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SYSC 19A.3 Remuneration principles for IFPRU investment firms5

Application: groups

SYSC 19A.3.1 R
  1. (1)

    A firm must apply the requirements of this section at group, parent undertaking and subsidiary undertaking levels, including those subsidiaries established in a country or territory which is not an EEA State.

  2. (2)

    Paragraph (1) does not limit SYSC 12.1.13 R (2)(dA) (which relates to the application of the Remuneration Code within UK consolidation groups and non-EEA sub-groups).

[Note:3article 92(1) of CRD]

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SYSC 19A.3.2 G

SYSC 12.1.13 R (2)(dA) requires the firm to ensure that the risk management processes and internal control mechanisms at the level of any UK consolidation group or non-EEA sub-group of which a firm is a member comply with the obligations set out in this section on a consolidated (or sub-consolidated) basis. In the FCA’s6 view, the application of6 this section at group, parent undertaking and subsidiary undertaking levels in SYSC 19A.3.1R(1) is in line with6 article 109(2) of CRD on6 the application of systems and controls requirements to groups (as6 in SYSC 12.1.13 R).

Application: categories of staff and proportionality

SYSC 19A.3.3 R
  1. (1)

    This section applies in relation to Remuneration Code staff, except as set out in (3).

  2. (2)

    When establishing and applying the total remuneration policies for Remuneration Code staff, a firm must comply with this section in a way and to the extent that is appropriate to its size, internal organisation and the nature, the scope and the complexity of its activities (the remuneration principles proportionality rule).

  3. (3)

    Paragraphs (1) and (2) do not apply to the requirement for significant firms to have a remuneration committee (SYSC 19A.3.12 R).

[Note:3article 92(2) of CRD]

3

[Note: In addition to the guidance in this section which relates to the remuneration principles proportionality rule, the FCA provides6 guidance7 on the division of firms into categories for the purpose of providing a framework for the operation of the remuneration principles proportionality rule. 4This guidance6 is available in the FCA website at http://www.fca.org.uk/your-fca/documents/finalised-guidance/remuneration-code6]

7 4 7 4
SYSC 19A.3.4 R
  1. (1)

    Remuneration Code staff comprises:

    1. (a)

      an employee of an IFPRU investment firm whose professional activities have a material impact on the firm’s risk profile, including any employee who is deemed to have a material impact on the firm’s risk profile in accordance with Regulation (EU) 604/2014 of 4 March 2014 (Regulatory technical standards to identify staff who are material risk takers); or

    2. (b)

      subject to (2) and (3), an employee of an overseas firm in SYSC 19A1.1.1R(1)(d) (i.e., an overseas firm that would have been an IFPRU investment firm if it had been a UK domestic firm) whose professional activities have a material impact on the firm’s risk profile, including any employee who would meet any of the criteria set out in articles 3 or 4(1) of Regulation (EU) 604/2014 of 4 March 2014 (Regulatory technical standards to identify staff who are material risk takers) if it had applied to him.

  2. (2)

    An overseas firm in SYSC 19A1.1.1R(1)(d) (i.e., an overseas firm that would have been an IFPRU investment firm if it had been a UK domestic firm) may deem an employee not to be Remuneration Code staff where:

    1. (a)

      the employee:

      1. (i)

        would meet the criteria in article 4(1) of Regulation (EU) No 604/2014 of 4 March 2014;

      2. (ii)

        would not meet any of the criteria in article 3 of Regulation (EU) No 604/2014 of 4 March 2014; and

      3. (iii)

        was awarded total remuneration of less than €750,000 in the previous year; and

    2. (b)

      the overseas firm determines that the professional activities of the employee do not have a material impact on its risk profile on the grounds described in article 4(2) of Regulation (EU) 604/2014 of 4 March 2014.

  3. (3)

    Where the overseas firm deems an employee not to be Remuneration Code staff as set out in (2), it must notify the FCA, applying the approach described in article 4(4) of Regulation (EU) 604/2014 of 4 March 2014.

5

[Note: article 92(2) of CRD and articles 3 and 4 of Regulation (EU) No 604/2014 of 4 March 2014.]5

3 3 5
SYSC 19A.3.4A G

Where an overseas firm in SYSC 19A1.1.1R(1)(d) (i.e., an overseas firm that would have been a IFPRU investment firm if it had been a UK domestic firm) wishes to deem an employee who earns more than €750,000 not to be Remuneration Code staff, the overseas firm may apply for a waiver of the requirement in SYSC 19A.3.4R in respect of that employee.

SYSC 19A.3.5 R

A firm must:

  1. (1)

    maintain a record of its Remuneration Code staff in accordance with the general record-keeping requirements (SYSC 9); and

  2. (2)

    take reasonable steps to ensure that its Remuneration Code staff understand the implications of their status as such, including the potential for remuneration which does not comply with certain requirements of the Remuneration Code to be rendered void and recoverable by the firm.

SYSC 19A.3.6 G

[deleted]6

Remuneration Principle 1: Risk management and risk tolerance

SYSC 19A.3.7 R

A firm must ensure that its remuneration policy is consistent with and promotes sound and effective risk management and does not encourage risk-taking that exceeds the level of tolerated risk of the firm.

[Note:3article 92(2)(a) of CRD]

3

Remuneration Principle 2: Supporting business strategy, objectives, values and long-term interests of the firm

SYSC 19A.3.8 R

A firm must ensure that its remuneration policy is in line with the business strategy, objectives, values and long-term interests of the firm.

[Note:3article 92(2)(b) of CRD]

3

Remuneration Principle 3: Avoiding conflicts of interest

SYSC 19A.3.9 R

A firm must ensure that its remuneration policy includes measures to avoid conflicts of interest.

[Note:3article 92(2)(b) of CRD]

3

Remuneration Principle 4: Governance

SYSC 19A.3.10 R

A firm must ensure that its 3management body in its supervisory function adopts and periodically reviews the general principles of the remuneration policy and is responsible for3 overseeing its implementation.

3

[Note:3article 92(2)(c) of CRD and Standard 1 of the FSB Compensation Standards]

3
SYSC 19A.3.11 R

A firm must ensure that the implementation of the remuneration policy is, at least annually, subject to central and independent internal review for compliance with policies and procedures for remuneration adopted by the 3management body in its supervisory function.

3

[Note:3article 92(2)(d) of CRD and Standard 1 of the FSB Compensation Standards]

3
SYSC 19A.3.12 R
  1. (1)

    A6firm that is significant in terms of its size, internal organisation and the nature, the scope and the complexity of its activities must establish a remuneration committee.

    3
  2. (2)

    The remuneration committee must be constituted in a way that enables it to exercise competent and independent judgment on remuneration policies and practices and the incentives created for managing risk, capital and liquidity.

  3. (3)

    The chairman and the members of the remuneration committee must be members of the 3management body who do not perform any executive function in the firm.

    3
  4. (4)

    The remuneration committee must be responsible for the preparation of decisions regarding remuneration, including those which have implications for the risk and risk management of the firm and which are to be taken by the 3management body.

    3
  5. (5)

    When preparing such decisions, the remuneration committee must take into account the long-term interests of shareholders, investors and other stakeholders in the firm3 and the public interest.

[Note:3article 95 of CRD and Standard 1 of the FSB Compensation Standards]

3
SYSC 19A.3.12A R

3A firm that maintains a website must explain on the website how it complies with the Remuneration Code.

[Note: article 96 of CRD]

SYSC 19A.3.12B R

4In SYSC 19A.3.12 R a ‘6firm that is significant' means a significant IFPRU firm.

SYSC 19A.3.13 G
  1. (1)

    A firm should be able to demonstrate that its decisions are consistent with an assessment of its financial condition and future prospects. In particular, practices by which remuneration is paid for potential future revenues whose timing and likelihood remain uncertain should be evaluated carefully and the governing body or remuneration committee (or both) should work closely with the firm's risk function in evaluating the incentives created by its remuneration system.

  2. (2)

    The governing body and any remuneration committee are responsible for ensuring that the firm'sremuneration policy complies with the Remuneration Code and where relevant should take into account relevant guidance, such as that issued by the Basel Committee on Banking Supervision, the International Association of Insurance Supervisors (IAIS) and the International Organization of Securities Commissions (IOSCO).

  3. (3)

    [deleted]6

  4. (4)

    Guidance on what the supervisory function might involve is set out in SYSC 4.3.3 G.

Remuneration Principle 5: Control functions

SYSC 19A.3.14 R

A firm must ensure that employees engaged in control functions:

  1. (1)

    are independent from the business units they oversee;

  2. (2)

    have appropriate authority; and

  3. (3)

    are remunerated:

    1. (a)

      adequately to attract qualified and experienced staff; and

    2. (b)

      in accordance with the achievement of the objectives linked to their functions, independent of the performance of the business areas they control.

[Note:3article 92(2)(e) of CRD and Standard 2 of the FSB Compensation Standards]

3
SYSC 19A.3.15 E
  1. (1)

    A firm's risk management and compliance functions should have appropriate input into setting the remuneration policy for other business areas. The procedures for setting remuneration should allow risk and compliance functions to have significant input into the setting of individual remuneration awards where those functions have concerns about the behaviour of the individuals concerned or the riskiness of the business undertaken.

  2. (2)

    Contravention of (1) may be relied on as tending to establish contravention of the rule on employees engaged in control functions having appropriate authority (SYSC 19A.3.14 R (2)).

SYSC 19A.3.16 R

A firm must ensure that the remuneration of the senior officers in risk management and compliance functions is directly overseen by the remuneration committee referred to in SYSC 19A.3.12 R, or, if such a committee has not been established, by the governing body in its supervisory function.

[Note:3article 92(2)(f) of CRD]

3
SYSC 19A.3.17 G
  1. (1)

    This Remuneration Principle is designed to manage the conflicts of interest which might arise if other business areas had undue influence over the remuneration of employees within control functions. Conflicts of interest can easily arise when employees are involved in the determination of remuneration for their own business area. Where these could arise they need to be managed by having in place independent roles for control functions (including, notably, risk management and compliance) and human resources. It is good practice to seek input from a firm's human resources function when setting remuneration for other business areas.

  2. (2)

    [deleted]6

  3. (3)

    [deleted]6

Remuneration Principle 6: Remuneration and capital

SYSC 19A.3.18 R

A firm must ensure that total variable remuneration does not limit the firm's ability to strengthen its capital base.

[Note:3article 94(1)(c) of CRD and Standard 3 of the FSB Compensation Standards]

3
SYSC 19A.3.19 G

[deleted]6

Remuneration Principle 7: Exceptional government intervention

SYSC 19A.3.20 R

A firm that benefits from exceptional government intervention must ensure that:

  1. (1)

    variable remuneration is strictly limited as a percentage of net revenues when it is inconsistent with the maintenance of a sound capital base and timely exit from government support;

  2. (2)

    it restructures remuneration in a manner aligned with sound risk management and long-term growth, including when appropriate establishing limits to the remuneration of3members of its management body; and

    3
  3. (3)

    no variable remuneration is paid to 3members of its management body unless this is justified.

    3

[Note:3article 93 of CRD and Standard 10 of the FSB Compensation Standards]

3
SYSC 19A.3.21 G

The FCA6 would normally expect it to be appropriate for the ban on paying variable remuneration to 3members of the management body of a firm that benefits from exceptional government intervention to apply only in relation to 3members of the management body who were in office at the time that the intervention was required.

3 3

Remuneration Principle 8: Profit-based measurement and risk adjustment

SYSC 19A.3.22 R
  1. (1)

    A firm must ensure that any measurement of performance used to calculate variable remuneration components or pools of variable remuneration components:

    1. (a)

      includes adjustments for all types of current and future risks and takes into account the cost and quantity of the capital and the liquidity required; and

    2. (b)

      takes into account the need for consistency with the timing and likelihood of the firm receiving potential future revenues incorporated into current earnings.

  2. (2)

    A firm must ensure that the allocation of variable remuneration components within the firm also takes into account all types of current and future risks.

[Note:3article 94(a)(j) and (k) of CRD and Standard 4 of the FSB Compensation Standards]

3
SYSC 19A.3.23 G
  1. (1)

    This Remuneration Principle stresses the importance of risk adjustment in measuring performance, and the importance within that process of applying judgement6 and common sense. The FCA expects a6firm to apply qualitative judgements and common sense in6 the final decision about the performance-related components6 of variable remuneration pools6.

  2. (2)

    A number of risk-adjustment techniques and measures are available, and a firm should choose those most appropriate to its circumstances. The FCA considers good practice for this Principle to be represented by firms who provide a quantitative reference or starting point that explicitly includes risk-adjusted metrics, before the application of more discretionary factors.6 Common measures include those based on economic profit or economic capital. Whichever technique is chosen, the full range of future risks should be covered including non-financial risks such as reputation, conduct, client outcomes, values and strategy6.

  3. (3)

    The FCA expects a firm to be able to provide it with details of all adjustments that the firm has made through application of formulae or the exercise of discretion. This will enable the FCA to consider if the firm’s risk adjustment framework is sufficiently robust. Where discretion has been applied, the firm should be able to provide a clear explanation for, and quantification of, such adjustments.6

  4. (4)

    A firm should ask the risk management function to validate and assess risk-adjustment techniques, and to attend a meeting of the governing body or remuneration committee for this purpose. 6

SYSC 19A.3.24 G

[deleted]6

SYSC 19A.3.25 R

A firm must base assessments6 of financial performance used to calculate variable remuneration components or pools of variable remuneration components6 principally on profits.

SYSC 19A.3.26 G

[deleted]6

SYSC 19A.3.27 R

A firm must ensure that its total variable remuneration is generally considerably contracted where subdued or negative financial performance of the firm occurs, taking into account both current remuneration and reductions in payouts of amounts previously earned3, including through malus or clawback arrangements.

3

[Note:3article 94(1)(n) of CRD and Standard 5 of the FSB Compensation Standards]

3
SYSC 19A.3.28 G

[deleted]6

Remuneration Principle 9: Pension policy

SYSC 19A.3.29 R

A firm must ensure that:

  1. (1)

    its pension policy is in line with its business strategy, objectives, values and long-term interests;

  2. (2)

    when an employee leaves the firm before retirement, any discretionary pension benefits are held by the firm for a period of five years in the form of instruments referred to in SYSC 19A.3.47 R (1); and

  3. (3)

    3when an employee reaches retirement, discretionary pension benefits are paid to the employee in the form of instruments referred to in SYSC 19A.3.47 R (1) and subject to a five-year retention period.

    3

[Note:3article 94(1)(o) of CRD]

3

Remuneration Principle 10: Personal investment strategies

SYSC 19A.3.30 R
  1. (1)

    A firm must ensure that its employees undertake not to use personal hedging strategies or remuneration- or liability-related contracts of insurance to undermine the risk alignment effects embedded in their remuneration arrangements.

  2. (2)

    A firm must maintain effective arrangements designed to ensure that employees comply with their undertaking.

[Note:3article 94(1)(p) of CRD and Standard 14 of the FSB Compensation Standards]

3
SYSC 19A.3.31 G

In the FCA’s6 view, circumstances in which a person will be using a personal hedging strategy include (and are not limited to)6 entering into an arrangement with a third party under which the third party will make payments, directly or indirectly, to that person that are linked to or commensurate with the amounts by which the person'sremuneration is subject to reductions.

3 3Remuneration Principle 11: Non-compliance with the Remuneration Code

SYSC 19A.3.32 R

A firm must ensure that variable remuneration is not paid through vehicles or methods that facilitate 3non-compliance with the Remuneration Code, the EU CRR or CRD6.

3

[Note:3article 94(1)(q) of CRD]

3

Remuneration Principle 12: Remuneration structures - introduction

SYSC 19A.3.33 G

Remuneration Principle 12 consists of a series of rules, evidential provisions and guidance relating to remuneration structures.

SYSC 19A.3.34 G
  1. (1)

    Taking account of the remuneration principles proportionality rule, the appropriate regulator7 does not generally consider it necessary for a firm to apply the rules referred to in (2) where, in relation to an individual ("X"), both the following conditions are satisfied:

    7
    1. (a)

      Condition 1 is that Xs variable remuneration is no more than 33% of total remuneration; and

    2. (b)

      Condition 2 is that Xs total remuneration is no more than 500,000.

  2. (2)

    The rules referred to in (1) are those relating to:

    1. (a)

      guaranteed variable remuneration (SYSC 19A.3.40 R);

    2. (b)

      retained shares or other instruments (SYSC 19A.3.47 R);

    3. (c)

      deferral (SYSC 19A.3.49 R); and

    4. (d)

      performance adjustment (SYSC 19A.3.51 R).

[Note: The FCA provides6 guidance on the application of certain rules on remuneration structures in relation to individuals who are Remuneration Code staff for only part of a given performance year. 4This guidance6 is available in the FCA website at www.fca.org.uk/your-fca/documents/finalised-guidance/remuneration-code.]

7 7 4 7 4

Remuneration Principle 12(a): Remuneration structures - general requirement

SYSC 19A.3.35 R

A firm must ensure that the structure of an employee'sremuneration is consistent with and promotes effective risk management.

SYSC 19A.3.35A R

3A firm must ensure that the remuneration policy makes a clear distinction between criteria for setting:

  1. (1)

    basic fixed remuneration that primarily reflects an employee's professional experience and organisational responsibility as set out in the employee's job description and terms of employment; and

  2. (2)

    variable remuneration that reflects performance in excess of that required to fulfil the employee's job description and terms of employment and that is subject to performance adjustment in accordance with the Remuneration Code.

[Note: article 92(2)(g) of CRD]

SYSC 19A.3.35B R

4A firm must ensure that the remuneration policy makes a clear distinction between criteria for setting:

  1. (1)

    basic fixed remuneration that primarily reflects an employee's professional experience and organisational responsibility as set out in the employee's job description and terms of employment; and

  2. (2)

    variable remuneration that reflects performance in excess of that required to fulfil the employee's job description and terms of employment and that is subject to performance adjustment in accordance with the Remuneration Code.

[Note: article 92(2)(g) of CRD]

Remuneration Principle 12(b): Remuneration structures - assessment of performance

SYSC 19A.3.36 R

A firm must ensure that where remuneration is performance-related:

  1. (1)

    the total amount of remuneration is based on a combination of the assessment of the performance of:

    1. (a)

      the individual;

    2. (b)

      the business unit concerned; and

    3. (c)

      the overall results of the firm; and

  2. (2)

    when assessing individual performance, financial as well as non-financial criteria are taken into account.

[Note:3article 94(1)(a) of CRD and Standard 6 of the FSB Compensation Standards]

3
SYSC 19A.3.37 G
  1. (1)

    The non-financial criteria in SYSC 19A.3.36R(2) should include:6

    1. (a)

      the extent of the employee’s adherence to effective risk management, and compliance with the regulatory system and with relevant overseas regulatory requirements; and6

    2. (b)

      metrics relating to conduct, which should comprise a substantial portion of the non-financial criteria.6

  2. (2)

    Poor performance, such as poor risk management or other behaviours contrary to firm values, can pose significant risks for a firm and non-financial metrics should override metrics of financial performance where appropriate.6

  3. (3)

    Aligning variable awards to sustainable financial performance requires firms to make appropriate ex-ante adjustments to take account of the potential for future unexpected losses. Performance measures commonly used (such as earnings per share (EPS), total shareholder return (TSR) and return on equity (RoE)) are not suitably adjusted for longer-term risk factors and have a tendency to incentivise highly leveraged activities.6

SYSC 19A.3.38 R

A firm must ensure that the assessment of performance is set in a multi-year framework in order to ensure that the assessment process is based on longer-term performance and that the actual payment of performance-based components of remuneration is spread over a period which takes account of the underlying business cycle of the firm and its business risks.

[Note:3article 94(1)(b) of CRD]

3
SYSC 19A.3.39 G

[deleted]6

SYSC 19A.3.39A G

6A firm should note that the requirement in SYSC 19A.3.36R(2) for financial and non-financial criteria to be taken into account applies wherever remuneration is performance-related including within any assessment of future performance.

Remuneration Principle 12(c): Remuneration structures - guaranteed variable remuneration, buy-outs and retention awards

SYSC 19A.3.40 R

A firm must ensure that guaranteed variable remuneration is not part of prospective remuneration plans.3 A firm must not award, pay or provide guaranteed variable remuneration unless:

3
  1. (1)

    3it is exceptional;

  2. (2)

    3it occurs in the context of hiring new Remuneration Code staff;

    3
  3. (3)

    3the firm has a sound and strong capital base; and

    3
  4. (4)

    3it is limited to the first year of service.

[Note:3article 94(1)(d) and (e) of CRD and Standard 11 of the FSB Compensation Standards]

3
SYSC 19A.3.40A R

3A firm must ensure that remuneration packages relating to compensation for, or buy out from, an employee's contracts in previous employment align with the long term interests of the firm and are subject to appropriate retention, deferral and performance and clawback arrangements.

[Note: article 94(1)(i) of CRD]

SYSC 19A.3.41 E

[deleted]6

SYSC 19A.3.42 G

Guaranteed variable remuneration should be subject to the same requirements applicable to6 variable remuneration awarded by the firm including deferral, malus and clawback6.

SYSC 19A.3.43 G

The FCA expects that guaranteed variable awards and retention awards should not be common practice for Remuneration Code staff and should be limited to rare, infrequent occurrences.6

Remuneration Principle 12(d): Remuneration structures - ratios between fixed and variable components of total remuneration

SYSC 19A.3.44 R

A firm must set an 5appropriate ratio 5between the fixed and variable components of total remuneration and ensure that:

  1. (1)

    fixed and variable components of total remuneration are appropriately balanced;

    3
  2. (2)

    the level of the 5fixed component represents a sufficiently high proportion of the total remuneration to allow the operation of a fully flexible policy on variable remuneration components, including the possibility to pay no variable remuneration component3; and

    3
  3. (3)

    subject to SYSC 19A.3.44AR, the level of the variable component of total remuneration must not exceed 100% of the fixed component of total remuneration for each Remuneration Code staff.5

[Note: article 94(1)(f) and 94(1)(g)(i) of the CRD]5

SYSC 19A.3.44A R

3A firm may set a higher maximum level of the 5ratio between the fixed and variable components of total remuneration provided:5

5 5
  1. (1)

    the overall level of the variable component does not exceed 200% of the fixed component of the total remuneration for each Remuneration Code staff; and5

    5
  2. (2)

    is approved by the shareholders or owners or members of the firm in accordance with SYSC 19A.3.44B R.

[Note: article 94(1)(g)(ii) of CRD]

SYSC 19A.3.44B R

A firm must ensure that any approval by the its shareholders or owners or members for the purposes of SYSC 19A.3.44AR is carried out in accordance with the following procedure:5

3 5
  1. (1)

    the firm must give reasonable notice to all its shareholders or owners or members of its intention to seek approval of the proposed higher ratio;5

    5
  2. (2)

    the firm must make a detailed recommendation to all its shareholders or owners or members that includes:

    1. (a)

      the reasons for, and the scope of, the approval sought;

    2. (b)

      the number of staff affected and their functions; and

    3. (c)

      the expected impact on the requirement to maintain a sound capital base;5

    5
  3. (3)

    the firm must:

    1. (a)

      without delay, inform the FCA of the recommendation to its shareholders or owners or members, including the proposed higher ratio and the reasons therefor; and

    2. (b)

      demonstrate to the FCA that the proposed higher ratio does not conflict with its obligations under the CRD and the EU CRR, having particular regard to the firm's own funds obligations;5

    5
  4. (4)

    the firm must ensure that employees who have an interest in the proposed higher ratio are not allowed to exercise, directly or indirectly, any voting rights they may have as shareholders or owners or members of the firm in respect of the approval sought; and

  5. (5)

    the higher ratio is approved by a majority of:

    1. (a)

      at least 66% of the shares or equivalent ownership rights represented, if at least 50% of the shares or equivalent ownership rights in the firm are represented; or5

      5
    2. (b)

      at least 75% of the shares or equivalent ownership rights represented, if less than 50% of the shares or equivalent ownership rights in the firm are represented.5

      5

[Note: article 94(1)(g)(ii) of CRD]

SYSC 19A.3.44C R

3A firm must notify without delay the FCA6 of the decisions taken by its shareholders or members or owners including any approved higher maximum ratio.

[Note: article 94(1)(g)(ii) of CRD]

SYSC 19A.3.44D R

3A firm may apply a discount rate to a maximum of 25% of an employee's total variable remuneration provided it is paid in instruments that are deferred for a period of not less than five years.

[Note: article 94(1)(g)(iii) of CRD]

SYSC 19A.3.44E R

In applying the discount rate in SYSC 19A.3.44DR, a firm must apply the EBA Guidelines on the applicable notional discount rate for variable remuneration published on 27 March 2014.5

Remuneration Principle 12(e): Remuneration structures - payments related to early termination

SYSC 19A.3.45 R

A firm must ensure that payments 3relating to the early termination of a contract reflect performance achieved over time and are designed in a way that does not reward failure3or misconduct.

3

[Note:3article 94(1)(h) of CRD and Standard 12 of the FSB Compensation Standards]

3
SYSC 19A.3.46 G

[deleted]6

Remuneration Principle 12(f): Remuneration structures - retained shares or other instruments

SYSC 19A.3.47 R
  1. (1)

    A firm must ensure that a substantial portion, which is at least 50%, of any variable remuneration consists of an appropriate balance of:

    1. (a)

      shares or equivalent ownership interests, subject to the legal structure of the firm concerned, or share-linked instruments or equivalent non-cash instruments in the case of a non-listed firm; and

    2. (b)

      3where possible other instruments which are eligible as Additional Tier 1 instruments or are eligible as Tier 2 instruments or other instruments that can be fully converted to Common Equity Tier 1 instruments or written down, that in each case adequately reflect the credit quality of the firm as a going concern and are appropriate for use as variable remuneration.

      3
  2. (2)

    The instruments in (1) must be subject to an appropriate retention policy designed to align incentives with the longer-term interests of the firm.

  3. (3)

    This rule applies to both the portion of the variable remuneration component deferred in accordance with SYSC 19A.3.49 R and the portion not deferred.

[Note:3article 94(1)(l) of CRD and Standard 8 of the FSB Compensation Standards]

3
SYSC 19A.3.48 G

[deleted]6

Remuneration Principle 12(g): Remuneration structures - deferral

SYSC 19A.3.49 R
  1. (1)

    A firm must not award, pay or provide a variable remuneration component unless a substantial portion of it, which is at least 40%, is deferred over a period which is not less than three to five years.

  2. (2)

    Remuneration under (1) must vest no faster than on a pro-rata basis.

  3. (3)

    In the case of a variable remuneration component:

    1. (a)

      of £500,000 or more;6 or

    2. (b)

      payable to a director of a firm that is significant in terms of its size, internal organisation and the nature, scope and complexity of its activities;

    at least 60% of the amount must be deferred.

  4. (4)

    [deleted]6

  5. (5)

    The length of the deferral period must be established in accordance with the business cycle, the nature of the business, its risks and the activities of the employee in question.

[Note:3 article 94(1)(m) of CRD and Standards 6 and 7 of the FSB Compensation Standards]

3
  1. (6)

    [deleted]6

  2. (7)

    [deleted]6

SYSC 19A.3.50 G
  1. (1)

    Deferred remuneration paid in:6

    1. (a)

      shares or share-linked instruments should be made under a scheme which meets appropriate criteria, including risk adjustment of the performance measure used to determine the initial allocation of shares; and6

    2. (b)

      cash should also be subject to performance criteria.6

  2. (2)

    The FCA6 would generally expect a firm to have a firm-wide policy (and group-wide policy, where appropriate) on deferral. The proportion deferred should generally rise with the ratio of variable remuneration to fixed remuneration and with the amount of variable remuneration. While any variable remuneration component of £500,0006 or more paid to Remuneration Code staff must be subject to 60% deferral, firms should also consider whether lesser amounts should be considered to be 'particularly high' taking account, for example, of whether there are significant differences within Remuneration Code staff in the levels of variable remuneration paid.

Remuneration Principle 12(h): Remuneration structures - performance adjustment, etc.

SYSC 19A.3.51 R

A firm must ensure that any variable remuneration, including a deferred portion, is paid or vests only if it is sustainable according to the financial situation of the firm as a whole, and justified on the basis of the performance of the firm, the business unit and the individual concerned.

3

[Note:article 94(1)(n) of CRD3]

SYSC 19A.3.51A R

3A firm must:

  1. (1)

    ensure that any of the total variable remuneration is subject to malus or clawback arrangements;

  2. (2)

    set specific criteria for the application of malus and clawback; and

  3. (3)

    ensure that the criteria for the application of malus and clawback in particular cover situations where the employee:

    1. (a)

      participated in or was responsible for conduct which resulted in significant losses to the firm;

    2. (b)

      failed to meet appropriate standards of fitness and propriety.

[Note: article 94(1)(n) of CRD]

SYSC 19A.3.52 E
  1. (1)

    A firm should reduce unvested deferred variable remuneration when, as a minimum:

    1. (a)

      there is reasonable evidence of employee misbehaviour or material error; or

    2. (b)

      the firm or the relevant business unit suffers a material downturn in its financial performance; or

    3. (c)

      the firm or the relevant business unit suffers a material failure of risk management.

  2. (2)

    For performance adjustment purposes, awards of deferred variable remuneration made in shares or other non-cash instruments should provide the ability for the firm to reduce the number of shares or other non-cash instruments.

  3. (3)

    Contravention of (1) or (2) may be relied on as tending to establish contravention of the rule on performance adjustment (SYSC 19A.3.51 R).

SYSC 19A.3.53 G
  1. (1)

    [deleted]6

  2. (2)

    The governing body (or, where appropriate, the remuneration committee) should approve performance adjustment policies, including the triggers under which adjustment would take place. The FCA6 may ask firms to provide a copy of their policies and expects firms to make adequate records of material decisions to operate the adjustments.

Effect of breaches of the Remuneration Principles

SYSC 19A.3.53A R

1 SYSC 19A Annex 1 makes provision about voiding and recovery.

SYSC 19A.3.54 R
  1. (1)

    Subject to (1A) to (3), the rules1 in SYSC 19A Annex 1.1R to 1.4R1 apply in relation to the prohibitions on Remuneration Code staff being remunerated in the ways specified in:

    11
    1. (a)

      SYSC 19A.3.40 R (guaranteed variable remuneration);

    2. (b)

      SYSC 19A.3.49 R (6deferred variable remuneration); and

    3. (c)

      (replacing payments recovered or property transferred).

  2. (1A)

    Paragraph (1) applies only to those prohibitions as they apply in relation to a firm that satisfies at least one of the conditions set out in (1B) and2 (1D).1

    2
  3. (1B)

    Condition 1 is that the firm is a relevant IFPRU 730k firm that has relevant total assets exceeding £50 billion.5

    525355332515
  4. (1C)

    [deleted]2

    2
  5. (1D)

    Condition 22 is that the firm:

    2
    1. (a)

      is a relevant IFPRU 730k firm or a relevant third country IFPRU 730k firm; and5

      533551
    2. (b)

      is part of a group containing a firm that has relevant total assets exceeding £50 billion and that is a relevant IFPRU 730k firm.5

      5253352515
  6. (1E)

    In this rule:2

    2
    1. (a)

      a “relevant IFPRU 730k firm" is any IFPRU 730k firm that is not a limited activity firm or a limited licence firm;1

    2. (b)

      a “relevant third country IFPRU 730k firm” is any third country IFPRU 730k firm that is not a limited activity firm or a limited licence firm; and21

    3. (c)

      “relevant total assets” means the arithmetic mean of the firm's total assets as set out in its balance sheet on its last three accounting reference dates.2

  7. (2)

    This rule does not apply in relation to the prohibition on Remuneration Code staff being remunerated in the way specified in SYSC 19A.3.40 R (guaranteed variable remuneration) if both the conditions in paragraphs (2) and (3) of that rule are met.

  8. (3)

    This rule does not apply in relation to Remuneration Code staff (X) in respect of whom both the following conditions are satisfied:

    1. (a)

      Condition 1 is that Xs variable remuneration is no more than 33% of total remuneration; and

    2. (b)

      Condition 2 is that Xs total remuneration is no more than 500,000.

  9. (4)

    In relation to (3):

    1. (a)

      references to remuneration are to remuneration awarded or paid in respect of the relevant performance year;

    2. (b)

      the amount of any remuneration is:

      1. (i)

        if it is money, its amount when awarded;

      2. (ii)

        otherwise, whichever of the following is greatest: its value to the recipient when awarded; its market value when awarded; and the cost of providing it;

    3. (c)

      where remuneration is, when awarded, subject to any condition, restriction or other similar provision which causes the amount of the remuneration to be less than it otherwise would be, that condition, restriction or provision is to be ignored in arriving at its value; and

    4. (d)

      it is to be assumed that the member of Remuneration Code staff will remain so for the duration of the relevant performance year.

SYSC 19A.3.55 G
  1. (1)

    Sections 137H and 137I of the Act enables the FCA6 to make rules that render void any provision of an agreement that contravenes specified prohibitions in the Remuneration Code, and that provide for the recovery of any payment made, or other property transferred, in pursuance of such a provision. SYSC 19A.3.53A R and1SYSC 19A.3.54 R (together with SYSC 19A Annex 1) are such rules1 and render1 void provisions of an agreement that contravene the specified prohibitions on guaranteed variable remuneration, non-deferred variable remuneration and replacing payments recovered or property transferred. This is an exception to the general position set out in section 138E(2) of the Act that a contravention of a rule does not make any transaction void or unenforceable.

    11
  2. (2)

    [deleted]1

    1