for quicker implementation. Beyond considering a response to the consultation, there is not much which Firms can immediately do. The remuneration arrangements of Firms who comply with the existing remuneration codes are likely to comply with the new code, but Firms are expected to want to take advantage of the more flexible approach as and when it becomes available. That will itself bring complexity and challenges: the removal of a prescriptive framework will mean Firms will need to be attuned to the market and where it will settle to devise attractive remuneration while also justifying their new governance and reward frameworks.

To read the FCA’s consultation paper, click here.