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Governance and remuneration under the Investment Firm Regulation and Directive
Journal of Financial Compliance,
2
(3),
207-219
(2019)
Abstract
The proposed Investment Firm Regulation and Directive (IFR/IFD) are currently going through the legislative process. The overall policy direction is to make the current prudential regime for investment in Europe more proportionate and risk-responsive. But, as this paper will argue, despite the wholesale changes in the capital calculation method, policymakers remain reluctant in relaxing the rules on governance and remuneration. This is perhaps due to the continuing concerns about weak governance, especially with respect to risk management and excessive executive pay. The risks to the financial system and customers, caused by excessive risk behaviour and inappropriate incentive schemes, mean that it is difficult for regulators to give an inch in this space. Nevertheless, small and non-interconnected firms will benefit from the easing of regulation, although it is believed that not a large number of investment firms in the UK fall in this category. Better news is that the regime will not apply the bankers’ bonus cap rule. This paper will analyse the details of these governance and remuneration rules, and consider their interaction with other regimes (eg Markets in Financial Instruments Directive II, Alternative Investment Fund Managers Directive) and what are the likely supervisory implications in the UK, assuming the Financial Conduct Authority (FCA) will implement this regime, post-Brexit.
Keywords: governance; remuneration; prudential regulation; investment firms
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Author's Biography
David Morrey is a partner of Grant Thornton UK LLP and Head of Investment Management and leads all of the firm’s major regulatory engagements in that sector. A chartered accountant, Mr Morrey has 29 years’ experience in risk and regulatory compliance within financial markets and specialises in addressing regulatory challenges in the investment firm sector. He is very active in leading ‘Skilled Person reviews’ having participated in approximately 20 reviews. Mr Morrey has reviewed and advised on Internal Capital Adequacy Assessment Processes (ICAAPs) and capital needs for a large number of investment firms, often as a precursor to a Supervisory Review and Evaluation Process (SREP) visit or to provide best practice insight. As a practitioner in industry he was responsible for prudential reporting and for capital modelling in accordance with Pillar 2.
Anthony Ma is currently Associate Director and Head of Prudential Assurance for Financial Services at Grant Thornton UK LLP. Mr Ma is a regulatory lawyer and business consultant. His practice areas lie in financial services regulations (FSRs) and enterprise risk management (ERM). In his present role, he leads a group of consultants to deliver prudential assurance services. In addition, he advises on all aspects of FSRs, with particular focus on prudential regimes, operational risk and resilience, governance and remuneration, and authorisations (licensing). He also sits in the Regulatory Law Committee of the City of London Law Society (CLLS) and is a Freeman of the City of London Solicitors’ Company. He worked at the Financial Conduct Authority (FCA) (and its predecessor Financial Services Authority) from 2010 to 2017, gaining experience in ring-fencing regime, banking supervision, prudential supervision of investment firms and complex regulatory transactions (including procedures for contentious matters). He was the main author of the winddown planning guide (WDPG) and played a key role in operationalising recovery and resolution regime in the FCA.
