Governance and remuneration under the Investment Firm Regulation and Directive

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.