Solo-regulated firms – FCA consults on Remuneration Code reform

On 14 July 2026, the FCA published a consultation paper (CP 26/27) on simplifying the remuneration code structure applicable to solo-regulated firms, including investment firms, alternative investment fund managers and UCITS managers.

The remuneration framework that currently applies across solo-regulated firms comprises:

• the Alternative Investment Fund Managers (AIFM) remuneration code (see SYSC 19B);
• the UCITS management companies (UCITS) remuneration code (see SYSC 19E); and
• the MIFIDPRU investment firms remuneration code (see SYSC 19G).

The FCA intends to simplify the regulatory framework applicable to remuneration at solo-regulated firms, replacing the three codes with a single composite code (the Code), that will be applicable to all in-scope solo regulated firms. However, this is not just an exercise in consolidation. The proposed Code (to be introduced in SYSC 19AA) will also be more flexible and less prescriptive than the current arrangements. 

This blog discusses the reasons for the intended change of approach and summarises the principal adjustments that are expected to be made.

The consultation remains open until 16 September 2026. The plan is for the new rules to be contained in a Policy Statement to be published in Q1 2027, with the new regime intended to come into effect the day after publication of the Policy Statement (although the new regime applicable to AIFM will be introduced in two stages, with the aim being to dovetail with the timing for wider AIFM reforms). The new regime will therefore apply in respect of performance periods that begin after the date on which the regime comes into force (so, for a firm with a calendar year performance period, the new Code will apply to remuneration from 1 January 2028). 

Consolidation into a single remuneration Code and move towards a principles-based approach

The FCA notes that the UK remuneration regime for non-banks is out of step with the more supervisory and principles-based approach adopted in many other major countries. The consultation paper also acknowledges that many in-scope firms find the current regime hard to apply and (especially for firms that do not pose systemic risk) unduly burdensome. There are also practical difficulties in navigating multiple regimes, which can lead to duplicated requirements or a need to apply the most onerous requirement, even where it is not necessarily the most appropriate. The FCA sees the solution as being the introduction of a consolidated single Code with fewer prescriptive rule-based requirements.

The new Code will therefore mark a shift to an outcomes-focused framework and proportionate approach. For example, formal governance requirements under the existing codes, such as a mandatory remuneration committee and annual independent review, will be withdrawn. Strong governance and effective oversight of remuneration arrangements will, however, remain very important, with an emphasis on firm governance and management body judgement. 

One of the consequences of a shift away from prescriptive rules is that different firms are likely to adopt different structures and different approaches – the FCA does not view that as a bad thing, but as a recognition that different firms have different business models and risk profiles and should be free to adopt structures that best suit them.   

Scope – to which firms will the new Code apply?

The new Code will apply to a defined group of FCA solo-regulated firms. This will include UK UCITS management companies.  

The intention is for UK AIFMs to come within scope on a phased basis, with full-scope AIFMs initially brought within scope, followed by medium and large UK AIFMs. Other AIFMs will not be within scope. The aim is to align with the broader AIFM reforms currently under discussion. One of the consequences of the proposals for AIFMs is that remuneration requirements will be consolidated in the Code (as opposed to the current position where various AIFM requirements are contained in non-handbook guidance). 

In terms of MIFIDPRU investment firms, all small and non-interconnected (SNI) firms will be excluded from remuneration requirements, with the new Code only applying to so-called non-SNI MIFIDPRU investment firms. The current tiered structure found in SYSC 19G will be removed and replaced with a single framework. 

Scope – to which employees will the proposed new Code apply?

The intention is that general remuneration requirements will apply to all staff, with additional targeted provisions for material risk takers. 

Who is a material risk taker?

It is proposed that the new Code will adopt a narrower and refocused definition of a material risk-taker (MRT). An MRT will be a staff member whose professional activities or remuneration incentives have a material impact on any of the following:

• the firm’s conduct in relation to its clients and investors;
• the interests of investors and (as the case may be) AIFs and UCITS schemes; or
• the firm’s compliance with obligations under the regulatory system.

This will impact certain certification functions under the SM&CR regime (although the certification regime is already under wider review as part of proposed reforms to SM&CR (see here for more details). 

General remuneration requirements applicable to all staff

In line with the focus on a principles-based approach, the proposed general remuneration requirements are flexibly drawn. There will be a need for firms to ensure appropriate governance and oversight of remuneration and for staff in control functions to be remunerated on the basis of the objectives linked to their function independent of business performance (with the remuneration for senior officers in such functions being overseen by the management body). Remuneration policies will also need to contain measures to avoid conflicts of interest.     

Guidance is expected, clarifying that firms may use a range of remuneration tools to support the design and implementation of their remuneration policies.

Remuneration requirements applicable to MRTs

In addition to the general requirements, firms will need to comply with remuneration principles for MRTs. These will include making a clear distinction (and maintaining an appropriate balance) between fixed and variable remuneration (in contrast to existing requirements, it does not appear that there will be any obligation to expressly set a ratio for the proportion of fixed pay to variable pay); assessing performance using both financial and non-financial criteria (including conduct and risk management); and ensuring severance pay reflects performance and does not reward failure. 

Deferral, malus and clawback

The specific remuneration principles for MRTs also cover deferral of variable remuneration. However, the FCA recognises that the prescriptive banking-derived rules in the current codes do not always suit the firms covered by the consultation. It is proposed that deferral should instead operate on a more flexible basis under the new Code.

The FCA's preferred option is to introduce a principles-based approach under which firms will have flexibility to introduce deferral structures that best support effective incentives and align with stakeholders' interests. Carried interest is specifically identified as a possible remuneration mechanism.

Under this option, there will be increased accountability for firms because responsibility will rest with the management body to devise and operate the appropriate structure – including 

• the form of deferral;
• to whom it will apply; and
• the duration of any deferral periods. 

Management bodies will need to be explicit about whether and how they are using deferral and how this supports good conduct and alignment with client and investor interests.

As a slightly more prescriptive alternative, the FCA is also consulting on a threshold-based deferral rule, under which mandatory deferral would apply to firms above a specific threshold, alongside a minimum deferral period. Below the threshold, the principles-based approach would apply. It is evident that the FCA prefers the first option.

The consultation paper contains no prescriptive recommendations in relation to performance-adjustment mechanisms for MRTs, such as malus and clawback, merely requiring firms to consider whether it would be appropriate to establish and implement performance adjustment mechanisms as tools to support good conduct, compliance and risk management expectations.

Guaranteed variable remuneration

It is also proposed to introduce more flexibility in the use of guaranteed variable remuneration for MRTs. This is intended to support firms in recruitment and retention, whilst ensuring that awards remain subject to risk alignment and do not undermine the overall objectives of the remuneration framework. Guaranteed remuneration will be permitted in specific circumstances, primarily in hiring and to compensate for forfeited remuneration from a previous employer. Any such award must be time-limited without creating an ongoing entitlement for the employee.  Guaranteed variable remuneration will also need to be subject to appropriate adjustment consistent with the firm’s overall remuneration policies.

What will the Code mean for in-scope firms?

Firms have consistently argued that the current remuneration arrangements are unduly inflexible and unnecessarily onerous for non-banks, especially those that do not pose systemic risk. The proposals contained in the consultation paper are therefore likely to be viewed as a welcome corrective, and many in-scope firms will view the opportunity to develop a more bespoke remuneration structure, more closely linked to their risk profile and stakeholder interests, as an attractive one. 

There remain risks for the unwary, though, and flexibility does not equate to relaxation – the focus on an outcomes-based approach and management body judgement means that if something goes wrong there is likely to be very close scrutiny of the remuneration decisions that an in-scope firm has (or has not) taken. Management bodies will be accountable for the remuneration decisions they take. Much will also depend on how the FCA supervises firms’ new remuneration policies in practice and whether it accepts decisions firms take to change their current remuneration arrangements such as removing malus and clawback or reclassifying MRTs. While the removal of prescriptive rules provides welcome flexibility it could lead firms to take a more cautious approach if they are concerned that they will face regulatory censure for adopting more flexible remuneration policies. If this were to happen the potential benefits of the FCA’s proposed changes will not be realised.

If you would like to discuss any of the points contained in this blog in further detail, do please get in touch with any of the authors or your normal Freshfields contact.