Can pay make someone a material risk taker?

How CP26/27 could make incentive design part of the MRT assessment for FCA solo-regulated firms.

Regulated firms have generally treated material risk taker (MRT) identification as a prelude to remuneration design: first identify the people whose jobs create material risk, then apply the remuneration rules to them.

That sequence is neat and familiar. The FCA now proposes to disturb it.

Under CP26/27, someone could be an MRT not only because of what they do, but because of how they are paid.

CP26/27 is the FCA’s consultation on replacing the existing AIFM, UCITS and MIFIDPRU remuneration codes with a single, more outcomes-focused code for in-scope solo-regulated firms. It is principally relevant to non-SNI MIFIDPRU investment firms, UK UCITS management companies and in-scope UK AIFMs.

It remains a consultation, not a rule. Nothing is settled and some of the proposals may change before the final rules arrive. But the direction of travel is clear enough to plan around now.

Pay would no longer simply be regulated because someone is an MRT. In an appropriate case, the way they are paid could itself make them one. Firms may therefore need to examine incentive design before finalising their MRT population, rather than identifying MRTs first and considering remuneration second.

The proposed change

Much of the initial commentary on CP26/27 has focused on simplification: three remuneration codes becoming one, small and non-interconnected MIFIDPRU firms falling out of scope and detailed requirements giving way to a more proportionate regime. All of that matters, but to my mind, the more interesting change sits inside the proposed MRT definition.

Under the current MIFIDPRU framework, the starting point is whether someone’s professional activities have a material impact on the risk profile of the firm or the assets it manages. Detailed criteria then identify particular roles, responsibilities and levels of authority.

That does not mean remuneration is absent from current identification exercises. Under the existing AIFM and UCITS Codes, employees whose total remuneration places them in the same remuneration bracket as senior management and risk takers are already part of the identification exercise. The UCITS Code expressly permits a firm not to treat such a person as Code staff where it can demonstrate that their professional activities do not have a material impact on the relevant risk profile.

Pay therefore already operates principally as a proxy or screening mechanism for potential risk. What appears new is the express inclusion of “remuneration incentives” in the MRT definition, alongside professional activities. That suggests the incentive itself, not merely the employee’s role or remuneration level, may be relevant to whether the material-impact test is met.

The proposed MRT definition would cover a member of staff “…whose professional activities or remuneration incentives have a material impact on…”:

• the firm’s conduct in relation to its clients and investors;
• the interests of investors, AIFs and UCITS schemes; or
• the firm’s compliance with its obligations under the regulatory system.

The “or” matters.

On the face of the proposed wording, the employee’s role does not have to satisfy the professional-activities limb independently if their remuneration incentives have the required material impact. The traditional sequence is broadly:

role → MRT status → remuneration rules

The proposed wording introduces another possibility:

incentive → MRT status → remuneration rules

The incentive could therefore become both a reason for classifying the employee and the subject of the additional requirements that classification triggers.

What exactly has to be material?

It is the impact of the incentive that must be material - not the amount of the award, the employee’s salary or simply the fact that some remuneration is variable. The question is whether the incentive has a material impact on one of the specified regulatory outcomes, namely: the firm’s conduct towards clients and investors, the interests of investors, AIFs or UCITS schemes or regulatory compliance.

The FCA’s draft guidance helps show how that test may operate. It gives six non-exhaustive examples of people who are likely to be MRTs. Five describe familiar territory: decision-making authority, strategic responsibility, responsibility for significant revenue or assets, the ability to commit the firm and influence over the design or distribution of products and services.

The sixth is different. It covers someone whose remuneration is materially linked to outcomes where poor conduct or misaligned incentives may cause material harm. This guidance is not a separate legal test, but it illustrates how the proposed remuneration limb may operate.

The causal chain is straightforward. The firm makes pay depend on an outcome, giving the employee a financial reason to pursue it. That pressure shapes how the employee exercises the influence available through their role. If the resulting decisions may materially affect clients, investors, funds or regulatory compliance, the remuneration limb may be satisfied.

There is no proposed threshold based on award value, percentage of salary or award multiple. Materiality will instead turn on the strength and structure of the link between pay and the relevant outcome; the employee’s ability to influence that outcome; who or what may be affected; and the significance of the potential regulatory consequences. Thresholds, cliffs and accelerators may intensify the pressure, while deferral, risk adjustment and discretion may temper it.

Actual harm does not need to have occurred. The draft guidance is forward-looking: it refers to circumstances in which poor conduct or misaligned incentives may cause material harm. A large bonus linked only loosely to firm-wide profit may therefore be too remote from an employee’s individual decisions, while a much smaller but sharply geared commission affecting a substantial or vulnerable client population may be material.

In short, the “or” creates the new route into MRT status, while the word “material” prevents that route from capturing every form of variable pay.

The job has not changed

Let's take a stylised example.

Suppose a relationship manager below senior-management level has limited formal authority and receives salary plus a broad discretionary bonus linked to overall firm performance. That bonus may be too remote from the employee’s individual client decisions to satisfy the remuneration limb and the employee may not otherwise qualify through their professional activities.

Now let's change only the pay arrangement. The employee receives a highly leveraged commission based on gross client inflows across a substantial client population, with an accelerator once a sales threshold is crossed and no adjustment for suitability, persistency, complaints or longer-term client outcomes.

The job has not changed but financial pressure attached to it has.

If that incentive gives the employee a strong personal reason to gather assets, encourage transactions or favour products that count towards the commission and that influence operates across a sufficiently significant client population, the incentive may have a material impact on the firm’s conduct towards its clients. On the proposed wording and guidance, the employee may therefore be an MRT because of the incentive.

Redesigning the arrangement may change the analysis. Measuring net rather than gross inflows, including client retention and complaints, softening accelerators, adding conduct gates, retaining discretion and deferring payment may all reduce the pressure towards harmful behaviour.

But better design is not a safe harbour. A well-aligned incentive may still materially influence client or investor outcomes and the employee’s professional activities may satisfy the definition independently. A firm should redesign an incentive because it produces better behaviour and better outcomes, not because it assumes that better design will remove the employee from the MRT population.

A smaller circle, drawn differently

The FCA describes the proposed definition as “narrowed and refocused”. Yet a narrower MRT population does not necessarily mean the same circle with a few names removed.

Some employees may fall out as detailed role-based criteria disappear. Others may be brought in because their remuneration creates a material connection to client conduct, investor interests or regulatory compliance that their title did not reveal. The circle may become smaller, but it will also be drawn differently.

MRT status would not determine whether an employee was covered by the proposed code. All staff of an in-scope firm would be subject to its general remuneration requirements. Broadly, these require remuneration policies and practices to support sound risk management, good conduct and culture, appropriate client and investor outcomes, effective management of conflicts and the independence of control functions.

MRTs would also be subject to six additional principles governing the structure and operation of their remuneration: the fixed-variable balance, performance assessment, guarantees, severance, deferral and performance adjustment.

This creates a feedback loop: the firm designs an incentive, the incentive affects the MRT assessment and the resulting classification determines which additional remuneration principles apply.

Arguably therefore, remuneration design and MRT identification can no longer sensibly be conducted as separate exercises by different teams at different times.

One exercise, not two

The consultation would also shift more responsibility from prescription to documented firm judgement. Decisions about scorecards, payout curves, deferral and performance adjustment would need to be explained by reference to the risks created by the incentive and the point at which client or investor outcomes become visible.

The rulebook becomes shorter, the explanation that firms need to give becomes longer.

The consultation closes on 16 September 2026. The FCA anticipates publishing its policy statement in the first quarter of 2027 and proposes that the new code should generally take effect the following day, applying to remuneration relating to performance periods beginning on or after that date. AIFMs would be subject to separate staged arrangements.

Depending on final timing and the relevant performance periods, some firms may need to administer aspects of the old and new regimes in parallel.

That phased application should not however delay the analytical work. Firms should begin with five questions:

• What does the incentive reward?
• What pressure does it create?
• What can the employee decide, influence or affect?
• Could that materially affect clients, investors, funds or regulatory compliance?
• What evidence supports the conclusion?

A new incentive, or a material change to a scorecard, payout curve, measurement period or deferral arrangement, should trigger reconsideration of the MRT analysis.

The answer will not always be more deferral, more measures or more discretion. Complexity is not the same as alignment - a scorecard with twelve measures can still reward the wrong thing.

For years, firms have identified risk in the organisation chart and treated remuneration as a consequence. If CP26/27 is adopted as drafted, they will need to look in both directions.

Sometimes the role creates the risk; sometimes the way someone is paid gives that risk its force.

Where pay makes someone an MRT, the question is not only which rules apply, it is also why the firm designed the incentive that way.

At Burges Salmon, our Financial Services, Incentives and Remuneration teams can help firms assess the impact of CP26/27, review their MRT identification methodologies and map material incentives against conduct, client and investor risks.