EU flag

IFR/IFD: Remuneration requirements for EU investment firms

Publication February 2020


The introduction of the Investment Firms Regulation1 (IFR) and Investment Firms Directive2 (IFD) will make alterations to not only the prudential framework governing investment firms, but also to their remuneration requirements.

The IFR becomes directly applicable in Member States on June 26, 2021. On that date, Member States are also required to adopt and publish measures that transpose the IFD. Most of the measures contained in the IFR and the IFD come into force on these dates although both contain a number of transitional provisions. It is expected that the requirements of the new regime will not apply retrospectively and that the new rules will apply to the remuneration year commencing January 2022.

For details of the prudential requirements of the IFR/IFD, including the transitional provisions and how investment firms are classified under the new regime, please refer to our briefing note The new prudential regime for investment firms.


When the UK leaves the EU on January 31, 2020, the terms of its departure will be set out in a Withdrawal Agreement. The Withdrawal Agreement provides, amongst other things, that on leaving the EU, the UK will enter into an implementation period where it will still be subject to EU law. The purpose of the implementation period3 is to reduce so-called “cliff edge risks” that arise should the UK suddenly find itself no longer bound by EU law and UK firms cannot take advantage of the Single Market passport. The implementation period will last until December 31, 2020, although it may be extended by one or two years should the UK and EU agree.

If the UK were to find itself within the implementation period when the new rules under the IFR/IFD come into force in June 2021, it will be required to implement them. However at present, this scenario seems unlikely. This is because the UK legislation ratifying the Withdrawal Agreement, the European Union (Withdrawal Agreement) Act 2020, prohibits any UK Minister from agreeing to extend the implementation period beyond December 31, 2020. Obviously this Act could be amended in the future to remove this prohibition but given the current political rhetoric from the UK Government, this seems unlikely.

Whilst it is likely that the IFR/IFD will come into force when the UK is out of the implementation period, it seems probable that it will not simply walk away from the new regime’s requirements. There are a number of reasons to suppose this. For example, whilst the UK was a member of the EU it would have been a party to the trilogue discussions and negotiations on the new regime. The new regime is also aligned with the UK regulators’ objectives. For systemic UK investment firms that are dual regulated, the IFR/IFD promote the Prudential Regulation Authority’s (PRA) statutory objective to promote firms’ safety and soundness. From a Financial Conduct Authority (FCA) perspective, the new regime enhances one of its operational objectives (protect and enhance the integrity of the UK financial system) and its strategic objective of ensuring that the relevant markets function well. Also, the IFR/IFD were both specified in the Financial Services (Implementation of Legislation) Bill 2017-19 before it failed ahead of the December 2019 General Election. The Bill was designed for a no-deal Brexit scenario and gave HM Treasury the power to make corresponding or similar provisions in UK law to EU financial services legislation that came into force within two years after the UK’s exit from the EU.

With it unlikely that the UK will walk away from the IFR and the IFD, the real question that UK investment firms will be asking themselves is what changes, if any, will the UK make when it implements the regime. At this stage, we don’t know the answer to this although further guidance should be given when the UK regulators issue their consultations on the new regime in H1 2020.

Investment firm classification and applicability

As discussed in our other briefing note, the IFR and IFD introduce a new classification system for EU investment firms (hereafter investment firms) that deviates from the strict services-based categorisation under the revised Markets in Financial Instruments Directive (MiFID II)4 and uses instead quantitative indicators known as K-factors. The new regime differentiates investment firms into three distinct classes according to their size and complexity.

Class 1 – Large investment firms. It is important to note that these investment firms will continue to be subject to the Capital Requirements Directive IV (CRD IV)5 and the Capital Requirements Regulation (CRR)6. While systemic investment firms will be required to seek authorisation as credit institutions, Article 1(2)7 investment firms will not be required to do so, but will still be treated as institutions subject to the prudential regime under the CRR.

Class 2 – Large and interconnected investment firms. Such investment firms exceed the categorisation thresholds for small and non-interconnected investment firms and will be subject to the full IFR/IFD regime.

Class 3 – Small and non-interconnected investment firms. Such investment firms are subject to the IFR/IFD regime but benefit from various exemptions and modifications given that the risks incurred by them are limited for the most part.

Where to find the remuneration provisions

Topic Relevant articles 
Scope 46
Remuneration policy and practices 51
Topic  Relevant articles 
Scope 25
Internal governance 26
Remuneration policies
Variable remuneration 
Remuneration committee
Oversight of remuneration policies

Scope of the remuneration regime

As can be seen from the above the majority of the remuneration provisions are located in the IFD. Articles 25 to 34 are located in section 2 of the IFD which states8 that the requirements do not apply to investment firms that meet all the conditions for qualifying as a small and non-interconnected investment firm (i.e. Class 3 investment firms)9. This means that the IFD remuneration rules apply to Class 2 investment firms, Class 3 investment firms remain subject to the remuneration requirements under MiFID II10. The European Commission’s (Commission) reasoning for the exclusion of Class 3 investment firms from the IFD regime was11:

“For Class 3 firms, the rules on governance and remuneration should focus on investor and consumer protection, as such firms do not pose significant risk to the financial stability. MiFID, which applies to all investment firms, ensures that remuneration structures of sales staff do not incentivise staff to recommend products which do not reflect clients' needs. MiFID also offers guarantees concerning robust governance arrangements, such as suitability requirements for board members. Therefore, remuneration and governance rules provided under MiFID are considered to be sufficient for Class 3 firms.”

Whilst a discussion on the Capital Requirements Directive V (CRD V)12 is outside the scope of this briefing note it’s worth noting for Class 3 investment firms that are within a banking group that the CRD V does not prevent Member States from applying remuneration requirements on a consolidated basis13.

Internal governance

The internal governance provisions in the IFD14 provide, amongst other things, that a Class 2 investment firm’s remuneration policies and practices should be consistent with and promote sound and effective risk management. Such policies should also be gender neutral. The European Banking Authority (EBA), in consultation with the European Securities and Markets Authority (ESMA), is to issue guidelines on gender neutral remuneration policies.

For the purposes of the IFD a gender neutral remuneration policy is one as described in point (65) of Article 3(1) of CRD IV as amended by the CRD V. This provides that such a remuneration policy is “based on equal pay for male and female workers for equal work or work of equal value.”

Remuneration policies

The IFD sets out a long list of principles15 that a Class 2 investment firm’s remuneration policy should follow. The IFD adds that such remuneration policies should be for the following categories of staff: senior management16, risk takers (see below), staff involved with control functions and employees receiving overall remuneration equal to at least the lowest remuneration received by senior management or risk takers.

Many of the principles set out in the IFD should already be familiar to Class 2 investment firms on the basis that they already appear in some shape or form in the remuneration provisions of the CRD IV . The categories of staff also appear in the CRD IV17.

IFD’s principles for remuneration policies

  1. Remuneration policy is clearly documented and proportionate to the size, internal organisation and nature, as well as to the scope and complexity of the activities of the investment firm.
  2. Remuneration policy is gender neutral.
  3. Remuneration policy is consistent with and promotes sound and effective risk management.
  4. Remuneration policy is in line with the business strategy and objectives of the investment firm, and also takes into account long term effects of the investment decisions taken.
  5. Remuneration policy contains measures to avoid conflicts of interest, encourages responsible business conduct and promotes risk awareness and prudent risk taking.
  6. Investment firm’s management body in its supervisory function adopts and periodically reviews the remuneration policy and has overall responsibility for overseeing implementation.
  7. Implementation of the remuneration policy is subject to a central and independent internal review by control functions at least annually.
  8. Staff engaged in control functions are independent from the business units they oversee, have appropriate authority and are remunerated in accordance with the achievement of the objectives linked to their functions, regardless of the performance of the business areas they control.
  9. Remuneration of senior officers in the risk management and compliance functions is directly overseen by the remuneration committee (see below) or where such committee has not been established by the management body.
  10. Taking into account national rules on wage setting the remuneration policy makes a clear distinction between the criteria to determine: (i) basic fixed remuneration, which primarily reflects relevant professional experience and organisational responsibility as set out in an employee’s job description as part of their terms of employment; (ii) variable remuneration which reflects a sustainable and risk adjusted performance of the employee, as well as performance in excess of the employee’s job description.
  11. Fixed component represents a sufficiently high proportion of the total remuneration so as to enable the operation of a fully flexible policy on variable remuneration components, including the possibility of paying no variable remuneration component.

Member States are to ensure that Class 2 investment firms establish and apply the above principles in a manner that is appropriate to their size and internal organisation and to the nature, scope and complexity of their activities.

Interestingly, in relation to items (4) and (5) there is no guidance given in the IFD’s recitals as to what the Commission is looking for when it talks about the remuneration policy taking into account the “long term effects of investment decisions” and “responsible business conduct”. However, the latter term is already used in MiFID II18 which has the requirement that the management body has to develop a specific remuneration policy for persons involved in the provision of services to clients so as to “encourage responsible business conduct, fair treatment of clients as well as avoiding conflict of interest in the relationship with the client.”

Risk takers

The term “risk takers”19 already appears in the CRD IV remuneration provisions20 so Class 2 investment firms should already have some idea as to which members of staff fall will within this category. The IFD states that the EBA will consult with ESMA to develop regulatory technical standards that will specify the criteria to identify risk takers. When developing these technical standards the EBA and ESMA will take into account the Commission Recommendation of April 30, 2009 on remuneration policies in the financial services sector and the remuneration guidelines produced under the UCITS Directive21, the Alternative Investment Fund Managers Directive22 and MiFID II. Importantly, the IFD adds that the European Supervisory Authorities will aim to minimise divergence from these existing provisions. Interestingly, the reference to earlier materials and the minimisation of divergence from them were not included when the IFD was first published in draft form although there is sense in including them.

On risk takers generally, it’s also worth noting that on December 19, 2019, the EBA issued a consultation paper on draft regulatory technical standards on the criteria to identify all categories of staff whose professional activities have a material impact on an institutions’ risk profile. The draft technical standards are being revised in light of Article 94(2) of CRD IV as amended by the CRD V that mandates the EBA to develop draft technical standards to set out criteria to define: managerial responsibility and control functions; material business unit and significant impact on the relevant business unit’s risk profile; and other categories of staff not expressly referred to in Article 92(3) CRD IV whose professional activities have an impact on the institution’s risk profile comparably as material as that of those categories of staff referred to therein. The deadline for comments on the consultation paper is February 19, 2020.

Variable remuneration

The IFD sets out a long list of requirements regarding variable remuneration award23. These requirements are very similar to those already set out in the CRD IV24.

The key headline is that the IFD does not impose a mandatory bonus cap although it is open to Member States to set such a cap if they so wish25. The IFD also requires that a Class 2 investment firm’s remuneration policy sets appropriate ratios between the fixed and variable component of total remuneration with the ability to pay no variable remuneration in certain cases.

The IFD’s list of requirements concerning variable remuneration

  1. Where variable remuneration is performance related, the total amount is based on a combination of the assessment of the performance of the individual, of the business unit concerned and of the overall results of the Class 2 investment firm.
  2. When assessing the performance of the individual, both financial and non-financial criteria are taken into account.
  3. The assessment of the performance in point (1) above is based on a multi-year period, taking into account the business cycle of the Class 2 investment firm and its business risks.
  4. The variable remuneration does not affect the Class 2 investment firm’s ability to ensure a sound capital base.
  5. There is no guaranteed variable remuneration other than for new staff only for the first year of employment of new staff and where the Class 2 investment firm has a strong capital base.
  6. Payments relating to the early termination of an employment contract reflect performance achieved over time by the individual and shall not reward failure or misconduct.
  7. Remuneration packages relating to compensation or buy out from contracts in previous employment are aligned with the long-term interests of the Class 2 investment firm.
  8. The measurement of performance used as a basis to calculate pools of variable remuneration takes into account all types of current and future risks and the cost of capital and liquidity required.
  9. The allocation of the variable remuneration components within the Class 2 investment firm takes into account all types of current and future risks.
  10. At least 50 per cent of variable remuneration consists of the following instruments: (i) shares or equivalent ownership interests, subject to the legal structure of the Class 2 investment firm concerned; (ii) share-linked instruments or equivalent non-cash instruments, subject to the legal structure of the Class 2 investment firm concerned; (iii) additional Tier 1 instruments or Tier 2 instruments or other instruments which can be fully converted to Common Equity Tier 1 instruments or written down and that adequately reflect the credit quality of the Class 2 investment firm as a going concern (the EBA is to draft regulatory technical standards specifying the classes of instruments that satisfy this condition); (iv) non-cash instruments which reflect the instruments of the portfolios managed.
  11. By way of derogation from (10) above, where the Class 2 investment firm does not issue any of the instruments referred to in that point, Member State competent authorities may approve the use of alternative arrangements fulfilling the same objectives (the EBA is to draft regulatory technical standards specifying possible alternative arrangements).
  12. At least 40 per cent of the variable remuneration is deferred over a three- to five-year period, depending on the business cycle of the Class 2 investment firm, the nature of its business, its risks and the activities of the individual in question, except in the case of variable remuneration of a particularly high amount26 where the proportion of the variable remuneration is at least 60 per cent.
  13. Up to 100 per cent of the variable remuneration is contracted where the financial performance of the Class 2 investment firm is subdued or negative, including through malus or clawback arrangements subject to criteria set by the Class 2 investment firm which in particular cover situations where the individual in question: (i) participated in or was responsible for conduct which resulted in significant losses for the firm; (ii) is no longer considered fit and proper.
  14. Discretionary pension benefits are in line with the business strategy, objectives, values and long-term interests of the Class 2 investment firm.

In relation to the instruments referred to in item (10) above, these will be subject to a retention policy designed to align the incentives of the individual with the longer term interests of the Class 2 investment firm, its creditors and clients. Member States may place restrictions on the types and designs of those instruments or prohibit the use of certain instruments for variable remuneration.

Also, items (10) and (12) above will not apply to:

  • An investment firm where the value of its on and off-balance sheet assets is on average equal to or less than €100m over the four-year period immediately preceding the given financial year.
  • An individual whose annual variable remuneration does not exceed €50,000 and does not represent more than one quarter of that individual’s total annual remuneration.

Subject to certain requirements27, Member States may increase or decrease the above two thresholds.

Remuneration committee and oversight of remuneration policies

The IFD requires investment firms to establish a remuneration committee28 similar to that set out in the CRD IV.29 Certain investment firms will be excluded from this requirement, being Class 3 investment firms and investment firms that have on and off-balance sheet assets which are less than €100m30.

The remuneration committee, which may be established at group level, is to be gender balanced and is expected to exercise “competent and independent judgment on remuneration policies and practices and the incentives created for managing risk, capital and liquidity”31. The chair of the remuneration committee and its members will be non-executives who sit on the management body. Should a Member State require employee representatives on the management body, the remuneration committee will include one or more of them. When making decisions the remuneration committee is to take into account the public interest and also the “long term interests of shareholders, investors and other stakeholders in the investment firm”32. The EBA, in consultation with ESMA, is to issue guidelines on the application of sound remuneration policies33.

Extraordinary public financial support

The IFD contains provisions34 that provide that nothing shall prevent Member States from adopting a stricter approach to remuneration when the investment firm receives extraordinary public financial support. In the IFD the term “extraordinary public financial support” is given the same meaning as it appears in the Bank Recovery and Resolution Directive3536 being State aid within the meaning of Article 107(1) TFEU37 or other public financial support at the supra-national level which, if provided at the national level, would constitute State aid.

Where an investment firm receives extraordinary public support, Member States shall ensure that the investment firm does not pay variable remuneration to members of the management body. Other members of staff may be paid variable remuneration where to do so would not be inconsistent with the maintenance of a sound capital base and the timely exit of the investment firm from extraordinary public financial support. In addition, the variable remuneration should be limited to a portion of net revenue.

Disclosure and reporting obligations

In addition to the IFD’s country-by-country reporting obligations38 that cover reporting items such as the activities and turnover of subsidiaries and branches, the Directive provides that Class 2 investment firms will be required to provide their Member State competent authority with information on the number of natural persons that are remunerated €1m or more per financial year including information on their job responsibilities, the business area they are involved with and the main elements of salary, bonus, long-term award and pension contribution. Class 2 investment firms will also be required to give to their competent authority on demand the total remuneration figures for each member of the management body or senior management39. The provision of information to Member State competent authorities on the lines set out above is something that is already set out in the CRD IV40.

The remainder of the remuneration related disclosure requirements can be found in the IFR41. These requirements share a number of similar features which the remuneration disclosure provisions set out in the CRR42.

The disclosure requirements in the IFR are compatible with the aims of the remuneration rules, namely to establish and maintain remuneration policies and practices that are consistent with effective risk management43. Class 2 investment firms should publicly disclose their remuneration policies and practices and such policies should be gender neutral44. Where a Class 3 investment firm no longer meets the conditions for qualifying as a small and non-interconnected investment firm, it must publicly disclose its remuneration policy and practices as of the financial year following the financial year in which it ceases to meet the conditions45.

In terms of what Class 2 investment firms need to disclose regarding their remuneration policy and practices46 for risk takers

1. The aspects related to gender neutrality and the gender pay gap.

2. The most important design characteristics of the remuneration system, including the level of variable remuneration and the criteria for awarding variable remuneration.           

3. The ratio between fixed and variable remuneration.

4. Aggregated quantitative information on remuneration broken down by senior management and risk takers indicating the following:

  • The amount of remuneration awarded in the financial year, split into fixed remuneration, including a description of the fixed components, and variable remuneration, and the number of beneficiaries.
  • The amounts and forms of awarded variable remuneration split into cash, shares, share-linked instruments and other types separately for the part paid upfront and for the deferred part.
  • The amounts of deferred remuneration awarded for previous performance periods, split into the amount due to vest in the financial year and the amount due to vest in subsequent years.
  • The amount of deferred remuneration due to vest in the financial year that is paid out during the financial year, and that is reduced through performance adjustments.
  • The guaranteed variable remuneration awards during the financial year and the number of beneficiaries of those awards.
  • The severance payments awarded in previous periods, that have been paid out during the financial year.
  • The amounts of severance payments awarded during the financial year, split into paid upfront and deferred, the number of beneficiaries of those payments and the highest payment that has been awarded to a single person.
5. Information on whether it benefits from a derogation under Article 32(4) of the IFD.

Class 2 investment firms have the discretion to choose the medium and location of their disclosures provided that it effectively complies with the obligations in the IFR47. The disclosures are to be provided in one medium or location.

Conclusion and next steps

For UK investment firms, e.g. BIPRU firms, that are currently subject to full application of the BIPRU Remuneration Code, the new IFR/IFD regime might not be too onerous as certain requirements very similar. However, UK investment firms that are currently able to dis-apply some of the remuneration requirements of the BIPRU remuneration code48 may find the new regime a bigger challenge. The starting point for UK investment firms will therefore be to identify their classification under the IFR / IFD. Having identified their classification the investment firm can then work out what remuneration provisions apply and scope out what work needs to be done.


1   Regulation (EU) 2019/2033 of the European Parliament and of the Council of November 27, 2019 on the prudential requirements of investment firms and amending Regulations (EU) No 1093/2010, (EU) No 575/2013, (EU) No 600/2014 and (EU) No 806/2014

2   Directive (EU) 2019/2034 of the European Parliament and of the Council of November 27, 2019 on the prudential supervision of investment firms and amending Directives 2002/87/EC, 2009/65/EC, 2011/61/EU, 2013/36/EU, 2014/59/EU and 2014/65/EU

3   Sometimes known as a transitional period

4   Directive 2014/65/EU of the European Parliament and of the Council of May 15, 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU

5   Directive 2013/36/EU of the European Parliament and of the Council of June 26, 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC

6   Regulation (EU) No 575/2013 of the European Parliament and of the Council of June 26, 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012

7   Article 1(2) of the IFR

8   Article 25(1) of the IFD

9   Article 25 of the IFD sets out further provisions where an investment firm no longer meets the conditions for a Class 3 investment firm

10   See Recital 22 of the IFD

11   European Commission FAQs: revised framework for investment firms (December 20, 2017)

12   Directive (EU) 2019/878 of the European Parliament and of the Council of May 20, 2019 amending Directive 2013/36/EU as regards exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures

13   See Recital 10 of the CRD V

14   Article 26 of the IFD

15   Article 30 of the IFD

16   As defined in point (37) of Article 4(1) of MiFID II

17   Article 92 of the CRD IV

18   Article 9(3)(c) of MiFID II

19   Staff whose professional activities have a material impact on the risk profile of the investment firm

20   Article 92(2) of the CRD IV

21   Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities

22   Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010

23   Article 32 of the IFD

24   Article 94 of the CRD IV

25   Recital 25 of the IFD

26   The term “particularly high amount” is not defined in the IFD; we expect this point to be clarified in the future

27   See Article 32(5) and 32(6) of the IFD

28   Article 33 of the IFD

29   Article 95 of the CRD IV

30   See further Article 32(4) of the IFD

31   Article 33(1) of the IFD

32   Article 33(3) of the IFD

33   Article 34(3) of the IFD

34   Article 31 of the IFD

35   Directive 2014/59/EU of the European Parliament and of the Council of May 15, 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council

36   See point (28) of Article 2(1) of the Bank Recovery and Resolution Directive

37   Treaty on the Functioning of the European Union

38   Article 27 of the IFD

39   Article 34(4) of the IFD

40   Article 75(3) of the CRD IV

41   Articles 46 and 51 of the IFR

42   Article 450 of the CRR

43   Recital 31 of the IFR

44   Recitals 30 and 31, Article 46(1) of the IFR

45   Article 46(3) of the IFR

46   Article 51 of the IFR

47   Article 46(4) of the IFR

48   SYSC 19C

Recent publications

Subscribe and stay up to date with the latest legal news, information and events...