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SYSC 19G.5 Application of remuneration requirements to material risk takers

Identifying material risk takers

SYSC 19G.5.1R

1A material risk taker is a staff member at a non-SNI MIFIDPRU investment firm whose professional activities have a material impact on the risk profile of the firm or of the assets that the firm manages.

SYSC 19G.5.2R

1A non-SNI MIFIDPRU investment firm must assess at least once a year which of its staff members are material risk takers.

SYSC 19G.5.3R

1For the purposes of SYSC 19G.5.1R, a staff member’s professional activities are deemed to have a material impact on a firm’s risk profile or the assets the firm manages if one or more of the following criteria are met:

  1. (1)

    the staff member is a member of the management body in its management function;

  2. (2)

    the staff member is a member of the management body in respect of the management body in its supervisory function;

  3. (3)

    the staff member is a member of the senior management;

  4. (4)

    the staff member has managerial responsibility for business units that are carrying on at least one of the following regulated activities:

    1. (a)

      arranging (bringing about) deals in investments;

    2. (b)

      dealing in investments as agent;

    3. (c)

      dealing in investments as principal;

    4. (d)

      managing investments;

    5. (e)

      making investments with a view to transactions in investments;

    6. (f)

      advising on investments (except P2P agreements); and/or

    7. (g)

      operating an organised trading facility;

  5. (5)

    the staff member has managerial responsibilities for the activities of a control function;

  6. (6)

    the staff member has managerial responsibilities for the prevention of money laundering and terrorist financing;

  7. (7)

    the staff member is responsible for managing a material risk within the firm;

  8. (8)

    in a firm that has permission for carrying on at least one of the regulated activities in (4)(a) to (g), the staff member is responsible for managing one of the following activities:

    1. (a)

      information technology;

    2. (b)

      information security; and/or

    3. (c)

      outsourcing arrangements of critical or important functions as referred to in article 30(1) of the MiFID Org Regulation; and

  9. (9)

    the staff member has authority to take decisions approving or vetoing the introduction of new products.

SYSC 19G.5.4G

1The FCA considers the following are key indicators that the professional activities of a staff member (X) have a material impact on the risk profile of the firm or of the assets that the firm manages for the purposes of SYSC 19G.5.1R:

  1. (1)

    there is no sufficiently senior and experienced material risk taker who supervises X on a day-to-day basis or to whom X reports;

  2. (2)

    X is responsible for key strategic decisions; and

  3. (3)

    X is responsible for significant revenue, material assets under management or for approving transactions.

SYSC 19G.5.5G

1The FCA expects individuals in the following roles would usually be categorised as material risk takers:

  1. (1)

    in relation to portfolio management business, heads of key areas including equities, fixed income, alternatives, private equity;

  2. (2)

    heads of investment research;

  3. (3)

    individuals responsible for a high proportion of revenue;

  4. (4)

    senior advisors where they can exert key strategic influence;

  5. (5)

    chief market strategists, where media profile is linked to reputational risk and risk to market integrity;

  6. (6)

    heads of a trading or broking desk; and

  7. (7)

    all individuals with responsibility for information technology, information security and outsourcing where there is not a single person with responsibility for all three areas. For example, if there is a chief operating officer and a chief information technology officer who are both equally senior and have shared responsibility for these areas, then both should be identified as material risk takers.

SYSC 19G.5.6G
  1. (1)

    1A firm should update its assessment under SYSC 19G.5.2R as necessary throughout the year.

  2. (2)

    It is important that firms consider all types of roles that may have a material impact on the firm’s risk profile or on the assets it manages. The categories of staff referred to in SYSC 19G.5.3R are intended to be a starting point only. A firm should develop its own additional criteria to identify further individuals based on the specific types of activities and risks relevant to the firm.

  3. (3)

    In identifying its material risk takers, a firm should consider all types of risks involved in its professional activities. These may include prudential, operational, market, conduct and reputational risks.

  4. (4)

    The decisive factor when identifying material risk takers is not the name of the function or role, but the authority and responsibility held by the individual.

SYSC 19G.5.7R
  1. (1)

    1If a non-SNI MIFIDPRU investment firm is part of an FCA investment firm group to which prudential consolidation applies, its material risk takers must be identified at both individual and consolidated level.

  2. (2)

    The UK parent entity of a firm is responsible for the material risk taker identification process at a consolidated level and must identify as material risk takers:

    1. (a)

      all staff members whose professional activities have a material impact on the risk profile of the investment firm group; and

    2. (b)

      all staff members of an undertaking in the investment firm group (‘undertaking A’) whose professional activities have a material impact on:

      1. (i)

        the risk profile of another undertaking within the investment firm group to whom the MIFIDPRU Remuneration Code applies on an individual basis (‘undertaking B’); or

      2. (ii)

        the risk profile of any assets managed by undertaking B.

SYSC 19G.5.8G

1It may be helpful for the UK parent entity to coordinate the process for identifying material risk takers across the group entities.

Exemption for individuals

SYSC 19G.5.9R
  1. (1)

    1The provisions in (2) do not apply in relation to a material risk taker (X), where X’s annual variable remuneration:

    1. (a)

      does not exceed £167,000; and

    2. (b)

      does not represent more than one-third of X’s total annual remuneration.

  2. (2)

    The provisions referred to in (1) are:

    1. (a)

      SYSC 19G.6.19R to SYSC 19G.6.21G (Shares, instruments and alternative arrangements);

    2. (b)

      SYSC 19G.6.22R and SYSC 19G.6.23G (Retention policy);

    3. (c)

      SYSC 19G.6.24R to SYSC 19G.6.29R (Deferral); and

    4. (d)

      SYSC 19G.6.35R(2) (Discretionary pension benefits).

SYSC 19G.5.10G
  1. (1)

    1SYSC 19G.5.9R applies only to material risk takers of non-SNI MIFIDPRU investment firms that do not fall within SYSC 19G.1.1R(2).

  2. (2)

    A non-SNI MIFIDPRU investment firm not falling within SYSC 19G.1.1R(2) should therefore assess whether staff members are material risk takers before applying the thresholds in SYSC 19G.5.9R.

  3. (3)

    As the provisions listed in SYSC 19G.5.9R(2) don’t apply on a consolidated basis (see 19G.1.18R(4)(b)), the exemption for individuals in SYSC 19G.5.9R(1) will not be relevant on a consolidated basis.

SYSC 19G.5.11R

1When considering whether an individual that becomes a material risk taker at a point during the firm’s performance period falls within SYSC 19G.5.9R, a firm must:

  1. (1)

    apply the full £167,000 variable remuneration threshold;

  2. (2)

    apply the requirement that the variable remuneration must not be more than one-third of the individual’s total remuneration to the relevant portion of the total remuneration paid for the part of the performance period that the individual is a material risk taker at that firm; and

  3. (3)

    include any guaranteed variable remuneration, for example a ‘sign-on bonus’, in the individual's variable remuneration for the part of the performance period that the individual is a material risk taker at that firm.

SYSC 19G.5.12G
  1. (1)

    1An individual may become a material risk taker at any point during the firm’s performance period, either by changing role within the firm or by joining the firm.

  2. (2)

    The effect of SYSC 19G.5.11R is illustrated by the following example:

    An individual (‘X’), becomes a material risk taker 6 months into the firm’s performance period. X receives annual fixed remuneration of £900,000. This means X will receive £450,000 for the 6 months of the performance period for which X is a material risk taker. X receives variable remuneration of £100,000 in respect of the first 6 months. X falls below the thresholds in SYSC 19G.5.9R because X’s variable remuneration of £100,000 is:

    1. (a)

      less than the £167,000 threshold in SYSC 19G.5.9R(1)(a)2, and

    2. (b)

      less than one-third of the £450,000 fixed remuneration received (which would be £150,000) for the purposes of SYSC 19G.5.9R(1)(b)2.

SYSC 19G.5.13G

1The FCA considers it good practice for a firm to consider whether applying any of the rules applicable to material risk takers to other members of staff would contribute to sound risk management or a healthy firm culture.