SYSC 19A.3 Remuneration principles for IFPRU investment firms5

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 outside the United Kingdom7.

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-UK sub-groups7).

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).

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 the Material Risk Takers Regulation7; 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 the Material Risk Takers Regulation7 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 the Material Risk Takers Regulation7;

      2. (ii)

         would not meet any of the criteria in article 3 of the Material Risk Takers Regulation7; 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 the Material Risk Takers Regulation7.

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 the Material Risk Takers Regulation7.

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.

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.

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

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

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.

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.

1. (1)

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

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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.

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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.

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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.

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

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

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.

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.

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

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

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3. (3)

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

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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.

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

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.

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.

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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.

A firm must ensure that variable remuneration is not paid through vehicles or methods that facilitate 3non-compliance with the Remuneration Code, the UK CRR or the UK legislation that implemented the CRD7.

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

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.

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.

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.

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:

1. (1)

   3it is exceptional;

2. (2)

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

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3. (3)

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

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4. (4)

   3it is limited to the first year of service.

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.

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;

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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

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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

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

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2. (2)

   is approved by the shareholders or owners or members of the firm in accordance with 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

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

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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

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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 UK legislation that implemented the7CRD and the UK CRR7, having particular regard to the firm's own funds obligations;5

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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

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   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

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

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.

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.

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.

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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.

1. (1)

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

2. (2)

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

3. (3)

   In the case of a variable remuneration component:

   1. (a)

      of £500,000 or more;6 or

   2. (b)

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

   at least 60% of the amount must be deferred.

4. (4)

   [deleted]6

5. (5)

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

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

1. (6)

   [deleted]6

2. (7)

   [deleted]6

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.

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.

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

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:

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   1. (a)

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

   2. (b)

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

   3. (c)

      (replacing payments recovered or property transferred).

2. (1A)

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

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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.