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SYSC 19C.1 General application and purpose

Who? What? Where?

SYSC 19C.1.1 R
  1. (1)

    The BIPRU Remuneration Code applies to a BIPRU firm and a third country BIPRU firm.

  2. (2)

    In relation to a third country BIPRU firm, the BIPRU Remuneration Code applies only in relation to activities carried on from an establishment in the United Kingdom.

SYSC 19C.1.1A G

1The AIFM Remuneration Code (SYSC 19B) also applies to a BIPRU firm which is a full-scope UK AIFM (ie, a full-scope UK AIFM that is an AIFM investment firm subject to BIPRU). Such a full-scope UK AIFM that complies with SYSC 19B will also comply with SYSC 19C. In such cases, the FCA will not require the full-scope UK AIFM to demonstrate compliance with SYSC 19C.

SYSC 19C.1.1B G
  1. (1)

    2The UCITS Remuneration Code (SYSC 19E) also applies to a BIPRU firm that is a UK UCITS management company (that is, a UK UCITS management company that is a UCITS investment firm subject to BIPRU).

  2. (2)

    A BIPRU firm that is a UK UCITS management company will meet its obligations under SYSC 19C and SYSC 19E by complying with SYSC 19E.

  3. (3)

    Under (1) and (2), the FCA will not require the UK UCITS management company to demonstrate compliance with SYSC 19C.

SYSC 19C.1.2 G

Part 2 of SYSC 1 Annex 1 provides for the application of SYSC 4.1.1 R and SYSC 4.1.1C 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)

    the BIPRU Remuneration Code:

    1. (a)

      applies to regulated activities, ancillary activities and applicable ancillary services;

    2. (b)

      applies 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)

    where the BIPRU Remuneration Code applies, it applies 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 19C.1.3 R

A firm must apply the remuneration requirements in SYSC 19C.3 to:

  1. (1)

    remuneration awarded, whether under a contract or otherwise, on or after 1 January 2014;

  2. (2)

    remuneration due on the basis of contracts concluded before 1 January 2014 which is awarded or paid on or after 1 January 2014; and

  3. (3)

    remuneration awarded, but not yet paid, before 1 January 2014, for services provided in 2013.

SYSC 19C.1.4 G

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

SYSC 19C.1.5 R
  1. (1)

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

  2. (2)

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

  3. (3)

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

Purpose

SYSC 19C.1.6 G

The aim of the BIPRU 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.

Notifications to the FCA

SYSC 19C.1.7 G
  1. (1)

    The BIPRU Remuneration Code does not contain specific notification requirements. However, general circumstances in which the FCA 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 BIPRU Remuneration Code;

    2. (b)

      any proposed remuneration policies, procedures or practices which could:

      1. (i)

        have a significant adverse impact on the firm's reputation; or

      2. (ii)

        affect the firm's 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; and

    4. (d)

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

  3. (3)

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

Individual guidance

SYSC 19C.1.8 G

The FCA's policy on individual guidance is set out in SUP 9. Firms should particularly 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 BIPRU Remuneration Code, including the general requirement for remuneration policies, procedures and practices to be consistent with and promote sound and effective risk management.

SYSC 19C.2 General requirement

Remuneration policies must promote effective risk management

SYSC 19C.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.

SYSC 19C.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 BIPRU 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 BIPRU 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 line with SYSC 4.1.2 R and SYSC 4.1.2AA R1, remuneration policies, procedures and practices must be comprehensive and proportionate to the nature, scale and complexity of the firm's1 activities. Therefore, what a firm must do to comply with the BIPRU Remuneration Code will vary. For example, while the BIPRU 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.

    11
  4. (4)

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

  5. (5)

    The FCA may also ask remuneration committees to provide the FCA with evidence of how well the firm'sremuneration policies meet the BIPRU Remuneration Code's principles, together with plans for improvement where there is a shortfall. The FCA 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 BIPRU 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 19C.2.3 G
  1. (1)

    The specific remuneration requirements in this chapter may apply only to certain categories of employee. However, the FCA expects firms, in complying with the BIPRU Remuneration Codegeneral requirement, to apply certain principles on a firm-wide basis.

  2. (2)

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

  3. (3)

    The FCA also expects firms to apply, as a minimum, 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 19C.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 19C.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 19C.2.6 G

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

SYSC 19C.3 Remuneration principles

Application: groups

SYSC 19C.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 and SYSC 12.1.15 R (which relate to the application of the BIPRU Remuneration Code within UK consolidation groups and non-EEA sub-groups).

SYSC 19C.3.2 G

The effect of SYSC 12.1.13 R (2)(dA) and SYSC 12.1.15 R is that the firm is required to ensure that the risk management processes and internal control mechanisms at the level of any 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.

Application: categories of staff and proportionality

SYSC 19C.3.3 R
  1. (1)

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

  2. (2)

    When establishing and applying the total remuneration policies for BIPRU 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, scope and complexity of its activities (the BIPRU 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 19C.3.12 R).

[Note: In addition to the guidance in this section which relates to the BIPRU remuneration principles proportionality rule, the FCA has published guidance on the operation of the BIPRU remuneration principles proportionality rule. This guidance is available at www.fca.org.uk/firms/remuneration.]

SYSC 19C.3.4 R

BIPRU Remuneration Code staff comprises categories of staff including senior management, risk-takers, staff engaged in control functions and any employee receiving total remuneration that takes them into the same remuneration bracket as senior management and risk-takers, whose professional activities have a material impact on the firm's risk profile.

SYSC 19C.3.5 R

A firm must:

  1. (1)

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

  2. (2)

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

SYSC 19C.3.6 G
  1. (1)

    In the FCA's view:

    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'sBIPRU Remuneration 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 to their own organisational structure;

      1
    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 BIPRU Remuneration Code staff in relation to remuneration in respect of a given performance year if they were BIPRU Remuneration Code staff for any part of that year.

    [Note: The FCA has published guidance on the application of particular rules on remuneration structures in relation to individuals who are BIPRU Remuneration Code staff for only part of a given performance year. This guidance is available at www.fca.org.uk/firms/remuneration

    .]

  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 19C.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.

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

SYSC 19C.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.

Remuneration Principle 3: Avoiding conflicts of interest

SYSC 19C.3.9 R

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

Remuneration Principle 4: Governance

SYSC 19C.3.10 R

A firm must ensure that its governing body, in its supervisory function, adopts and periodically reviews the general principles of the remuneration policy and is responsible for its implementation.

SYSC 19C.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 governing body in its supervisory function.

SYSC 19C.3.12 R
  1. (1)

    A firm that is significant in terms of its size, internal organisation and the nature, scope and 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 governing body who do not perform any executive function in the firm.

  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 governing body in its supervisory function.

  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 firm.

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

SYSC 19C.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 BIPRU Remuneration Code and, where relevant, should take into account relevant guidance, such as that issued by the International Organization of Securities Commissions (IOSCO).

  3. (3)

    The periodic review of the implementation of the remuneration policy should assess compliance with the BIPRU 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 19C.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 line with the achievement of the objectives linked to their functions, independent of the performance of the business areas they control.

SYSC 19C.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 19C.3.14R (2)).

SYSC 19C.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 19C.3.12 R, or, if such a committee has not been established, by the governing body in its supervisory function.

SYSC 19C.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 do 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 FCA generally expects 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 19C.3.18 R

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

SYSC 19C.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 19C.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 alignment with sound risk management and long-term growth, including when appropriate establishing limits to the remuneration of senior personnel; and

  3. (3)

    no variable remuneration is paid to its senior personnel unless justified.

SYSC 19C.3.21 G

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

Remuneration Principle 8: Profit-based measurement and risk adjustment

SYSC 19C.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, taking 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.

SYSC 19C.3.23 G
  1. (1)

    This Remuneration Principle stresses the importance of risk adjustment in measuring performance, and the importance 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 that are most appropriate to its circumstances. Common measures include those that are based on economic profit or economic capital. Whichever technique is chosen, the full range of future risks should be covered. The FCA 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 FCA expects a firm to 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 19C.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) includes dividend distributions in its measurement, 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 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 19C.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 19C.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 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 19C.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 earned.

[Note: Standard 5 of the FSB Compensation Standards]

SYSC 19C.3.28 G

Where a firm makes a loss, the FCA generally expects 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 19C.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 19C.3.47R (1); and

  3. (3)

    when employees reach retirement, discretionary pension benefits are paid to the employee in the form of instruments in SYSC 19C.3.47R (1) and subject to a five-year retention period.

Remuneration Principle 10: Personal investment strategies

SYSC 19C.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.

SYSC 19C.3.31 G

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 linked to, or commensurate with, the amounts by which the person'sremuneration is subject to reductions.

Remuneration Principle 11: Avoidance of the Remuneration Code

SYSC 19C.3.32 R

A firm must ensure that variable remuneration is not paid through vehicles or methods that facilitate the avoidance of the BIPRU Remuneration Code.

Remuneration Principle 12: Remuneration structures - introduction

SYSC 19C.3.33 G

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

SYSC 19C.3.34 G
  1. (1)

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

    1. (a)

      condition 1 requires that X’s variable remuneration is no more than 33% of total remuneration; and

    2. (b)

      condition 2 requires that X’s total remuneration is no more than 500,000.

  2. (2)

    The rules referred to in (1) relate to:

    1. (a)

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

    2. (b)

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

    3. (c)

      deferral (SYSC 19C.3.49 R); and

    4. (d)

      performance adjustment (SYSC 19C.3.51 R).

[Note: The FCA has published guidance on the application of certain rules on remuneration structures in relation to individuals who are BIPRU Remuneration Code staff for only part of a given performance year. This guidance is available at www.fca.org.uk/firms/remuneration.]

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

SYSC 19C.3.35 R

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

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

SYSC 19C.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.

SYSC 19C.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 19C.3.38 R

A firm must ensure that the assessment of performance is set in a multi-year framework, 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.

SYSC 19C.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 19C.3.40 R

A firm must not award, pay or provide guaranteed variable remuneration unless it:

  1. (1)

    is exceptional;

  2. (2)

    occurs in the context of hiring new BIPRU Remuneration Code staff; and

  3. (3)

    is limited to the first year of service.

SYSC 19C.3.41 E
  1. (1)

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

    1. (a)

      it has taken reasonable steps to ensure that the remuneration is not more generous in its amount or terms (including any deferral or retention periods) than the variable remuneration awarded or offered by X’s 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 19C.3.40 R).

SYSC 19C.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 19C.3.43 G

Variable remuneration can be awarded to BIPRU Remuneration Code staff in the form of retention awards where it is compatible with the BIPRU Remuneration Code general requirement to do so. The FCA 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 19C.3.44 R

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

  1. (1)

    fixed and variable components of total remuneration are appropriately balanced; and

  2. (2)

    the fixed 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 component.

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

SYSC 19C.3.45 R

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

SYSC 19C.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 BIPRU Remuneration Code general requirement.

[Note: Standard 12 of the FSB Compensation Standards]

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

SYSC 19C.3.47 R
  1. (1)

    A firm must ensure that a substantial portion, 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 for a non-listed firm; and

    2. (b)

      where appropriate, capital instruments which are eligible for inclusion at stage B1 of the calculation in the capital resources table, where applicable, adequately reflect the credit quality of the firm as a going concern.

  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 the portion of the variable remuneration component deferred, and not deferred, in line with SYSC 19C.3.49 R.

[Note: Standard 8 of the FSB Compensation Standards]

SYSC 19C.3.48 G
  1. (1)

    Regarding SYSC 19C.3.47R (3), 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.

  2. (2)

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

Remuneration Principle 12(g): Remuneration structures - deferral

SYSC 19C.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 of 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 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 line with the business cycle, the nature of the business, its risks and the activities of the employee in question.

    [Note: Standards 6 and 7 of the FSB Compensation Standards]

  6. (6)

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

  7. (7)

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

SYSC 19C.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 FCA generally expects 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 BIPRU 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 BIPRU Remuneration Code staff in the levels of variable remuneration paid.

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

SYSC 19C.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 according to the performance of the firm, the business unit and the individual concerned.

[Note: Standards 6 and 9 of the FSB Compensation Standards]

SYSC 19C.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 19C.3.51 R).

SYSC 19C.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 FCA may ask firms to provide a copy of their policies and expects firms to make adequate records of material decisions to operate the adjustments.