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SYSC 19G.6 Variable remuneration

Remuneration and capital

SYSC 19G.6.1R

1A MIFIDPRU investment firm must ensure that variable remuneration does not affect the firm’s ability to ensure a sound capital base.

Exceptional government intervention

SYSC 19G.6.2R

1A MIFIDPRU investment firm that benefits from exceptional government intervention must ensure that:

  1. (1)

    no variable remuneration is paid to members of its management body, unless it is justified to do so; and

  2. (2)

    variable remuneration is limited to a portion of net revenue when its payment to staff that are not members of its management body would be inconsistent with:

    1. (a)

      the maintenance of the firm’s sound capital base; and

    2. (b)

      its timely exit from exceptional government intervention.

SYSC 19G.6.3G

1An example of where it may be justifiable to pay variable remuneration to a member of the management body of a MIFIDPRU investment firm that benefits from exceptional government intervention is where that person was not in office at the time the exceptional government intervention was first required.

Assessment of performance

SYSC 19G.6.4R

1A non-SNI MIFIDPRU investment firm must ensure that where variable remuneration is performance-related:

  1. (1)

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

    1. (a)

      the material risk taker;2

    2. (b)

      the business unit concerned; and

    3. (c)

      the overall results of the firm;

  2. (2)

    the assessment of performance is part of a multi-year framework that ensures:

    1. (a)

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

    2. (b)

      the payment of perfomance-based remuneration is spread over a period that takes account of the business cycle of the firm and its business risks.

SYSC 19G.6.5R

1When assessing individual performance to determine the amount of variable remuneration to be paid to an individual, a MIFIDPRU investment firm must take into account financial as well as non-financial criteria.

SYSC 19G.6.6G
  1. (1)

    1For some firms it may be appropriate to give equal weight to financial and non-financial criteria for the purposes of SYSC 19G.6.5R. For other firms a slightly different split may be appropriate.

  2. (2)

    Non-financial criteria under SYSC 19G.6.5R should:

    1. (a)

      form a significant part of the performance assessment process;

    2. (b)

      override financial criteria, where appropriate;

    3. (c)

      include metrics on conduct, which should make up a substantial portion of the non-financial criteria; and

    4. (d)

      include how far the individual adheres to effective risk management and complies with relevant regulatory requirements.

  3. (3)

    Examples of non-financial criteria under SYSC 19G.6.5R include:

    1. (a)

      measures relating to building and maintaining positive customer relationships and outcomes, such as positive customer feedback;

    2. (b)

      performance in line with firm strategy or values, for example by displaying leadership, teamwork or creativity;

    3. (c)

      adherence to the firm’s risk management and compliance policies;

    4. (d)

      achieving targets relating to:

      1. (i)

        environmental, social and governance factors; and

      2. (ii)

        diversity and inclusion.

  4. (4)

    A firm should ensure that when it assesses individual performance, the assessment process and any variable remuneration awarded in accordance with SYSC 19G.6.4R does not discriminate on the basis of the protected characteristics of an individual in accordance with the Equality Act 2010.

General requirements for awards of non-standard forms of variable remuneration

SYSC 19G.6.7R
  1. (1)

    1A non-SNI MIFIDPRU investment firm must ensure that all guaranteed variable remuneration, retention awards, severance pay and buy-out awards falling under SYSC 19G.6.8R to SYSC 19G.6.14G are:

    1. (a)

      subject to malus and clawback;

    2. (b)

      in the case of non-SNI MIFIDPRU investment firms to which those rules apply:

      1. (i)

        subject to the requirements in SYSC 19G.6.19R and SYSC 19G.6.21G (Shares, instruments and alternative arrangements), SYSC 19G.6.22R and SYSC 19G.6.23G (Retention policy), and SYSC 19G.6.24R to SYSC 19G.6.29R (Deferral); and

      2. (ii)

        included in the variable component of the variable to fixed ratio for the performance period in which the award is made.

  2. (2)

    A non-SNI MIFIDPRU investment firm must ensure that each decision it makes to award variable remuneration falling within the scope of (1) is appropriate, taking all relevant circumstances into account.

Guaranteed variable remuneration

SYSC 19G.6.8R

1A non-SNI MIFIDPRU investment firm must not award, pay or provide guaranteed variable remuneration to a material risk taker unless:

  1. (1)

    it occurs in the context of hiring a new material risk taker;

  2. (2)

    it is limited to the first year of service; and

  3. (3)

    the firm has a strong capital base.

SYSC 19G.6.9G
  1. (1)

    1Guaranteed variable remuneration is sometimes referred to as a ‘sign-on bonus’ or ‘golden handshake’.

  2. (2)

    Guaranteed variable remuneration can be used as a way to compensate new staff members where they have lost the opportunity to receive variable remuneration by leaving their previous employment during the performance period. These awards may be called ‘lost opportunity bonuses’.

  3. (3)

    The FCA expects non-SNI MIFIDPRU investment firms to award guaranteed remuneration only rarely and not as common practice.

Retention awards

SYSC 19G.6.10R

Retention awards must only be paid to material risk takers:

  1. (1)

    after a defined event; or

  2. (2)

    at a specified point in time.

SYSC 19G.6.11G
  1. (1)

    1Retention awards are bonuses which are dependent on an individual remaining in a role until a defined event or for a set period of time. For example, retention bonuses can be used under restructurings, in wind-down or in the context of specific projects within a firm.

  2. (2)

    The payment of a retention award may be made dependent on the material risk taker meeting certain performance criteria that have been defined in advance.

  3. (3)

    The FCA expects non-SNI MIFIDPRU investment firms to make retention awards to material risk takers only rarely and not as common practice.

Severance pay

SYSC 19G.6.12R
  1. (1)

    1A non-SNI MIFIDPRU investment firm must ensure that payments to material risk takers relating to the early termination of an employment contract reflect the individual’s performance over time and do not reward failure or misconduct.

  2. (2)

    A non-SNI MIFIDPRU investment firm must set out in its remuneration policy whether severance payments may be paid, and any maximum amount or criteria for determining the amount.

Buy-out awards

SYSC 19G.6.13R

1A non-SNI MIFIDPRU investment firm must ensure that remuneration packages relating to compensation for, or buy out from, a material risk taker’s contracts in previous employment:

  1. (1)

    align with the long term interests of the firm; and

  2. (2)

    contain provisions on periods of retention, deferral, vesting and ex post risk adjustment that are no shorter than any corresponding periods that applied to unvested variable remuneration under the previous contract of employment, and which remained outstanding.

SYSC 19G.6.14G

1Buy-out awards involve a firm compensating a new staff member, or ‘buying out’ their previous contract with another employer, where the deferred variable remuneration of the staff member was reduced, revoked or cancelled by the previous employer. This could be because they terminated their contract or because the individual has to pay back some money, for example where the employer has paid for a training course or qualification for the individual that was attached to a retention clause.

Risk adjustment

SYSC 19G.6.15R

1A non-SNI MIFIDPRU investment firm must ensure that any measurement of performance used as a basis to calculate pools of variable remuneration takes into account all types of current and future risks and the cost of the capital and liquidity required in accordance with MIFIDPRU.

SYSC 19G.6.16R

1A non-SNI MIFIDPRU investment firm must ensure that the allocation of variable remuneration components within the firm takes into account all types of current and future risks.

SYSC 19G.6.17R

1For the purposes of SYSC 19G.6.15R and SYSC 19G.6.16R, a non-SNI MIFIDPRU investment firm must:

  1. (1)

    determine at what level the adjustments should be applied (for example at business unit, trading desk or individual level), which risks are relevant, and which risk adjustment techniques and measures are most appropriate; and

  2. (2)

    in considering all types of current and future risks, include both financial risks (for example economic profit or economic capital) and non-financial risks (for example reputation, conduct and customer outcomes, values and strategy).

SYSC 19G.6.18R

1A non-SNI MIFIDPRU investment firm must ensure that its total variable remuneration is generally considerably contracted, including through malus or clawback arrangements, where the financial performance of the firm is subdued or negative.

Shares, instruments and alternative arrangements

SYSC 19G.6.19R

1A non-SNI MIFIDPRU investment firm to which this rule applies must ensure that at least 50% of the variable remuneration paid to a material risk taker in relation to a performance period consists of any of the following eligible instruments:

  1. (1)

    shares, or subject to the firm’s legal structure, equivalent ownership interests;

  2. (2)

    share-linked instruments, or subject to the firm’s legal structure, equivalent non-cash instruments;

  3. (3)

    instruments that comply with the requirements in SYSC 19G Annex 1R; or

  4. (4)

    non-cash instruments (including those settled in cash) which reflect the instruments of the portfolios managed.

SYSC 19G.6.20R

1Where an eligible instrument that falls within the scope of SYSC 19G.6.19R(1) or (2) relates to an ownership interest in a parent undertaking of the MIFIDPRU investment firm, it will only satisfy the requirements of SYSC 19G.6.19R where its value moves in line with the value of an equivalent ownership interest in the MIFIDPRU investment firm.

SYSC 19G.6.21G
  1. (1)

    1Where a MIFIDPRU investment firm is unable to issue eligible instruments, the firm may apply to the FCA for a modification under section 138A of the Act to permit the firm to use alternative arrangements. The firm will need to provide a detailed explanation in its application of the alternative arrangements it is proposing to operate.

  2. (2)

    The FCA may grant a modification under section 138A of the Act for these purposes only where it is satisfied that:

    1. (a)

      compliance by the firm with the requirement to issue variable remuneration in eligible instruments would be unduly burdensome or would not achieve the purpose for which the rules were made; and

    2. (b)

      granting the modification would not adversely affect the advancement of any of the FCA’s objectives.

  3. (3)

    As part of its assessment of whether the modification would adversely affect the advancement of its objectives, the FCA will consider whether the proposed alternative arrangements for variable remuneration achieve similar outcomes to the standard requirements applicable to eligible instruments. In particular, the FCA will normally consider the following non-exhaustive list of factors:

    1. (a)

      whether the proposed alternative arrangement ensures suitable alignment between the interests of the staff member and the long-term interests of the firm, its clients and creditors;

    2. (b)

      whether the proposed alternative arrangement is subject to a retention policy that is of sufficient length to align the incentives of the staff member with the long-term interests of the firm, its clients and creditors;

    3. (c)

      whether the proposed alternative arrangement is clear and transparent to the staff member and contains sufficient detail on the applicable conditions;

    4. (d)

      whether the firm will ensure that any amounts that are subject to deferral and retention arrangements cannot be accessed, transferred or redeemed by the staff member during the deferral and retention periods;

    5. (e)

      whether the proposed alternative arrangement would facilitate the appropriate application of malus and clawback requirements;

    6. (f)

      whether the proposed alternative arrangements adequately ensure that the value of the variable remuneration received does not increase during the deferral period through distributions or other payments on the instrument; and

    7. (g)

      where the proposed alternative arrangements allow for predetermined changes of the value received as variable remuneration during deferral and retention periods, based on the performance of the firm or the managed assets, whether the following conditions would be met:

      1. (i)

        the change of the value is based on predefined performance indicators that are based on the credit quality of the firm or the performance of the managed assets;

      2. (ii)

        where deferral and retention must be applied, value changes are calculated at least annually and at the end of the retention period;

      3. (iii)

        the rate of possible positive and negative value changes is equally based on the level of positive or negative credit quality changes or performance measured;

      4. (iv)

        where the value change under (i) is based on the performance of assets managed, the percentage of value change should be limited to the percentage of value change of the managed assets;

      5. (v)

        where the value change under (i) is based on the credit quality of the firm, the percentage of value change should be limited to the percentage of the annual total gross revenue in relation to the firm’s total own funds.

  4. (4)

    If a firm cannot issue eligible instruments because of its legal structure, that is likely to be a reason for the FCA to conclude that requiring the firm to comply with SYSC 19G.6.19R would not achieve the purpose for which that rule was made.

Retention policy

SYSC 19G.6.22R

1A non-SNI MIFIDPRU investment firm to which this rule applies must establish an appropriate retention policy for eligible instruments that is designed to align the interests of the staff member with the longer-term interests of the firm, its creditors and clients.

SYSC 19G.6.23G
  1. (1)

    1In considering what is an appropriate retention policy for the purposes of SYSC 19G.6.22R, a firm should consider at least the following:

    1. (a)

      the length of the deferral period referred to in SYSC 19G.6.24R(1);

    2. (b)

      the length of the firm’s business cycle;

    3. (c)

      the types of risks relevant to the role of the staff member; and

    4. (d)

      how long it could take for the risks underlying the staff member’s performance to crystallise.

  2. (2)

    The greater the impact of the material risk taker on the risk profile of the firm and of the assets managed, the longer the retention period should be. Different retention periods for different material risk takers may be appropriate, particularly where the applicable deferral periods differ.

Deferral

SYSC 19G.6.24R
  1. (1)

    1A non-SNI MIFIDPRU investment firm to which this rule applies must not award, pay or provide a variable remuneration component unless at least 40% is deferred over a period which is at least 3 years.

  2. (2)

    Where the variable remuneration is a particularly high amount, and in all cases where the variable remuneration is £500,000 or more, at least 60% of the amount must be deferred.

  3. (3)

    Deferred variable remuneration must vest no faster than on a pro-rata basis.

  4. (4)

    The first deferred portion of the variable remuneration must not vest sooner than a year after the start of the deferral period.

SYSC 19G.6.25R
  1. (1)

    1A non-SNI MIFIDPRU investment firm must take into account the factors in (2) when determining:

    1. (a)

      the amount of variable remuneration to be deferred under SYSC 19G.6.24R(1) and (2);

    2. (b)

      the length of the deferral period under SYSC 19G.6.24R(1); and

    3. (c)

      the speed of vesting of the variable remuneration for the purposes of SYSC 19G.6.24R(3).

  2. (2)

    The factors referred to in (1) are:

    1. (a)

      the firm’s business cycle, the nature of its business and its risk profile;

    2. (b)

      the activities and responsibilities of the staff member in question and how these may impact the risk profile of the firm or the assets the firm manages;

    3. (c)

      whether the deferred variable remuneration is paid out in instruments or cash;

    4. (d)

      the amount of the variable remuneration; and

    5. (e)

      the ratio of variable to fixed remuneration.

SYSC 19G.6.26G
  1. (1)

    1Where appropriate, a firm should tailor the proportion of deferred variable remuneration, the deferral period and the speed of vesting in different ways for different categories of material risk taker.

  2. (2)

    The FCA considers that it may be appropriate for the most senior material risk takers at a firm (for example members of the management body), to be subject to a deferral period longer than the 3-year minimum.

  3. (3)

    It may be appropriate for firms to apply different proportions of deferred variable remuneration, deferral periods or vesting arrangements to the portion of variable remuneration paid out in cash and the portion paid out in instruments.

  4. (4)

    In the FCA’s view, the higher the amount of the variable remuneration, and the higher the ratio of variable to fixed remuneration, the more appropriate it is likely to be to defer a greater proportion of the variable remuneration.

  5. (5)

    In certain circumstances variable remuneration below £500,000 may still be considered ‘particularly high’ and so subject to 60% deferral. A firm should take into account the average remuneration at the firm, the ratio of the variable to fixed remuneration of the material risk taker, and the amount of variable remuneration compared to that of other staff at the firm.

  6. (6)

    After the first deferred portion of the variable remuneration vests in accordance with SYSC 19G.6.24R(4), the FCA does not expect vesting to take place more often than once a year.

SYSC 19G.6.27R

1A non-SNI MIFIDPRU investment firm must pay out at least 50% of the variable remuneration deferred under SYSC 19G.6.24R in instruments falling within SYSC 19G.6.19R.

SYSC 19G.6.28G

1The FCA considers it good practice for the deferred portion to contain a higher proportion of instruments than the non-deferred portion.

SYSC 19G.6.29R

1A non-SNI MIFIDPRU investment firm may only pay to a material risk taker interest or dividends on an instrument which is subject to deferral under SYSC 19G.24R where:

  1. (1)

    the rate of interest or level of dividends paid on that instrument is no higher than would have been paid to an ordinary holder of such an instrument; and

  2. (2)

    payment is not made before the date on which the instrument vests.

Performance adjustment

SYSC 19G.6.30R

1A non-SNI MIFIDPRU investment 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 material risk taker2 concerned.

SYSC 19G.6.31R

1A non-SNI MIFIDPRU investment firm must:

  1. (1)

    ensure that all of the total variable remuneration is subject to in-year adjustments, 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 material risk taker:

    1. (a)

      participated in or was responsible for conduct which resulted in significant losses to the firm; and/or

    2. (b)

      failed to meet appropriate standards of fitness and propriety.

SYSC 19G.6.32R

1A non-SNI MIFIDPRU investment firm must:

  1. (1)

    set minimum malus and clawback periods as part of its remuneration policies;

  2. (2)

    ensure that malus can be applied until the award has vested in its entirety; and

  3. (3)

    ensure that the clawback period spans at least the combined length of any deferral and retention periods.

SYSC 19G.6.33G
  1. (1)

    1The effect of SYSC 19G.6.31R(1) is that (save in the circumstances explained in (2)) a non-SNI MIFIDPRU investment firm must include in its remuneration policy the possibility of applying in-year adjustments, malus and clawback to the variable remuneration of its material risk takers. Where performance adjustment is required, the appropriate tool or tools (in-year adjustments, malus or clawback) should then be applied.

  2. (2)

    A non-SNI MIFIDPRU investment firm that is not required by SYSC 19G.6.24R to apply deferral will not be able to apply malus, so should foresee the use of in-year adjustments and clawback arrangements only. Alternatively, the firm may choose to use deferral, which would enable the use of malus arrangements in addition to in-year adjustments and clawback.

  3. (3)

    A non-SNI MIFIDPRU investment firm should ensure that the malus and clawback periods it sets and applies allow sufficient time for any potential risks to crystallise. This may mean that different periods are set for different categories of material risk takers.

  4. (4)

    In setting appropriate malus and clawback periods, a non-SNI MIFIDPRU investment firm should take into account all relevant factors, including:

    1. (a)

      the nature of the material risk taker’s activities;

    2. (b)

      the material risk taker’s impact on the risk profile of the firm or of the assets it manages; and

    3. (c)

      the length of the business cycle that is relevant for the material risk taker’s role.

  5. (5)

    For a non-SNI MIFIDPRU investment firm that satisfies the conditions in SYSC 19G.1.1R(2)(a) or (b), the FCA considers that 3 years will generally be an appropriate starting point for the firm’s consideration of the appropriate clawback period.

  6. (6)

    The FCA’s ‘General guidance on the application of ex-post risk adjustment to variable remuneration’ provides further detail of the FCA’s expectations on firms’ use of malus and clawback arrangements.

SYSC 19G.6.34G
  1. (1)

    1In the FCA’s view, malus should be applied when, as a minimum:

    1. (a)

      there is reasonable evidence of staff member misbehaviour or material error;

    2. (b)

      the firm or the relevant business unit suffers a material downturn in its financial performance; or

    3. (c)

      the firm or the relevant business unit suffers a material failure of risk management.

  2. (2)

    In the FCA’s view, clawback should, in particular, be applied in cases of fraud or other conduct with intent or severe negligence which led to significant losses.

Discretionary pension benefits

SYSC 19G.6.35R
  1. (1)

    1A non-SNI MIFIDPRU investment firm must ensure that:

    1. (a)

      any discretionary pension benefits it awards or pays to material risk takers are:

      1. (i)

        in line with its business strategy, objectives, values and long-term interests; and

      2. (ii)

        paid only in eligible instruments;

    2. (b)

      it applies malus and clawback arrangements to discretionary pension benefits in the same way as to other elements of variable remuneration.

  2. (2)

    A non-SNI MIFIDPRU investment firm to which this paragraph applies must ensure that:

    1. (a)

      where a material risk taker leaves the firm before retirement age, any discretionary pension benefits are held by the firm for a period of 5 years; and

    2. (b)

      where a material risk taker reaches retirement age, any discretionary pension benefits are subject to a 5-year retention period by that individual.

Personal investment strategies

SYSC 19G.6.36R

1A non-SNI MIFIDPRU investment firm must take all reasonable steps to ensure that material risk takers do not use personal hedging strategies or remuneration- and liability-related contracts of insurance to undermine the remuneration rules in the MIFIDPRU Remuneration Code.

SYSC 19G.6.37G

1Actions a firm may take under SYSC 19G.6.36R include requesting an undertaking or declaration from its material risk takers and implementing policies regarding dealing in financial instruments.

Avoidance of the MIFIDPRU Remuneration Code

SYSC 19G.6.38R

1A non-SNI MIFIDPRU investment firm must not pay variable remuneration through financial vehicles or methods that facilitate non-compliance with the MIFIDPRU Remuneration Code or MIFIDPRU.