From 26 June 2021, a new prudential regime will apply to Markets in Financial Instruments Directive (MiFID) investment firms across the EU. The changes are being introduced by the Investment Firms Directive (IFD) and the Investment Firms Regulation (IFR).

Our earlier briefing (Investment Firms: New prudential rules will apply from 26 June 2021) summarised the new classification regime for MiFID investment firms, and outlined the key requirements of IFD/IFR regarding capital, remuneration, disclosures and reporting.  We also hosted a webinar (‘IFD/IFR – 2 months to go….’) on 29 April 2021 – you can access the recording here.

By way of reminder, the IFD/IFR classification regime is as follows:

CLASSIFICATION	DETAILS
‘Class 1’	Systemically important firms that are authorised to deal on own account and/or underwrite or place financial instruments on a firm commitment basis and whose total assets exceed €30 billion (individually or on a group basis) will be ‘Class 1’ firms.
‘Class 1 minus’	‘Class 1 minus’ firms are firms that are authorised to deal on own account and/or underwrite or place financial instruments on a firm commitment basis and whose total value of consolidated assets exceeds €15 billion but does not meet the €30 billion ‘Class 1’ threshold.
‘Class 2’	Firms that are not systemically important but that hold a particular level of own funds will be classified as ‘Class 2’.
‘Class 3’	Small and non-interconnected investment firms that do not meet certain thresholds and do not hold client assets will be classified as ‘Class 3’.

 

Remuneration Reminder

At the moment, CRR2/CRDV-scope MiFID investment firms are subject to the CRR2/CRDV remuneration requirements.  This will change from 26 June 2021. Under IFR/IFD, MiFID investment firms will fall into one of three separate categories for remuneration purposes:

• ‘Class 1’ firms and ‘Class 1 minus’ firms will remain subject to the CRR2/CRDV remuneration regime
• ‘Class 2’ firms will be subject to the new IFR/IFD remuneration regime
• ‘Class 3’ firms will not be subject to the new IFR/IFD remuneration regime and will be subject to the high-level MiFID requirements

The new remuneration rules applicable to ‘Class 2’ firms will apply to all staff whose professional activities have a material impact on the firm’s risk profile: senior management, risk takers, control functions, and employees receiving overall remuneration equal to at least the lowest remuneration of any risk taker or member of senior management.

 

Variable Remuneration – Discretions

The IFD gives Member States and competent authorities three key discretions regarding variable remuneration. The Department of Finance confirmed this week how it plans to approach those discretions.

MEMBER STATE DISCRETION	IRISH APPROACH
Pay-out (payment in shares and equivalent interests): 50% or more of the variable element of remuneration must be paid in certain instruments (e.g. shares or equivalent ownership interests). Those instruments must be connected to the firm’s retention policy.
Limit the types and designs of these instruments or ban certain instruments.	This discretion will not be exercised.
Proportionality: A firm can dis-apply the rules on pay-out and deferral if: the value of its on and off-balance sheet assets is (on average)  ≤ €100 million over the 4 years immediately preceding the relevant financial year; and the individual’s variable remuneration does not exceed €50,000 and does not represent more than 25% of the individual’s total annual remuneration.
Increase the €100 million threshold if: the firm is not one of the three largest investment firms in terms of total value of assets; the firm is not subject to obligations or is subject to simplified obligations in relation to recovery and resolution planning in accordance with Article 4 of the Bank Recovery and Resolution Directive; the size of the firm’s on and off‐balance sheet trading‐book business is ≤ €150 million; the size of the investment firm’s on and off‐balance sheet derivative business is ≤ €100 million; the threshold does not exceed €300 million; and it is appropriate to increase the threshold, taking into account the nature and scope of the firm’s activities, its internal organisation, and, where applicable, the characteristics of the group to which it belongs.	The threshold will be increased to €300 million if those conditions are met.
Lower that threshold if certain conditions are met.	The Central Bank of Ireland (CBI) will be allowed to reduce the €300 million threshold where it feels that it is appropriate to do so, taking into account the nature and scope of the investment firm’s activities, its internal organisation, and, where applicable, the characteristics of the group to which the firm forms part.
Decide that the exemption will not apply to certain staff members (who would otherwise qualify) due to market remuneration practices or job profile.	This part of the discretion will not be exercised.

 

Variable Remuneration – EU Update

Separately, a number of remuneration-related deliverables under the IFD/IFR are the responsibility of the European Banking Authority (EBA).  Work to finalise these deliverables is continuing:

DELIVERABLE	STATUS
Regulatory technical standards (RTS) setting out appropriate criteria to identify the categories of staff whose professional activities have a material impact on an investment firm’s risk profile.	The EBA published the final draft RTS in January 2021. These are with the Commission for approval and are expected to be published in the Official Journal shortly.
RTS with requirements for investment firms regarding Additional Tier 1, Tier 2 and other instruments used for the purposes of variable remuneration.	Same as above.
Guidelines on the application of sound remuneration policies.	The EBA consulted on the draft Guidelines in December 2020 and has committed to finalising these Guidelines by June 2021.
Guidelines on the benchmarking of remuneration practices and the gender pay gap.	The EBA has committed to putting these Guidelines in place by December 2021.
Publish supervisory information on high earners.	The EBA has committed to doing this by December 2021.

 

As 26 June 2021 approaches, we will keep you updated on key developments. We expect to see a regulatory notice from the CBI shortly on the ‘Implementation of NCA Discretions in IFD/IFR’.  As expected, it has been confirmed that the Minister will designate the CBI as national competent authority for IFD/IFR purposes.

If you require advice or assistance in relation to the application or impact of IFD/IFR on your business, please contact our Financial Regulation Group.