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SYSC 19A.1 General application and purpose

Who? What? Where?

SYSC 19A.1.1 R
  1. (1)

    1The Remuneration Code applies to:3

    3
    1. (a)

      [deleted]6

      3
    2. (b)

      [deleted]6

      3
    3. (c)

      an IFPRU investment firm;6

      3
    4. (d)

      3an overseas firm that:

      1. (i)

        3is not an EEA firm;

      2. (ii)

        3has its head office outside the EEA; and

      3. (iii)

        3would be a firm in (a), (b) or (c) if it had been a UK domestic firm, had carried on all its business in the UK and had obtained whatever authorisations for doing so as are required under the Act.

  2. (2)

    In relation to a 3firm that falls under (1)(d), the Remuneration Code applies only in relation to activities carried on from an establishment in the United Kingdom.

    3
  3. (3)

    Otherwise, the Remuneration Code applies to a firm within (1) in the same way as SYSC 4.1.1 R (General Requirements).

SYSC 19A.1.2 G

Part 2 of SYSC 1 Annex 1 provides for the application of SYSC 4.1.1 R (General Requirements). In particular, and subject to the provisions on group risk systems and controls requirements in SYSC 12, this means that:

  1. (1)

    in relation to what the Remuneration Code applies to, it:

    1. (a)

      applies in relation to regulated activities, activities that constitute dealing in investments as principal (disregarding the exclusion in article 15 of the Regulated Activities Order (Absence of holding out etc)), ancillary activities and (in relation to MiFID business) ancillary services;

    2. (b)

      applies with respect to the carrying on of unregulated activities in a prudential context; and

    3. (c)

      takes into account activities of other group members; and

  2. (2)

    in relation to where the Remuneration Code applies, it applies in relation to:

    1. (a)

      a firm'sUK activities;

    2. (b)

      a firm'spassported activities carried on from a branch in another EEA State; and

    3. (c)

      a UK domestic firm's activities wherever they are carried on, in a prudential context.

When?

SYSC 19A.1.3 R
3
  1. (1)

    A firm must apply the remuneration requirements in SYSC 19A.3 other than SYSC 19A.3.44 R (3) and SYSC 19A.3.44A R in relation to:

    1. (a)

      remuneration awarded, whether pursuant to a contract or otherwise, on or after 1 January 2011;3

    2. (b)

      remuneration due on the basis of contracts concluded before 1 January 2011 which is awarded or paid on or after 1 January 2011; and3

    3. (c)

      remuneration awarded, but not yet paid, before 1 January 2011, for services provided in 2010.3

    [Note: article 3(2) of the Third Capital Requirements Directive (Directive 2010/76/EU)]

  2. (2)

    3A firm must apply the remuneration requirements in SYSC 19A.3.44 R (3) and SYSC 19A.3.44A R in relation to remuneration awarded for services provided or performance from the year 2014 onwards, whether due on the basis of contracts concluded before, on or after 31 December 2013.

    3[Note: article 162(3) of CRD]

    3
SYSC 19A.1.4 G

Subject to the requirements of SYSC 19A.1.5 R, in the appropriate regulator's view SYSC 19A.1.3 R does not require a firm to breach requirements of applicable contract or employment law.

[Note: recital 14 of the Third Capital Requirements Directive (Directive 2010/76/EU)]

SYSC 19A.1.5 R
  1. (1)

    This rule applies to a firm that is unable to comply with the Remuneration Code because of an obligation it owes to a Remuneration Code staffmember under a provision of an agreement made on or before 29 July 2010 (the "provision").

  2. (2)

    A firm must take reasonable steps to amend or terminate the provision referred to in (1) in a way that enables it to comply with the Remuneration Code at the earliest opportunity.

  3. (3)

    Until the provision referred to in (1) ceases to prevent the firm from complying with the Remuneration Code, the firm must adopt specific and effective arrangements, processes and mechanisms to manage the risks raised by the provision.

Purpose

SYSC 19A.1.6 G
  1. (1)

    The aim of the Remuneration Code is to ensure that firms have risk-focused remuneration policies, which are consistent with and promote effective risk management and do not expose them to excessive risk. It expands upon the general organisational requirements in SYSC 4.

  2. (2)

    The Remuneration Code implements the main provisions of the 3CRDwhich relate to remuneration. The Committee of European Banking Supervisors published Guidelines on Remuneration Policies and Practices on 10 December 2010. Provisions of the Capital Requirements Regulations 2013 (SI 2013/3115)5 together with the European Banking Authority’s Guidelines to article75(1) and (3) of the CRD5 relating to the collection of remuneration benchmarking information and high earners information have been implemented through SUP 16 Annex 33AR and SUP 16 Annex 34AR. The Guidelines can be found at http://www.eba.europa.eu/regulation-and-policy/remuneration/guidelines-on-the-remuneration-benchmarking-exercise and http://www.eba.europa.eu/regulation-and-policy/remuneration/guidelines-on-the-data-collection-exercise-regarding-high-earners.5.2

    3235555
  3. (3)

    [deleted]7

    7

Notifications to the appropriate regulator

SYSC 19A.1.7 G
  1. (1)

    The Remuneration Code does not contain specific notification requirements. However, general circumstances in which the appropriate regulator expects to be notified by firms of matters relating to their compliance with requirements under the regulatory system are set out in SUP 15.3 (General notification requirements).

  2. (2)

    In particular, in relation to remuneration matters such circumstances should take into account unregulated activities as well as regulated activities and the activities of other members of a group and would include each of the following:

    1. (a)

      significant breaches of the Remuneration Code, including any breach of a rule to which the detailed provisions on voiding and recovery in SYSC 19A Annex 1 apply;

    2. (b)

      any proposed remuneration policies, procedures or practices which could:

      1. (i)

        have a significant adverse impact on the firms reputation; or

      2. (ii)

        affect the firms ability to continue to provide adequate services to its customers and which could result in serious detriment to a customer of the firm; or

      3. (iii)

        result in serious financial consequences to the financial system or to other firms;

    3. (c)

      any proposed changes to remuneration policies, practices or procedures which could have a significant impact on the firms risk profile or resources;

    4. (d)

      fraud, errors and other irregularities described in SUP 15.3.17 R which may suggest weaknesses in, or be motivated by, the firmsremuneration policies, procedures or practices.

  3. (3)

    Such notifications should be made immediately the firm becomes aware, or has information which reasonably suggests such circumstances have occurred, may have occurred or may occur in the foreseeable future.

Individual guidance

SYSC 19A.1.8 G

The FCA's policy on individual guidance is set out in SUP 9. Firms should in particular note the policy on what the FCA considers to be a reasonable request for guidance (see SUP 9.2.5 G). For example, where a firm is seeking guidance on a proposed remuneration structure the FCA will expect the firm to provide a detailed analysis of how the structure complies with the Remuneration Code, including the general requirement for remuneration policies, procedures and practices to be consistent with and promote sound and effective risk management.

SYSC 19A.2 General requirement

Remuneration policies must promote effective risk management

SYSC 19A.2.1 R

A firm must establish, implement and maintain remuneration policies, procedures and practices that are consistent with and promote sound and effective risk management.

[Note:1article 74(1) of CRD]

1
SYSC 19A.2.2 G
  1. (1)

    If a firm'sremuneration policy is not aligned with effective risk management it is likely that employees will have incentives to act in ways that might undermine effective risk management.

  2. (2)

    The Remuneration Code covers all aspects of remuneration that could have a bearing on effective risk management including salaries, bonuses, long-term incentive plans, options, hiring bonuses, severance packages and pension arrangements. In applying the Remuneration Code, a firm should have regard to applicable good practice on remuneration and corporate governance, such as guidelines on executive contracts and severance produced by the Association of British Insurers (ABI) and the National Association of Pension Funds (NAPF). In considering the risks arising from its remuneration policies, a firm will also need to take into account its statutory duties in relation to equal pay and non-discrimination.

  3. (3)

    As with other aspects of a firm's systems and controls, in accordance with SYSC 4.1.2 Rremuneration policies, procedures and practices must be comprehensive and proportionate to the nature, scale and complexity of the common platform firm's activities. What a firm must do in order to comply with the Remuneration Code will therefore vary. For example, while the Remuneration Code refers to a firm'sremuneration committee and risk management function, it may be appropriate for the governing body of a smaller firm to act as the remuneration committee, and for the firm not to have a separate risk management function.

  4. (4)

    The principles in the Remuneration Code are used by the appropriate regulator to assess the quality of a firm'sremuneration policies and whether they encourage excessive risk-taking by a firm'semployees.

  5. (5)

    The appropriate regulator may also ask remuneration committees to provide the appropriate regulator with evidence of how well the firm'sremuneration policies meet the Remuneration Code's principles, together with plans for improvement where there is a shortfall. The appropriate regulator also expects relevant firms to use the principles in assessing their exposure to risks arising from their remuneration policies as part of the internal capital adequacy assessment process (ICAAP).

  6. (6)

    The Remuneration Code is principally concerned with the risks created by the way remuneration arrangements are structured, not with the absolute amount of remuneration, which is generally a matter for firms'remuneration committees.

SYSC 19A.2.3 G
  1. (1)

    The specific remuneration requirements in this chapter may apply only in relation to certain categories of employee. But the appropriate regulator would expect firms, in complying with the Remuneration Code general requirement, to apply certain principles on a firm-wide basis.

  2. (2)

    In particular, the appropriate regulator considers that firms should apply the principle relating to guaranteed variable remuneration on a firm-wide basis (Remuneration Principle 12(c); SYSC 19A.3.40 R to SYSC 19A.3.43 G).

  3. (3)

    The appropriate regulator would also expect firms to apply at least the principles relating to risk management and risk tolerance (Remuneration Principle 1); supporting business strategy, objectives, values and long-term interests of the firm (Remuneration Principle 2); conflicts of interest (Remuneration Principle 3); governance (Remuneration Principle 4); risk adjustment (Remuneration Principle 8); pension policy (Remuneration Principle 9); personal investment strategies (Remuneration Principle 10); payments related to early termination (Remuneration Principle 12(e)) and deferral (Remuneration Principle 12(g)) on a firm-wide basis.

Record-keeping

SYSC 19A.2.4 G

In line with the record-keeping requirements in SYSC 9, a firm should ensure that its remuneration policies, practices and procedures are clear and documented. Such policies, practices and procedures would include performance appraisal processes and decisions.

Interpretation of references to remuneration

SYSC 19A.2.5 R
  1. (1)

    In this chapter references to remuneration include remuneration paid, provided or awarded by any person to the extent that it is paid, provided or awarded in connection with employment by a firm.

  2. (2)

    Paragraph (1) is without prejudice to the meaning of remuneration elsewhere in the Handbook.

SYSC 19A.2.6 G

Remuneration includes, for example, payments made by a seconding organisation which is not subject to the Remuneration Code to a secondee in respect of their employment by a firm which is subject to the Remuneration Code.

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 appropriate regulator's view, the requirement to apply this section at group, parent undertaking and subsidiary undertaking levels (as provided for in SYSC 19A.3.1 R (1)) is in line with the requirements in article 109(2) of CRD concerning the application of systems and controls requirements to groups (as implemented 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 FSA gave guidance6 on the division of firms into categories for the purpose of providing a framework for the operation of the remuneration principles proportionality rule. 4This guidance has been adopted by the FCA and is available in the FCA website at www.fca.org.uk/your-fca/documents/finalised-guidance/remuneration-code]

6 4 6 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
  1. (1)

    In the appropriate regulator's6 view:

    6
    1. (a)

      a firm's staff includes its employees;

    2. (b)

      a person who performs a significant influence function for, or is a senior manager of, a firm would normally be expected to be part of the firm'sRemuneration Code staff;

    3. (c)

      the table in (2) provides a non-exhaustive list of examples of key positions that should, subject to (d), be within a firm's definition of staff who are risk takers;

    4. (d)

      firms should consider how the examples in the table in (2) apply in relation to their own organisational structure (as the description of suggested business lines in the first row may be most appropriate to a firm which deals on its own account to a significant extent);

    5. (e)

      firms may find it useful to set their own metrics to identify their risk takers based, for example, on trading limits; and

    6. (f)

      a firm should treat a person as being Remuneration Code staff in relation to remuneration in respect of a given performance year if they were Remuneration Code staff for any part of that year.

    [Note: The FSA gave6guidance on the application of particular rules on remuneration structures in relation to individuals who are Remuneration Code staff for only part of a given performance year. 4This guidance has been adopted by the FCA and is available in the FCA website at www.fca.org.uk/your-fca/documents/finalised-guidance/remuneration-code]

    646
  2. (2)

    High-level category

    Suggested business lines

    Heads of significant business lines (including regional heads) and any individuals or groups within their control who have a material impact on the firm's risk profile

    Fixed income

    Foreign exchange

    Commodities

    Securitisation

    Sales areas

    Investment banking (including mergers and acquisitions advisory)

    Commercial banking

    Equities

    Structured finance

    Lending quality

    Trading areas

    Research

    Heads of support and control functions and other individuals within their control who have a material impact on the firm's risk profile

    Credit / market / operational risk

    Legal

    Treasury controls

    Human resources

    Compliance

    Internal audit

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)

    A3CRRfirm 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.

  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

[Note: The guidance referred to in the Note to SYSC 19A.3.3 R also gives guidance on proportionality in relation to remuneration committees.]

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 ‘CRRfirm 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)

    The periodic review of the implementation of the remuneration policy should assess compliance with the Remuneration Code.

  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)

    The need to avoid undue influence is particularly important where employees from the control functions are embedded in other business areas. This Remuneration Principle does not prevent the views of other business areas being sought as an appropriate part of the assessment process.

  3. (3)

    The appropriate regulator would generally expect the ratio of the potential variable component of remuneration to the fixed component of remuneration to be significantly lower for employees in risk management and compliance functions than for employees in other business areas whose potential bonus is a significant proportion of their remuneration. Firms should nevertheless ensure that the total remuneration package offered to those employees is sufficient to attract and retain staff with the skills, knowledge and expertise to discharge those functions. The requirement that the method of determining the remuneration of relevant persons involved in the compliance function must not compromise their objectivity or be likely to do so also applies (see SYSC 6.1.4 R (4)).

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

This Remuneration Principle underlines the link between a firm's variable remuneration costs and the need to manage its capital base, including forward-looking capital planning measures. Where a firm needs to strengthen its capital base, its variable remuneration arrangements should be sufficiently flexible to allow it to direct the necessary resources towards capital building.

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 appropriate regulator 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 judgment and common sense. 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.

  2. (2)

    A number of risk-adjustment techniques and measures are available, and a firm should choose those most appropriate to its circumstances. Common measures include those based on economic profit or economic capital. Whichever technique is chosen, the full range of future risks should be covered. The appropriate regulator expects a firm to be able to provide it with details of all adjustments that the firm has made under a formulaic approach.

  3. (3)

    The appropriate regulator expects that a firm will apply qualitative judgments and common sense in the final decision about the performance-related components of variable remuneration pools.

  4. (4)

    A firm'sgoverning body (or remuneration committee where appropriate) should take the lead in determining the measures to be used. It should offer the appropriate checks and balances to prevent inappropriate manipulation of the measures used. It should consult closely and frequently with the firm's risk management functions, in particular those relating to operational, market, credit and liquidity risk.

SYSC 19A.3.24 G
  1. (1)

    Long-term incentive plans should be treated as pools of variable remuneration. Many common measures of performance for long-term incentive plans, such as earnings per share (EPS), are not adjusted for longer-term risk factors. Total shareholder return (TSR), another common measure, includes in its measurement dividend distributions, which can also be based on unadjusted earnings data. If incentive plans mature within a two to four year period and are based on EPS or TSR, strategies can be devised to boost EPS or TSR during the life of the plan, to the detriment of the true longer-term health of a firm. For example, increasing leverage is a technique which can be used to boost EPS and TSR. Firms should take account of these factors when developing risk-adjustment methods.

  2. (2)

    Firms that have long-term incentive plans should structure them with vesting subject to appropriate performance conditions, and at least half of the award vesting after not less than five years and the remainder after not less than three years.

  3. (3)

    Long-term incentive plan awards may be included in the calculation of the deferred portion of variable remuneration only if upside incentives are adequately balanced by downside adjustments. The valuation of the award should be based on its value when the award is granted, and determined using an appropriate technique.

SYSC 19A.3.25 R

Assessments of financial performance used to calculate variable remuneration components or pools of variable remuneration components must be based principally on profits.

SYSC 19A.3.26 G
  1. (1)

    Performance measures based primarily on revenues or turnover are unlikely to pay sufficient regard to the quality of business undertaken or services provided. Profits are a better measure provided they are adjusted for risk, including future risks not adequately captured by accounting profits.

  2. (2)

    Management accounts should provide profit data at such levels within the firm's structure as to enable a firm to see as accurate a picture of contributions of relevant staff to a firm's performance as is reasonably practicable. If revenue or turnover is used as a component in performance assessment, processes should be in place to ensure that the quality of business undertaken or services provided and their appropriateness for clients are taken into account.

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

Where a firm makes a loss the appropriate regulator would generally expect no variable remuneration to be awarded. Variable remuneration may nevertheless be justified, for example, to incentivise employees involved in new business ventures which could be loss-making in their early stages.

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 appropriate regulator's view, circumstances in which a person will be using a personal hedging strategy include 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.

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 regulator6 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:

    6
    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 FSA also gave6 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 guidance has been adopted by the FCA and is available in the FCA website at www.fca.org.uk/your-fca/documents/finalised-guidance/remuneration-code.]

6 4 6 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

Non-financial performance metrics should form a significant part of the performance assessment process and should include adherence to effective risk management and compliance with the regulatory system and with relevant overseas regulatory requirements. Poor performance as assessed by non-financial metrics such as poor risk management or other behaviours contrary to firm values can pose significant risks for a firm and should, as appropriate, override metrics of financial performance. The performance assessment process and the importance of non-financial assessment factors in the process should be clearly explained to relevant employees and implemented. A balanced scorecard can be a good technique.

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

The requirement for assessment of performance to be in a multi-year framework reflects the fact that profits from a firm's activities can be volatile and subject to cycles. The financial performance of firms and individual employees can be exaggerated as a result. Performance assessment on a moving average of results can be a good way of meeting this requirement. However, other techniques such as good quality risk adjustment and deferral of a sufficiently large proportion of remuneration may also be useful.

Remuneration Principle 12(c): Remuneration structures - guaranteed variable remuneration

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
  1. (1)

    A firm should not award, pay or provide guaranteed variable remuneration in the context of hiring new Remuneration Code staff (X) unless:

    1. (a)

      it has taken reasonable steps to ensure that the remuneration is not more generous in either its amount or terms (including any deferral or retention periods) than the variable remuneration awarded or offered by Xs previous employer; and

    2. (b)

      it is subject to appropriate performance adjustment requirements.

  2. (2)

    Contravention of (1) may be relied on as tending to establish contravention of the rule on guaranteed variable remuneration (SYSC 19A.3.40 R).

SYSC 19A.3.42 G

Guaranteed variable remuneration should be subject to the same deferral criteria as other forms of variable remuneration awarded by the firm.

SYSC 19A.3.43 G

In the appropriate regulator's view, variable remuneration can be awarded to Remuneration Code staff in the form of retention awards where it is compatible with the Remuneration Code general requirement to do so. The appropriate regulator considers this is likely to be the case only where a firm is undergoing a major restructuring and a good case can be made for retention of particular key staff members on prudential grounds. Proposals to give retention awards should form part of any notice of the restructuring proposals required in accordance with Principle 11 and the general notification requirements in SUP 15.3.

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 appropriate regulator 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

Firms should review existing contractual payments related to termination of employment with a view to ensuring that these are payable only where there is a clear basis for concluding that they are consistent with the Remuneration Code general requirement.

[Note: Standard 12 of the FSB Compensation Standards]

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
  1. (1)

    The Committee of European Banking Supervisors has given guidance on the interpretation of the Directive provision transposed by SYSC 19A.3.47 R (3). Its Guidelines provide that this requirement means that the 50% minimum threshold for instruments must be applied equally to the non-deferred and the deferred components; in other words, firms must apply the same chosen ratio between instruments and cash for their total variable remuneration to both the upfront and deferred components. (Guidelines on Remuneration Policies and Practices, 10 December 2010, paragraph 133.)

  2. (2)

    This simplified example illustrates the operation of (1). The variable remuneration of a material risk taker (X) is 100, and by SYSC 19A.3.49 R (3) X is required to defer 60%. Xs upfront component is 40 and Xs deferred component is 60. At least 20 of Xs upfront component, and at least 30 of Xs deferred component, must be in instruments referred to in SYSC 19A.3.47 R (1).

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 a particularly high amount, 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)

    Paragraph (3)(b) does not apply to a non-executive director.

  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)

    500,000 is a particularly high amount for the purpose of (3)(a).

  2. (7)

    Paragraph (6) is without prejudice to the possibility of lower sums being considered a particularly high amount.

SYSC 19A.3.50 G
  1. (1)

    Deferred remuneration paid in 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. Deferred remuneration paid in cash should also be subject to performance criteria.

  2. (2)

    The appropriate regulator 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 500,000 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)

    Variable remuneration may be justified, for example, to incentivise employees involved in new business ventures which could be loss-making in their early stages.

  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 appropriate regulator 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 (non-deferred 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 appropriate regulator 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

SYSC 19A Annex 1 Detailed provisions on voiding and recovery (SYSC 19A.3.53AR and SYSC 19A.3.54R)2

Rendering contravening provisions of agreements void

1

R

1Any provision of an agreement that contravenes a prohibition on persons being remunerated in a way specified in a rule to which this rule2 applies (a "contravening provision") is void.2

2

21A

R

A contravening provision does not cease to be void because:

(1)

the firm concerned ceases to satisfy any of the conditions set out in SYSC 19A.3.54R (1B) to (1D); or

(2)

the member of Remuneration Code staff concerned starts to satisfy both of the conditions set out in SYSC 19A.3.54R (3)(a) and (b).

2

R

A contravening provision that, at the time a rule to which this rule2 applies was made, is contained in an agreement made before that time is not rendered void by 1R unless it is subsequently amended so as to contravene such a rule.

2

3

G

The effect of 2R, in accordance with sections 137H and 137I of the Act, is to prevent contravening provisions being rendered void retrospectively. Contravening provisions may however be rendered void if they are contained in an agreement made after the rule containing the prohibition is made by the appropriate regulator but before the rule comes into effect. For further relevant transitional provisions, see SYSC TP 3.6A.2

23A

R

(1)

A pre-existing provision is not rendered void by 1R.

(2)

In this Annex a pre-existing provision is any provision of an agreement that would (but for this rule) be rendered void by 1R that was agreed at a time when either:

(a) the firm concerned did not satisfy any of the conditions set out in SYSC 19A.3.54R (1B) to (1D); or

(b) the member of Remuneration Code staff concerned satisfied both of the conditions set out in SYSC 19A.3.54R (3)(a) and (b).

(3)

But an amendment to, or in relation to, a pre-existing provision is not to be treated as a pre-existing provision where the amendment is agreed at a time when both:

(a) the firm concerned satisfies at least one of the conditions set out in SYSC 19A.3.54R (1B) to (1D); and

(b) the member of Remuneration Code staff concerned does not satisfy both of the conditions set out in SYSC 19A.3.54R (3)(a) and (b).

4

R

For the purposes of this chapter it is immaterial whether the law which (apart from this annex) governs a contravening provision is the law of the United Kingdom, or of a part of the United Kingdom.

Recovery of payments made or property transferred pursuant to a void contravening provision

5

R

In relation to any payment made or other property transferred in pursuance of a contravening provision other than a pre-existing provision,2 a firm must take reasonable steps to:

(1)

recover any such payment made or other property transferred by the firm; and

(2)

ensure that any other person ("P") recovers any such payment made or other property transferred by that person.2

25A

R

Paragraph 5R continues to apply in one or both of the following cases:

(1)

the firm concerned ceases to satisfy any of the conditions set out in SYSC 19A.3.54R (1B) to (1D);

(2)

the member of Remuneration Code staff concerned starts to satisfy both of the conditions set out in SYSC 19A.3.54R (3)(a) and (b).

6

G

The rule in 5R(2) would, for example, apply in the context of a secondment. Where a group member seconds an individual to a firm and continues to be responsible for the individuals remuneration in respect of services provided to the firm, the firm would need to take reasonable steps to ensure that the group member recovers from the secondee any remuneration paid in pursuance of a contravening provision.

Replacing payments recovered or property transferred

7

R

(1)

A firm must not award, pay or provide variable remuneration to a person who has received remuneration in pursuance of a contravening provision other than a pre-existing provision2 (the "contravening remuneration") unless the firm has obtained a legal opinion stating that the award, payment or provision of the remuneration complies with the Remuneration Code.

2

(2)

This rule applies only to variable remuneration relating to a performance year to which the contravening remuneration related.

(3)

The legal opinion in (1) must be properly reasoned and be provided by an appropriately qualified independent individual.2

2 (4)

Paragraph (1) continues to apply in one or both of the following cases:

(a) the firm concerned ceases to satisfy any of the conditions set out in SYSC 19A.3.54R (1B) to (1D);

(b) the member of Remuneration Code staff concerned starts to satisfy both of the conditions set out in SYSC 19A.3.54R (3)(a) and (b).

Notification to the appropriate regulator

8

G

The appropriate regulator considers any breach of a rule to which this annex applies to be a significant breach which should be notified to the appropriate regulator in accordance with SUP 15.3.11 R (Breaches of rules and other requirements in or under the Act). Such a notification should include information on the steps which a firm or other person has taken or intends to take to recover payments or property in accordance with 5R.