4The AIFM Remuneration Code (SYSC 19B) also applies to a BIPRUfirm which is a full-scope UK AIFM (ie a full-scope UK AIFM that is an AIFM investment firm). Such a full-scope UK AIFM that complies with all of SYSC 19B will also comply with all of the provisions of SYSC 19A. In such cases, the FCA will not require the full-scope UK AIFM to demonstrate compliance with SYSC 19A.

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.

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.

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 Third Capital Requirements Directive (Directive 2010/76/EU)which relate to remuneration. The Committee of European Banking Supervisors published Guidelines on Remuneration Policies and Practices on 10 December 2010. Provisions of the Third Capital Requirements Directive relating to Pillar 3 disclosures of information relating to remuneration2 have been implemented through amendments to BIPRU 11 (specifically the rules and guidance in BIPRU 11.5.18 R to BIPRU 11.5.21 G). Provisions of the Capital Requirements (Amendment)Regulations 2012 (SI 2012/917) together with the European Banking Authority’s Guidelines to article22(3) and (5) of the Banking Consolidation Directive 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/cebs/media/Publications/Standards%20and%20Guidelines/2012/EBA-GL-2012-04---GL-4-on-remuneration-benchmarking-exercise-.pdf and http://www.eba.europa.eu/cebs/media/Publications/Standards%20and%20Guidelines/2012/EBA-GL-2012-05---GL-5-on-remuneration-data-collection-exercise-.pdf.2

   2
3. (3)

   [deleted]9

   9

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.

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.

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.

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.

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.

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 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 73(3) of the Banking Consolidation Directive concerning the application of systems and controls requirements to groups (as implemented in SYSC 12.1.13 R).

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.

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)).

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.

The appropriate regulator 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.

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.

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.

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.

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.

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.

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

1. (1)

   Taking account of the remuneration principles proportionality rule, the appropriate regulator8 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:

   8
   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).

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.

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.

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

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.

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.

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).

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.

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.

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