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Timeline guidance

SYSC 19F.1 MiFID remuneration incentives

Application

SYSC 19F.1.1 R
  1. (1)

    1SYSC 19F.1 applies to:

    1. (a)

      a common platform firm, unless it is a collective portfolio management investment firm;

    2. (b)

      a MiFID optional exemption firm; and3

    3. (c)

      a third country firm.3

    4. (d)

      [deleted]3

  2. (2)

    In relation to a firm that falls under (1)(c), SYSC 19F.1 applies only in relation to activities carried on from an establishment in the United Kingdom.

Purpose

SYSC 19F.1.2 G

2This chapter contains rules implementing article 24(10) of MiFID and on remuneration policies and practices.

MiFID requirement on remuneration incentives

SYSC 19F.1.3 R

2A firm which provides investment services to clients must ensure that it does not remunerate or assess the performance of its staff in a way that conflicts with its duty to act in the best interests of its clients. In particular, a firm must not make any arrangement by way of remuneration, sales targets or otherwise that could provide an incentive to its staff to recommend a particular financial instrument to a retail client when the firm could offer a different financial instrument which would better meet that client’s needs.

[Note: article 24(10) of MiFID]

Remuneration policies and practices

SYSC 19F.1.4 R
  1. (1)

    2A dormant account fund operator in respect of its investment services and ancillary services, a MiFID optional exemption firm in respect of its investment services and ancillary services and a third country firm in respect of its MiFID or equivalent third country business must:

    1. (a)

      define and implement remuneration policies and practices under appropriate internal procedures taking into account the interests of all the clients of the firm, with a view to ensuring that clients are treated fairly and their interests are not impaired by the remuneration practices adopted by the firm in the short, medium or long term. Remuneration policies and practices must be designed in such a way so as not to create a conflict of interest or incentive that may lead relevant persons to favour their own interests or the firm’s interests to the potential detriment of any client;

    2. (b)

      ensure that their remuneration policies and practices apply to all relevant persons with an impact, directly or indirectly, on investment services and ancillary services provided by the firm or on its corporate behaviour, regardless of the type of clients, to the extent that the remuneration of such persons and similar incentives may create a conflict of interest that encourages them to act against the interests of any of the firm’sclients; and

    3. (c)

      ensure that its management body approves, after taking advice from the compliance function, the firm’sremuneration policy. The senior management of the firm must be responsible for the day-to-day implementation of the remuneration policy and the monitoring of compliance risks related to the policy.

  2. (2)
    1. (a)

      Remuneration and similar incentives must not be solely or predominantly based on quantitative commercial criteria, and must take fully into account appropriate qualitative criteria reflecting compliance with the applicable regulations, the fair treatment of clients and the quality of services provided to clients.

    2. (b)

      A balance between fixed and variable components of remuneration must be maintained at all times, so that the remuneration structure does not favour the interests of the firm or its relevant persons against the interests of any client.

SYSC 19F.1.5 G

2A firm should also be aware of:

  1. (1)

    in the case of a common platform firm (but excluding a collective portfolio management investment firm), the requirements on remuneration in article 27 of the MiFID Org Regulation applying to it;

  2. (2)

    the requirements in relation to remuneration policies (SYSC 4.3A.1AR) and conflicts of interest (SYSC 10.1.7R);

  3. (3)

    the Finalised Guidance 13/01 entitled ‘Risks to customers from financial incentives’ published in January 2013; and

  4. (4)

    the Finalised Guidance 15/10 entitled ‘Risks to customers from performance management at firms’ published in July 2015.

SYSC 19F.2 IDD remuneration incentives

Application

SYSC 19F.2.1 R

1This section applies to insurance distributors carrying on insurance distribution activities from an establishment maintained by it, or its appointed representative, in the United Kingdom.

[Note: article 7(2) of the IDD]

SYSC 19F.2.1A R

2This section does not apply to an authorised professional firm with respect to its non-mainstream regulated activities if:

  1. (1)

    the firm’sdesignated professional body has made rules which implemented3 article 17(3) of the IDD;

  2. (2)

    those rules have been approved by the FCA under section 332(5) of the Act; and

  3. (3)

    the firm is subject to the rules in the form in which they were approved.

Remuneration and the customer’s best interests

SYSC 19F.2.2 R
  1. (1)

    1Insurance distributors must not:

    1. (a)

      be remunerated; or

    2. (b)

      remunerate or assess the performance of their employees,

    in a way that conflicts with their duty to comply with the customer’s best interests rules (ICOBS 2.5.-1R, in relation to a non-investment insurance contract, or COBS 2.1.1R, in relation to a life policy).

  2. (2)

    In particular, an insurance distributor must not make any arrangements by way of remuneration, sales target or otherwise that could provide an incentive to itself or its employees to recommend a particular contract of insurance to a customer in contact with the firm5 when the insurance distributor could offer a different insurance contract which would better meet the customer’s needs.

[Note: article 17(3) of the IDD]

  1. (3)

    5In relation to a non-investment insurance contract, an insurance distributor must not make any arrangements by way of remuneration or incentive to any person, including itself, its employees or any third party, that could lead:

    1. (a)

      the firm or its employees to arrange a particular contract of insurance; or

    2. (b)

      the customer to take out a particular insurance contract,

    where that would not be consistent with the interests of all customers of the policy, including prospective or actual policyholders or policy stakeholders including leaseholders (as the case may be).

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

    5When assessing whether it complies with SYSC 19F.2.2R, an insurance distributor should consider all of the remuneration it receives in connection with a non-investment insurance contract, whether or not it intends to retain that remuneration or make payments out of that amount to another person. A firm should consider whether the gross amount of any sum it receives by way of remuneration, whether in the form of commission or of any other type, is consistent with ICOBS 2.5.-1R, rather than the net amount that the firm intends to retain.

  2. (2)

    5Where a firm has arrangements to provide incentives, including partial premium refunds or commission-like payments, to third parties (including the customer taking out the policy), this may encourage those persons to use the services of the firm. Where that is the case, those arrangements would be expected to lead to the firm receiving a financial or non-financial benefit or other incentive in respect of the insurance distribution activities to which it relates and so would be remuneration to which SYSC 19F.2.2R(1) applies.

Retail premium finance

SYSC 19F.2.3 R

4The requirement in SYSC 19F.2.2R applies to remuneration an insurance distributor receives in relation to retail premium finance.

SYSC 19F.2.4 G

4 ICOBS 6A.5 includes further guidance on remuneration in relation to retail premium finance.

SYSC 19F.3 Funeral plan remuneration incentives

Application

SYSC 19F.3.1 R

1This section applies to a firm carrying on regulated funeral plan activities.

Remuneration and the customer’s best interests

SYSC 19F.3.2 R
  1. (1)

    A firm must not:

    1. (a)

      be remunerated; or

    2. (b)

      remunerate or assess the performance of its employees,

    in a way that conflicts with its duty to comply with the customer’s best interests rule.

  2. (2)

    In particular, a firm must not make any arrangements by way of remuneration, sales target or otherwise that could provide an incentive to itself or its employees to recommend or offer a particular funeral plan contract to a customer when the firm could offer a different funeral plan contract which would better meet the customer’s needs.

SYSC 19F.3.3 G
  1. (1)

    A firm should consider FPCOB 6.4R and FPCOB 6.5R when making arrangements which concern remuneration or performance incentives.

  2. (2)

    Examples of remuneration arrangements which may conflict with the customer’s best interests rule include:

    1. (a)

      arrangements which provide for higher levels of remuneration based on the price of the plan that is recommended or offered (i.e. higher remuneration for selling a more expensive plan);

    2. (b)

      arrangements for remuneration or performance management which are based primarily on the number of plans sold, or the price of plans sold; and

    3. (c)

      arrangements which do not have adequate provision for remuneration to be taken back if the customer cancels the plan.