SYSC 19D.3 Remuneration principles

1. (1)

   A firm that is a member of a group must:6

   3
   1. (a)

      comply with this section on an individual basis; and6

   2. (b)

      comply, and ensure that the other members of the group comply, with this section on a consolidated basis or sub-consolidated basis, including in respect of those subsidiaries established in a country or territory which is outside the United Kingdom.6

2. (2)

   Paragraph (1) does not limit SYSC 12.1.13R(2)(dA) (which relates to the application of the dual-regulated firms Remuneration Code within UK consolidation groups4).

   3

1. (1)

   2For a firm within the scope of SYSC 19D.1.1R(1)(a), (1)(b) or (1)(c), the provisions6 in (3) do not apply if:

   1. (a)

      [deleted]6

   2. (b)

      the firm:6

      1. (i)

         has average total assets of less than or equal to £4 billion; or6

      2. (ii)

         has average total assets of less than or equal to £20 billion, and meets the conditions set out in Chapter 2A.1 of the Remuneration Part of the PRA Rulebook (as amended from time to time); and6

      .

      333
   3. (c)

      where the firm is part of a group that contains any other firm which is subject to these rules on an individual basis, the requirements of (1A) are met.6

2. (1A)

   The requirements of this paragraph are met where:6

   1. (a)

      both of the following criteria are satisfied:6

      1. (i)

         each firm in the group to which these rules apply on an individual basis has average total assets less than or equal to £4 billion; and 6

      2. (ii)

         where any firm in the group to which these rules apply on an individual basis is a member of a UK consolidation group, the UK consolidation group has average total assets less than or equal to £4 billion on a consolidated basis; or 6

   2. (b)

      all of the following criteria are satisfied:6

      1. (i)

         each firm in the group to which these rules apply on an individual basis has average total assets that are less than or equal to £20 billion;6

      2. (ii)

         where any firm in the group to which these rules apply on an individual basis is a member of a UK consolidation group, the UK consolidation group has average total assets that are less than or equal to £20 billion on a consolidated basis;6

      3. (iii)

         each firm in the group to which these rules apply on an individual basis meets the following conditions in the Remuneration Part of the PRA Rulebook (as amended from time to time):6

         1. (A)

            for a firm within the scope of SYSC 19D.1.1R(1)(a), (1)(b) or (1)(c), the conditions in Chapter 2A.1; or6

         2. (B)

            for a firm within the scope of SYSC 19D.1.1R(1)(d), the conditions in Chapter 2B.1; and6

      4. (iv)

         where any firm in the group to which these rules apply on an individual basis is a member of a UK consolidation group, the UK consolidation group meets the conditions in (1), (2) and (3) of Chapter 2A.1 of the Remuneration Part of the PRA Rulebook (as amended from time to time) on a consolidated basis. 6

3. (1B)

   References in (1A) to a firm’s average total assets are, for any firm within the scope of SYSC 19D.1.1R(1)(d), to be read as references to the average total assets that relate to the activities of the UK branch.6

4. (2)

   For a firm within the scope of SYSC 19D.1.1R(1)(d), the provisions in (3) do not apply if:6

   3
   1. (a)

      either:6

      1. (i)

         the average total assets that relate to the activities of the UK branch are less than or equal to £4 billion; or6

      2. (ii)

         the average total assets that relate to the activities of the UK branch are less than or equal to £20 billion and the conditions set out in Chapter 2B.1 of the Remuneration Part of the PRA Rulebook (as amended from time to time) are met; and6

   2. (b)

      where the firm is part of a group that contains any other firm which is subject to these rules on an individual basis, the requirements of (1A) are met.6

5. (3)

   The provisions6 referred to in (1) and (2) are:

   1. (a)

      SYSC 19D.3.31R(2) and (3) (pension policy);

   2. (b)

      SYSC 19D.3.56R (retained shares or other instruments);6

   3. (c)

      SYSC 19D.3.59R (deferral) ; and6

   4. (d)

      SYSC 19D.3.61R(2), (3), (3A), (4) and (5), SYSC 19D.3.62R, SYSC 19D.3.63E and SYSC 19D.3.64R (performance adjustment (affordability, malus, clawback)).6

6. (4)

   If a firm has not yet been required to report its total assets, the calculations in respect of average total assets shall instead be done on the basis of the firm’s reasonable forecast of its total assets as at the first occasion on which it will be required to report them.6

1. (1)

   This section applies in relation to dual-regulated firms Remuneration Code staff, except as set out in (3).

2. (2)

   When establishing and applying the total remuneration policies for dual-regulated firms Remuneration Code staff, a firm must comply with this section in a way2 that is appropriate to its size, internal organisation and the nature, the scope and the complexity of its activities (the dual-regulated firms 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 19D.3.12R).

A firm must:

1. (1)

   maintain a record of its dual-regulated firms Remuneration Code staff under the general record-keeping requirements (SYSC 9); and

2. (2)

   take reasonable steps to ensure that its dual-regulated firms 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 dual-regulated firms 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 management body in its supervisory function adopts and periodically reviews the general principles of the remuneration policy and is responsible for 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 management body in its supervisory function.

1. (1)

   A significant firm2 must establish a remuneration committee .

2. (2)

   A firm in (1) must ensure that:

   1. (a)

      the remuneration committee is constituted in a way that enables it to exercise competent and independent judgement on remuneration policies and practices and the incentives created for managing risk, capital and liquidity;

   2. (b)

      the chairman and the members of the remuneration committee must be members of the management body who do not perform any executive function in the firm;

   3. (c)

      the remuneration committee is 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 management body; and

   4. (d)

      when preparing those decisions, the remuneration committee must take into account the long-term interests of shareholders, investors and other stakeholders in the firm and the public interest.

A firm that maintains a website must explain on the website how it complies with the dual-regulated firms Remuneration Code.

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 employees; 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 19D.3.12R 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 of members of its management body; and

3. (2)

   no variable or discretionary remuneration of any kind is paid to members of its management body unless this is justified.

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 have a clear and verifiable mechanism for measuring performance, with risk adjustment applied thereafter in a clear and transparent manner.

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

1. (1)

   A firm’s risk-adjustment approach must reflect both ex-ante adjustment (which adjusts remuneration for intrinsic risks that are inherent in its business activities) and ex-post adjustment (which adjusts remuneration for crystallisation of specific risks events).

2. (2)

   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, 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 19D.3.56R(1); and

3. (3)

   when an employee reaches retirement, discretionary pension benefits are paid to the employee in the form of instruments referred to in SYSC 19D.3.56R(1) and subject to a five-year retention period.

1. (1)

   A firm must ensure that its employees undertake not to use personal hedging strategies to undermine the risk alignment effects embedded in their remuneration arrangements.

2. (2)

   A firm must ensure that its employees do not use remuneration- or liability-related contracts of insurance to undermine the risk alignment effects embedded in their remuneration arrangements.

3. (3)

   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 non-compliance with obligations arising from the Dual-regulated Remuneration Code4, the UK CRR3 or the UK legislation that implemented the3 CRD.

1. (1)

   2The rules in (2) do not apply to a firm in relation to an individual (X), where both the following conditions are satisfied:

   1. (a)

      Condition 1 is that X’s annual variable remuneration is no more than one third of X’s total annual remuneration; and

   2. (b)

      Condition 2 is that X’s total annual variable remuneration is no more than £44,0003.

2. (2)

   The rules referred to in (1) are those relating to:

   1. (a)

      pension policy (SYSC 19D.3.31R(2) and (3));

   2. (b)

      retained shares or other instruments (SYSC 19D.3.56R);

   3. (c)

      deferral (SYSC 19D.3.59R); and

   4. (d)

      [deleted]

   [Note: article 94(3)(b) of CRD V]

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

A 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 dual-regulated firms Remuneration Code.

A firm must not award variable remuneration to a non-executive director acting as such.

1. (1)

   A firm must ensure that where remuneration is performance-related:

   1. (a)

      the total amount of remuneration is based on a combination of the assessment of the performance of:

      1. (i)

         the individual;

      2. (ii)

         the business unit concerned; and

      3. (iii)

         the overall results of the firm; and

   2. (b)

      when assessing individual performance, financial as well as non-financial criteria are taken into account.

A firm must clearly explain the performance assessment process in SYSC 19D.3.39R to relevant employees.

A firm must ensure that the assessment of performance is set in a multi-year framework in order to ensure that:

1. (1)

   the assessment process is based on longer-term performance; and

2. (2)

   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.

1. (1)

   A firm must ensure that guaranteed variable remuneration is not part of prospective remuneration plans.

2. (2)

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

   1. (a)

      it is exceptional;

   2. (b)

      it occurs in the context of hiring new dual-regulated firms Remuneration Code staff;

   3. (c)

      the firm has a sound and strong capital base; and

   4. (d)

      it is limited to the first year of service.

A firm must ensure that remuneration packages relating to compensation for, or buy out from, an employee's contracts in previous employment align with its long-term interests including appropriate retention, deferral and performance and clawback arrangements.

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

1. (1)

   fixed and variable components of total remuneration are appropriately balanced; and5

2. (2)

   the level of 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.5

3. (3)

   [deleted]5

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

      subject to the legal structure of the firm concerned: shares or equivalent ownership interests; or share-linked instruments or equivalent non-cash instruments2; and

   2. (b)

      where possible, other instruments that in each case adequately reflect the credit quality of the firm as a going concern and are appropriate for use as variable remuneration, such as:

      1. (i)

         those which are eligible as additional tier 1 instruments or tier 2 instruments; or

      2. (ii)

         those that can be fully converted to common equity tier 1 instruments or written down;

      (where the expressions in italics are defined, with the conditions for eligibility, in the Definition of the Capital part of the PRA Rulebook).

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 19D.3.59R and the portion not deferred.

1. (1)

   In relation to higher paid material risk takers a2 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:

   1. (a)

      for dual-regulated firms Remuneration Code staff who perform a FCA-designated senior management function, five years,2 and vesting no faster than on a pro-rata basis;2

   2. (b)

      for dual-regulated firms Remuneration Code staff who perform a PRA-designated senior management function, seven years, with no vesting taking place until three years after the award, and vesting no faster than on a pro-rata basis; and2

   3. (c)

      for any other dual-regulated firms Remuneration Code staff who do not fall within (a) or (b) above, four years, and vesting no faster than on a pro-rata basis.2

2. (1A)

   In relation to dual-regulated firms Remuneration Code staff who are not higher paid material risk takers, 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:2

   1. (a)

      for dual-regulated firms Remuneration Code staff who perform a FCA-designated senior management function at a significant firm, five years, and vesting no faster than on a pro-rata basis;2

   2. (b)

      for dual-regulated firms Remuneration Code staff who perform a PRA-designated senior management function at a significant firm, five years, and vesting no faster than on a pro-rata basis;2

   3. (c)

      for any other dual-regulated firms Remuneration Code staff who do not fall within (a) or (b) above, four years, and vesting no faster than on a pro-rata basis.2

3. (2)

   In the case of a variable remuneration component:

   1. (a)

      of £500,000 or more, or

   2. (b)

      payable to a director of a significant firm2;

   at least 60% of the amount must be deferred on the basis set out in SYSC 19D.3.59R(1) and vesting no faster than on a pro-rata basis2.

4. (3)

   Subject to (1), 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.

A firm must ensure that:

1. (1)

   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;

2. (2)

   any variable remuneration is subject to clawback, such that it is only awarded if an amount corresponding to it can be recovered from the individual by the firm if the recovery is justified on the basis of the circumstances described in SYSC 19D.3.62R(2) and SYSC 19D.3.64R;

3. (3)

   for higher paid material risk takers, variable remuneration is subject to clawback for a period of at least seven years from the date on which the variable remuneration is awarded2;

4. (3A)

   for dual-regulated firms Remuneration Code staff who are not higher paid material risk takers:2

   1. (a)

      who are PRA-designated senior management function holders at a significant firm, the deferred component of variable remuneration is subject to clawback for a period of at least six years from the date on which the variable remuneration is awarded;2

   2. (b)

      who are FCA-designated senior management function holders at a significant firm, the deferred component of variable remuneration is subject to clawback for a period of at least six years from the date on which the variable remuneration is awarded;2

   3. (c)

      who do not fall within (a) or (b) above, the deferred component of variable remuneration is subject to clawback for a period of at least five years from the date on which the variable remuneration is awarded;2

   4. (d)

      the undeferred component of variable remuneration is subject to clawback for a period of at least one year from the date on which the variable remuneration is awarded; and2

5. (4)

   for dual-regulated firms Remuneration Code staff whose total annual remuneration is greater than £500,000 and2 who perform either a PRA-designated senior management function or FCA-designated senior management function, it can, by notice to the employee2 to be given no later than seven years after the variable remuneration was awarded, extend the period during which variable remuneration is subject to clawback to at least ten years from the date on which the variable remuneration is awarded, where:

   1. (a)

      the firm has commenced an investigation into facts or events which it considers could potentially lead to the application of clawback were it not for the expiry of the clawback period; or

   2. (b)

      the firm has been notified by a regulatory authority (including an overseas regulatory authority) that an investigation has been commenced into facts or events which the firm considers could potentially lead to the application of clawback by the firm were it not for the expiry of the clawback period; and

6. (5)

   it considers on an ongoing basis whether to use the power in (4).

A firm must:

1. (1)

   set specific criteria for the application of malus and clawback; and

2. (2)

   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; or

   2. (b)

      failed to meet appropriate standards of fitness and propriety.

1. (1)

   A firm must make all reasonable efforts to recover an appropriate amount corresponding to some or all vested variable remuneration where either of the following circumstances arise during the period in which clawback applies (including any part of such period occurring after the relevant employment has ceased):

   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 failure of risk management.

2. (2)

   A firm must take into account all relevant factors (including, where the circumstances described in (1)(b) arise, the proximity of the employee to the failure of risk-management in question and the employee’s level of responsibility) in deciding whether, and to what extent it is reasonable, to seek recovery of any or all of their vested variable remuneration.

1. (1)

   Subject to (2) to (7), the rules in SYSC 19D Annex 1.1R to 1.6R apply in relation to the prohibitions on dual-regulated firms Remuneration Code staff being remunerated in the ways specified in:

   1. (a)

      SYSC 19D.3.44R (guaranteed variable remuneration);

   2. (b)

      SYSC 19D.3.59R (1deferred variable remuneration);

   3. (c)

      SYSC 19D.3.61R(2) (performance adjustment – clawback); and

   4. (d)

      SYSC 19D Annex 1.10R (replacing payments recovered or property transferred).

2. (2)

   Paragraph (1) applies only to those prohibitions as they apply in relation to a firm that satisfies either Condition 1 or Condition 2 as set out in (3) and (4).

3. (3)

   Condition 1 is that the firm is a UK bank, a building society, or a UK designated investment firm, that has relevant total assets exceeding £50 billion.

4. (4)

   Condition 2 is that the firm:

   1. (a)

      is either a full credit institution or a UK designated investment firm; and

   2. (b)

      is part of a group containing a firm that has relevant total assets exceeding £50 billion and that is a UK bank1, a building society or a UK designated investment firm.

5. (5)

   For the purposes of this rule, ‘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.

6. (6)

   This rule does not apply in relation to the prohibition on dual-regulated firms Remuneration Code staff being remunerated in the way specified in SYSC 19D.3.44R (guaranteed variable remuneration) if both the conditions in paragraphs (2)(b) and (2)(c)1 of that rule are met.

7. (7)

   This rule does not apply to a firm in relation to an individual (X), where both the following conditions are satisfied:2

   1. (a)

      Condition 1 is that X’s annual2 variable remuneration is no more than one third of X’s total annual2 remuneration; and

   2. (b)

      Condition 2 is that X’s total annual variable2 remuneration is no more than £44,0003.

      2
8. (8)

   In relation to (7):

   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:

         1. (A)

            its value to the recipient when awarded;

         2. (B)

            its market value when awarded; and

         3. (C)

            the cost of providing it at the time of the award;6

      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 dual-regulated firms Remuneration Code staff will remain so for the duration of the relevant performance year.