SYSC 19G.1 General application

Application: non-SNI MIFIDPRU investment firms

SYSC 19G.1.1 R
  1. (1)

    1Subject to (2), the MIFIDPRU Remuneration Code applies to a non-SNI MIFIDPRU investment firm.

  2. (2)

    The provisions in (4) do not apply to a non-SNI MIFIDPRU investment firm:

    1. (a)

      where the value of the firm’s on-balance sheet assets and off-balance sheet items over the preceding 4-year period is a rolling average of £100 million or less; or

    2. (b)

      where:

      1. (i)

        the value of the firm’s on-balance sheet assets and off-balance sheet items over the preceding 4-year period is a rolling average of £300 million or less; and

      2. (ii)

        the conditions in (3) are (where they are relevant to a firm) satisfied.

  3. (3)

    The conditions referred to in (2)(b)(ii) are:

    1. (a)

      that the exposure value of the firm’s on- and off-balance sheet trading book business is equal to or less than £150 million; and

    2. (b)

      that the exposure value of the firm’s on- and off-balance sheet derivatives business is equal to or less than £100 million.

  4. (4)

    The provisions referred to in (2) 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).

  5. (5)

    For the purposes of paragraph (2), paragraph (6) applies where a non-SNI MIFIDPRU investment firm does not have monthly data covering the 4-year period referred to in that paragraph.

  6. (6)

    Where this paragraph applies, a non-SNI MIFIDPRU investment firm must calculate the rolling averages referred to in paragraph (2) using the data points that it does have.

SYSC 19G.1.2 G
  1. (1)

    1For the purposes of SYSC 19G.1.1R(5), the FCA expects a non-SNI MIFIDPRU investment firm to have insufficient data for a period only where it did not carry on any MiFID business during that period, or where (for periods prior to the application of the MIFIDPRU Remuneration Code) the firm did not record the relevant data on a monthly basis.

  2. (2)

    Where a firm doesn’t have all the monthly data points, the firm should use the data points it has in the way that paints the most representative picture of the period in question. For example, if a firm has monthly data for 2 years of the 4-year period, but prior to that only recorded the relevant data on a quarterly basis, the firm could sensibly calculate its rolling average by using the quarterly figure for each of the 3 monthly data points in each quarter.

SYSC 19G.1.3 R
  1. (1)

    1The amounts referred to in SYSC 19G.1.1R must be calculated on an individual basis, and:

    1. (a)

      in the case of on-balance sheet assets, in accordance with the applicable accounting framework;

    2. (b)

      in the case of off-balance sheet items, using the full nominal value.

  2. (2)

    The value of the on-balance sheet assets and off-balance sheet items in SYSC 19G.1.1R(2)(a) and (b) must be an arithmetic mean of the assets and items over the preceding 4 years, based on monthly data points.

  3. (3)

    A firm may choose the day of the month that it uses for the data points in (2), but once that day has been chosen the firm may only change it for genuine business reasons.

SYSC 19G.1.4 R
  1. (1)

    1When calculating the amounts referred to in SYSC 19G.1.1R(2)(a) and (b), a firm must use the total amount of its on-balance sheet assets and off-balance sheet items.

  2. (2)

    A firm must calculate the exposure values referred to in SYSC 19G.1.1R(3)(a) and (b) by adding together the following items:

    1. (a)

      the positive excess of the firm’s long positions over its short positions in all trading bookfinancial instruments, using the approach specified for K-NPR in MIFIDPRU 4.12.2R to calculate the net position for each instrument; and

    2. (b)

      the exposure value of contracts and transactions referred to in MIFIDPRU 4.14.3R, calculated using the approach specified for K-TCD in MIFIDPRU 4.14.8R.

  3. (3)

    Any amounts in foreign currencies must be converted into pound sterling using the relevant conversion rate.

  4. (4)

    A firm must determine the relevant conversion rate referred to in (3) by reference to an appropriate market rate and must record which rate was chosen.

SYSC 19G.1.5 G

1The FCA considers that an example of an appropriate market rate for the purposes of SYSC 19G.1.4R(4) is the relevant daily spot exchange rate against pound sterling published by the Bank of England.

Application: SNI MIFIDPRU investment firms

SYSC 19G.1.6 R
  1. (1)

    1The provisions in (2) apply to a SNI MIFIDPRU investment firm.

  2. (2)

    The provisions referred to in (1) are:

    1. (a)

      SYSC 19G.2 (Remuneration policies and practices);

    2. (b)

      SYSC 19G.3.1R to SYSC 19G.3.3R (Oversight of remuneration policies and practices);

    3. (c)

      SYSC 19G.3.6R to SYSC 19G.3.8G (Control functions);

    4. (d)

      SYSC 19G.4.1R to SYSC 19G.4.5R and SYSC 19G.4.7G(1) and (2) (Fixed and variable components of remuneration);

    5. (e)

      SYSC 19G.6.1R (Remuneration and capital);

    6. (f)

      SYSC 19G.6.2R (Exceptional government intervention); and

    7. (g)

      SYSC 19G.6.5R to SYSC 19G.6.6G (Assessment of performance).

Application: summary of application to MIFIDPRU investment firms

SYSC 19G.1.7 G
  1. (1)

    1The effect of the application provisions in SYSC 19G.1.1R to 19G.1.6R is summarised in the following table.

    Type of firm

    Applicable sections

    Non-SNI MIFIDPRU investment firm not falling within SYSC 19G.1.1R(2)

    The MIFIDPRU Remuneration Code

    Non-SNI MIFIDPRU investment firm falling within SYSC 19G.1.1R(2)

    The MIFIDPRU Remuneration Code except for:

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

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

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

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

    SNI MIFIDPRU investment firm

    SYSC 19G.2 (Remuneration policies and practices);

    SYSC 19G.3.1R to SYSC 19G.3.3R (Oversight of remuneration policies and practices);

    SYSC 19G.3.6R to SYSC 19G.3.8G (Control functions);

    SYSC 19G.4.1R to SYSC 19G.4.5R and SYSC 19G.4.7G(1) and SYSC 19G.4.7G(2) (Fixed and variable components of remuneration);

    SYSC 19G.6.1R (Remuneration and capital);

    SYSC 19G.6.2R (Exceptional government intervention); and

    SYSC 19G.6.5R to SYSC 19G.6.6G (Assessment of performance)

  2. (2)

    MIFIDPRU 1.2 contains provisions regarding the classification of a firm as a SNI MIFIDPRU investment firm and non-SNI MIFIDPRU investment firm.

Application: where the application of SYSC 19G.1.1R changes in relation to a firm

SYSC 19G.1.8 R
  1. (1)

    1This rule applies to a non-SNI MIFIDPRU investment firm that did not meet either condition in SYSC 19G.1.1R(2)(a) or (b) but subsequently does.

  2. (2)

    The provisions referred to in SYSC 19G.1.1R(2) cease to apply to the firm in (1) if:

    1. (a)

      the firm has met the conditions in either SYSC 19G.1.1R(2)(a) or (b) for a continuous period of at least 6 months (or such longer period as may have elapsed before the firm submits the notification in (b)); and

    2. (b)

      it has notified the FCA that it has met the conditions in (a).

  3. (3)

    The notification in (2)(b) must be submitted through the online notification and application system using the form in MIFIDPRU 7 Annex 3R2.

SYSC 19G.1.9 G

1The effect of SYSC 19G.1.8R(2)(a) is that a firm may move between meeting the conditions in SYSC 19G.1.1R(2)(a) and (b) during the 6-month period.

SYSC 19G.1.10 R

1Where a non-SNI MIFIDPRU investment firm has met the conditions in SYSC 19G.1.1R(2)(a) or (b) but then ceases to do so, it must comply with the provisions referred to in SYSC 19G.1.1R(2) within 12 months from the date on which the firm ceased to meet the conditions.

SYSC 19G.1.11 R
  1. (1)

    1Where a non-SNI MIFIDPRU investment firm ceases to meet the conditions in SYSC 19G.1.1R(2)(a) or (b), it must promptly notify the FCA.

  2. (2)

    The notification in (1) must be submitted through the online notification and application system using the form in MIFIDPRU 1 Annex 3R.

SYSC 19G.1.12 G

1Where a firm ceases to meet the conditions in SYSC 19G.1.1R(2)(a) or (b), but subsequently meets the conditions again within a period of 6 months, the firm will still be subject to the provisions referred to in SYSC 19G.1.1R(2) for 12 months after the date on which it first ceased to meet the conditions. The firm only ceases to be subject to the provisions referred to in SYSC 19G.1.1R(2) where it meets the conditions in SYSC 19G.1.8R(2).

SYSC 19G.1.13 R

1The requirements in SYSC 19G.1.8R(2)(b) and SYSC 19G.1.11R(1) do not apply where a non-SNI MIFIDPRU investment firm has notified the FCA in accordance with the requirements of MIFIDPRU 7.1.9R(2)(b) or MIFIDPRU 7.1.12R(1) of the same event.

Application: collective portfolio management investment firms

SYSC 19G.1.15 G
  1. (1)

    1A collective portfolio management investment firm must assess the thresholds in SYSC 19G.1.1R(2) and (3) on the basis of the total of both its MiFID business and non-MiFID business.

  2. (2)

    SYSC 19G.1.20R to SYSC 19G.1.23G explain the position for firms subject to the MIFIDPRU Remuneration Code and another FCA remuneration code.

Application: levels of application

SYSC 19G.1.16 G

1 SYSC 19G.1.1R to SYSC 19G.1.15R and SYSC 19G.1.17R explain when the MIFIDPRU Remuneration Code applies to a firm on an individual basis. SYSC 19G.1.18R and 19G.1.19R explain when the MIFIDPRU Remuneration Code applies on a consolidated basis, and what that means.

SYSC 19G.1.17 R

1The MIFIDPRU Remuneration Code applies to a firm on an individual basis where the FCA has granted a firm permission under MIFIDPRU 2.4.17R and MIFIDPRU 2.4.18R to apply the group capital test.

SYSC 19G.1.18 R
  1. (1)

    1Subject to (3), where MIFIDPRU 2.5 applies to a UK parent entity, the MIFIDPRU Remuneration Code applies to that UK parent entity on a consolidated basis.

  2. (2)

    A UK parent entity that is treated as an SNI MIFIDPRU investment firm in accordance with MIFIDPRU 2.5.21R is also treated as an SNI MIFIDPRU investment firm when applying the MIFIDPRU Remuneration Code on a consolidated basis.

  3. (3)

    A UK parent entity that is treated as a non-SNI MIFIDPRU investment firm in accordance with MIFIDPRU 2.5.21R is also treated as a non-SNI MIFIDPRU investment firm when applying the MIFIDPRU Remuneration Code on a consolidated basis.

  4. (4)

    The following provisions only apply to a firm on an individual basis:

    1. (a)

      SYSC 19G.1.1R(2), (3), (5) and (6);

    2. (b)

      The provisions listed in SYSC 19G.1.1R(4);

    3. (c)

      SYSC 19G.1.2G to 19G.1.5G; and

    4. (d)

      SYSC 19G.1.8G to 19G.1.13G.

  5. (5)

    For the purposes of the MIFIDPRU Remuneration Code, application on a consolidated basis means on the basis of the situation that results from applying the requirements in the MIFIDPRU Remuneration Code to a UK parent entity as if that undertaking, together with all the investment firms, financial institutions, ancillary services undertakings and tied agents in the investment firm group, formed a single MIFIDPRU investment firm.

  6. (6)

    For the purposes of (5), the terms investment firm, financial institution, ancillary services undertaking and tied agent apply to undertakings established in third countries, which, if established in the UK, would satisfy the definitions of those terms.

  7. (7)

    Where an undertaking in a third country is included in the consolidated situation of a UK parent entity as a result of (6), the MIFIDPRU Remuneration Code only applies in relation to material risk takers at that undertaking who oversee or are responsible for business activities that take place in the UK.

SYSC 19G.1.19 G
  1. (1)

    1Where the MIFIDPRU Remuneration Code applies on a consolidated basis, the effect of SYSC 19G.1.18R(5) is that the UK parent entity and all the investment firms, financial institutions, ancillary services undertakings and tied agents in the investment firm group are treated for these purposes as a single MIFIDPRU investment firm. This means, for example, treating a staff member of an undertaking within the investment firm group as if they were a staff member of the UK parent entity.

  2. (2)

    When considering which rules in the MIFIDPRU Remuneration Code apply on a consolidated basis, a UK parent entity must consider whether it is treated as an SNI MIFIDPRU investment firm or a non-SNI MIFIDPRU investment firm under MIFIDPRU 2.5.21R (which, as SYSC 19G.1.18R(2) and (3) explain, also determines its categorisation under the MIFIDPRU Remuneration Code).

  3. (3)

    The effect of SYSC 19G.1.18R(4)(b) is that a UK parent entity need not comply with the provisions listed in SYSC 19G.1.1R(4) on a consolidated basis. These provisions apply on an individual basis where a firm exceeds the thresholds in SYSC 19G.1.1R(2)(a) or (b). As these thresholds are not relevant where the MIFIDPRU Remuneration Code applies on a consolidated basis, the provisions concerning them are also disapplied.

Application: firms subject to different remuneration requirements

SYSC 19G.1.20 R
  1. (1)

    1Where a firm is subject to the MIFIDPRU Remuneration Code and, as a result of the application of any of the requirements listed in (2), to provisions imposing different remuneration requirements, only one of which can be complied with, it must comply with the most stringent of the relevant provisions.

  2. (2)

    The requirements referred to in (1) are:

    1. (a)

      different requirements in the MIFIDPRU Remuneration Code;

    2. (b)

      the AIFM Remuneration Code;

    3. (c)

      the Dual-regulated firms Remuneration Code; and

    4. (d)

      the UCITS Remuneration Code.

SYSC 19G.1.21 G
  1. (1)

    1SYSC 19G.1.20R states that where different remuneration requirements apply to a firm it must comply with the most stringent of the relevant provisions. Some non-exhaustive examples follow.

  2. (2)

    Example 1: A firm may be subject to different requirements under the MIFIDPRU Remuneration Code on an individual basis and on a consolidated basis. This scenario may arise because a firm is an SNI MIFIDPRU investment firm on an individual basis but a non-SNI MIFIDPRU investment firm on a consolidated basis.

  3. (3)

    Example 2: Different remuneration requirements may apply to a firm when an investment firm group contains both a PRA-designatedinvestment firm and an FCAinvestment firm (but not a credit institution). This may lead to a firm being subject to both the MIFIDPRU Remuneration Code and the Dual-regulated firms Remuneration Code.

  4. (4)

    Example 3: A staff member at a collective portfolio management investment firm may be a material risk taker and also AIFM Remuneration Code Staff or UCITS Remuneration Code Staff. In this case the material risk taker will be subject to the MIFIDPRU Remuneration Code and the requirements of the AIFM Remuneration Code or the UCITS Remuneration Code.

SYSC 19G.1.22 G

1The effect of SYSC 19G.1.20R is that a firm must consider which requirement is the most stringent on a provision by provision basis.

SYSC 19G.1.23 G

1 SYSC 19G.1.20R is not relevant where a firm can comply with both sets of remuneration requirements, for example requirements to establish, implement and maintain remuneration policies and practices on both an individual basis and a consolidated basis.

Application: staff

SYSC 19G.1.24 G

1The term ‘staff’ should be interpreted broadly in the MIFIDPRU Remuneration Code to include, for example, employees of the firm itself, partners or members (in the case of partnership structures), employees of other entities in the group, employees of joint service companies, and secondees.

Application: performance periods

SYSC 19G.1.25 G

1The rules in the MIFIDPRU Remuneration Code apply to each performance period, regardless of whether it is annual, quarterly, or another frequency. A firm must comply with the rules on performance assessment and risk adjustment in relation to each such performance period.

Application: proportionality

SYSC 19G.1.26 R

1A firm must comply with the MIFIDPRU Remuneration Code in a manner that is appropriate to its size and internal organisation and to the nature, scope and complexity of its activities.

Application: carried interest

SYSC 19G.1.27 R
  1. (1)

    1The MIFIDPRU Remuneration Code applies to remuneration, including carried interest (which represents a share in the profits of a fund managed by the firm’s staff, as compensation for the management of the fund).

  2. (2)

    Where arrangements concerning carried interest meet the conditions in (3), the following provisions do not apply:

    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.6.30R to SYSC 19G.6.34G (Performance adjustment).

  3. (3)

    The conditions referred to in (2) are that:

    1. (a)

      the value of the carried interest must be determined by the performance of the fund in which the carried interest is held;

    2. (b)

      the period between the award of the carried interest and any payment under it must be at least 4 years; and

    3. (c)

      there are provisions for the forfeiture or cancellation of carried interest that include at least the circumstances set out in SYSC 19G.6.31R(3)(a) and SYSC 19G.6.31R(3)(b).

SYSC 19G.1.28 R

1For the purposes of the MIFIDPRU Remuneration Code, a carried interest must be valued at the time of its award.

Application: general

SYSC 19G.1.29 G

1While the rules in the MIFIDPRU Remuneration Code set out the minimum regulatory requirements that a MIFIDPRU investment firm must comply with, the FCA considers it good practice for a firm to assess whether going beyond those regulatory requirements would contribute to sound risk management or a healthy firm culture.

When?

SYSC 19G.1.30 R

1A firm must apply the MIFIDPRU Remuneration Code from the start of its first performance period that begins on or after 1 January 2022.

SYSC 19G.2 Remuneration policies and practices

General requirements

SYSC 19G.2.1 R

1A MIFIDPRU investment firm must establish, implement and maintain remuneration policies and practices.

SYSC 19G.2.2 G

1The remuneration policies and practices referred to in SYSC 19G.2.1R should cover all aspects of remuneration within the scope of the MIFIDPRU Remuneration Code, and all staff.

SYSC 19G.2.3 G

1In line with the record-keeping requirements in SYSC 9, a firm should ensure that its remuneration policies and practices (including performance assessment processes and decisions) are clear and documented.

Proportionality

SYSC 19G.2.4 R

1A firm’sremuneration policies and practices must be appropriate and proportionate to the nature, scale and complexity of the risks inherent in the business model and the activities of the firm.

SYSC 19G.2.5 G

1The proportionality principle in SYSC 19G.2.4R means that the content and level of detail of a firm’sremuneration policy may depend on a number of factors. These may include the number of staff it employs, the different types of roles, the activities it carries out, and whether the firm is part of a group with a group-wide remuneration policy.

Gender neutral remuneration policies and practices

SYSC 19G.2.6 R

1A firm must ensure that its remuneration policy is a gender neutral remuneration policy and the practices referred to in SYSC 19G.2.1R are gender neutral.

SYSC 19G.2.7 G

1 Firms are reminded that the Equality Act 2010 prohibits discrimination on the basis of an individual's protected characteristics both before and after employment is offered. The Act applies to pay and all other contractual terms, including variable remuneration. A firm must ensure that its remuneration policy complies with the Equality Act 2010.

Risk management, business strategy and avoiding conflicts of interest

SYSC 19G.2.8 R

1A firm must ensure that its remuneration policies and practices are consistent with, and promote sound and effective, risk management.

SYSC 19G.2.9 R

1A firm must ensure that its remuneration policies and practices are in line with the business strategy, objectives and long-term interests of the firm.

SYSC 19G.2.10 G

1For the purposes of SYSC 19G.2.9R, the business strategy, objectives and long-term interests of the firm should include consideration of:

  1. (1)

    the firm’s risk appetite and strategy, including environmental, social and governance risk factors;

  2. (2)

    the firm’s culture and values; and

  3. (3)

    the long-term effects of the investment decisions taken.

SYSC 19G.2.11 R

1A firm must ensure that its remuneration policy:

  1. (1)

    contains measures to avoid conflicts of interest;

  2. (2)

    encourages responsible business conduct; and

  3. (3)

    promotes risk awareness and prudent risk taking.

SYSC 19G.2.12 R

1A MIFIDPRU investment firm must not pay variable remuneration to members of the management body who do not perform any executive function in the firm.

SYSC 19G.3 Governance and oversight

Oversight of remuneration policies and practices

SYSC 19G.3.1 R

1A MIFIDPRU investment firm must ensure that its management body in its supervisory function adopts and periodically reviews the remuneration policy and has overall responsibility for overseeing its implementation.

SYSC 19G.3.2 G
  1. (1)

    1Each firm should assess the most appropriate frequency for the periodic reviews referred to in SYSC 19G.3.1R, taking into account all relevant factors.

  2. (2)

    The development and review of the remuneration policy should be supported by the control functions, including (where they exist) risk management, compliance, internal audit and human resources, and by business units.

  3. (3)

    The processes and decision-making around the development, review and amendment of remuneration policies and practices are subject to the general record-keeping requirements set out in SYSC 9.

SYSC 19G.3.3 R

1A firm’sremuneration committee, where it has one, must oversee the implementation of the firm’sremuneration policies and practices established under SYSC 19G.2.1R.

SYSC 19G.3.4 R

1A non-SNI MIFIDPRU investment firm must, at least annually, conduct a central and independent internal review of whether the implementation of its remuneration policies and practices complies with the remuneration policy and practices adopted by the management body in its supervisory function.

SYSC 19G.3.5 G
  1. (1)

    1The FCA would expect the central and independent internal review to assess whether the implementation of the remuneration policies and practices:

    1. (a)

      results in remuneration awards that are in line with the firm’s business strategy;

    2. (b)

      reflects the risk profile, long-term objectives and other relevant goals of the firm; and

    3. (c)

      complies with all relevant legal requirements.

  2. (2)

    A non-SNI MIFIDPRU investment firm may outsource part or all of the independent review in SYSC 19G.3.4R. The management body in its supervisory function remains responsible for ensuring the review is carried out and any necessary follow up actions are taken.

  3. (3)

    A non-SNI MIFIDPRU investment firm should document appropriately the results of the review and the actions taken to remedy any findings.

Control functions

SYSC 19G.3.6 R

1A MIFIDPRU investment firm must ensure that staff engaged in control functions:

  1. (1)

    are independent from the business units they oversee;

  2. (2)

    have appropriate authority; and

  3. (3)

    are remunerated in accordance with the achievement of the objectives linked to their functions, independent of the performance of the business areas they control.

SYSC 19G.3.7 R

1A MIFIDPRU investment firm must ensure that the remuneration of the senior officers in risk management and compliance functions is directly overseen by the remuneration committee, or, if such a committee has not been established, by the management body in its supervisory function.

SYSC 19G.3.8 G

1 SYSC 19G.3.6R and SYSC 19G.3.7R are designed to manage the conflicts of interest which may arise if other business areas had undue influence over the remuneration of staff in control functions. Conflicts of interest can easily arise when staff members 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 control functions (in particular risk management, compliance and human resources functions).

SYSC 19G.4 Fixed and variable components of remuneration

Categorising fixed and variable remuneration

SYSC 19G.4.1 R

1A MIFIDPRU investment firm must ensure that the remuneration policy makes a clear distinction between criteria for setting fixed and variable remuneration.

SYSC 19G.4.2 G
  1. (1)

    1The effect of SYSC 19G.4.1R is that all remuneration paid to a staff member must be clearly categorised as either fixed or variable remuneration.

  2. (2)

    In allocating individual remuneration components to fixed or variable remuneration, it is the quality and purpose of the component that is decisive, not the label applied to it.

  3. (3)

    The FCA considers that:

    1. (a)

      fixed remuneration:

      1. (i)

        should primarily reflect a staff member’s professional experience and organisational responsibility as set out in the staff member’s job description and terms of employment; and

      2. (ii)

        should be permanent, pre-determined, non-discretionary, non-revocable and not dependent on performance; and

    2. (b)

      variable remuneration:

      1. (i)

        should be based on performance or, in exceptional cases, other conditions;

      2. (ii)

        where based on performance, should reflect the long-term performance of the staff member as well as performance in excess of the staff member’s job description and terms of employment;2

      3. (iii)

        includes discretionary pension benefits; and2

      4. (iv)

        includes carried interest, as referred to in SYSC 19G.1.27R.2

SYSC 19G.4.3 G

1Returns made by staff on co-investment arrangements are shares in the profits as a pro rata return on an investment. The FCA does not usually consider these returns to be remuneration for the purposes of the MIFIDPRU Remuneration Code. However, the FCA considers these returns will be remuneration if the investment was made using a loan provided by the firm or by an undertaking in the same group as the firm, and if the loan was either not provided on commercial terms or had not been repaid in full by the date on which the returns on investment were paid.

SYSC 19G.4.4 G
  1. (1)

    1In relation to remuneration received by a partner or a member in a limited liability partnership, the FCA’s view on how to categorise certain payments received by those individuals is as follows:

    1. (a)

      at the end of each year, the residual profits of a partnership or limited liability partnership are distributed among the partners or members. The level of ownership of each partner or member is reflected in the number of ownership shares they have. Residual profits are distributed according to the ownership shares, so are not linked to work or performance. In the FCA’s view, payments on this basis are not remuneration;

    2. (b)

      a partner or member may receive an amount fixed at the beginning of the year and subject only to the firm making a profit. These are often called fixed profit shares. A partner or member usually takes drawings on it throughout the year, often monthly. If profits at year-end are insufficient, drawings may have to be paid back. The FCA considers that drawings on fixed profit shares are usually fixed remuneration;

    3. (c)

      a partner or member may receive a discretionary share of the profit at the end of the year. These may be distributed to all partners or members but are usually dependent on the performance of the individual or their business unit. Awards may be at the discretion of the remuneration committee. The FCA considers that payments made on this basis are usually variable remuneration.

  2. (2)

    A firm that is a partnership or limited liability partnership may use a benchmarking approach instead of, or in addition to, the approach in (1) to categorise payments made to partners or members of limited liability partnerships. For example, it may take into account:

    1. (a)

      the remuneration structures of other individuals performing similar tasks or working in similar businesses as the partner or member in question; or

    2. (b)

      the return expected in a similar investment context where the partner or member has invested in a fund or firm.

  3. (3)

    Where a partner or member of a limited liability partnership works full-time for a firm the FCA would expect a reasonable portion of the partner’s or member’s profit share to be categorised as remuneration. Where a partner or member works part-time and receives less remuneration than a partner or member who works full-time, the FCA would expect a smaller proportion of the part-time partner or member’s profit share to be classed as remuneration.

Balance of fixed and variable components of total remuneration

SYSC 19G.4.5 R

1A MIFIDPRU investment firm must ensure that:

  1. (1)

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

  2. (2)

    the fixed component represents a sufficiently high proportion of the total remuneration to enable the operation of a fully flexible policy on variable remuneration, including the possibility of paying no variable remuneration component.

SYSC 19G.4.6 R

1For the purposes of SYSC 19G.4.5R, a non-SNI MIFIDPRU investment firm must set an appropriate ratio between the variable component and the fixed component of the total remuneration in their remuneration policies.

SYSC 19G.4.7 G
  1. (1)

    1When determining what is an appropriate balance and an appropriate ratio for the purposes of SYSC 19G.4.5R and SYSC 19G.4.6R respectively, a firm should consider all relevant factors, including:

    1. (a)

      the firm’s business activities and associated prudential and conduct risks; and

    2. (b)

      the role of the individual in the firm and, in the case of material risk takers, the impact that different categories of staff have on the risk profile of the non-SNI MIFIDPRU investment firm or of the assets it manages.

  2. (2)

    It may be appropriate for some staff to receive only fixed remuneration. The FCA does not consider it would be an appropriate balance for any individual to receive only variable remuneration.

SYSC 19G.4.8 G

1A non-SNI MIFIDPRU investment firm may set different ratios for different categories of staff. For example, the FCA considers that it will usually be appropriate to set a lower ratio of variable to fixed remuneration for control functions than for the business units they control.

SYSC 19G.4.9 G

1Ratios may differ from one performance period to the next.

SYSC 19G.4.10 G

1When setting a ratio, a firm should consider all potential scenarios, including that a firm exceeds its financial objectives. The ratio should reflect the highest amount of variable remuneration that can be awarded in the most positive scenario. A firm should be satisfied that it has considered all relevant factors and should be able to explain its decision to the FCA if requested.

SYSC 19G.4.11 R

1When a firm is assessing whether the award of variable remuneration is consistent with the ratio set in accordance with SYSC 19G.4.6R, it may exclude from that calculation any amount of severance pay that:

  1. (1)

    exceeds the maximum amount of severance pay that can be paid under the firm’sremuneration policy (in accordance with SYSC 19G.6.12R(2)); and

  2. (2)

    the firm has become obliged to pay as a result of a legal obligation that has arisen after the date on which the firm adopted the relevant version of its remuneration policy.

SYSC 19G.4.12 G

1As explained in SYSC 19.6.12R(2), where severance pay is payable a firm’sremuneration policy must set out the maximum level of severance pay or the criteria for determining the amount. Firms should therefore take these policies into account when establishing the ratio between variable and fixed remuneration in accordance with SYSC 19G.4.6R. The FCA accepts that in rare circumstances, for reasons that wouldn’t have been clear to a firm when setting its remuneration policy, a firm may become legally obliged to pay a higher amount of severance pay, for example as a result of legal proceedings. In these situations, SYSC 19G.4.11 states that the difference between the maximum severance pay permitted under the firm’sremuneration policy and the higher amount the firm is legally obliged to pay may be excluded from an assessment of whether an award of variable remuneration is consistent with the ratio set in accordance with SYSC 19G.4.6R.

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

Identifying material risk takers

SYSC 19G.5.1 R

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.5.2 R

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

SYSC 19G.5.3 R

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.5.4 G

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.5.5 G

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.5.6 G
  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.5.7 R
  1. (1)

    1If a non-SNI MIFIDPRU investment firm is part of an FCAinvestment 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.5.8 G

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.5.9 R
  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.5.10 G
  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.5.11 R

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.5.12 G
  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.5.13 G

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.

SYSC 19G.6 Variable remuneration

Remuneration and capital

SYSC 19G.6.1 R

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.6.2 R

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.6.3 G

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.6.4 R

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.6.5 R

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.6.6 G
  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.6.7 R
  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.6.8 R

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.6.9 G
  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.6.10 R

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.6.11 G
  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.6.12 R
  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.6.13 R

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.6.14 G

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.6.15 R

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.6.16 R

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.6.17 R

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.6.18 R

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.6.19 R

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.6.20 R

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.6.21 G
  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.6.22 R

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.6.23 G
  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.6.24 R
  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.6.25 R
  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.6.26 G
  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.6.27 R

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.6.28 G

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

SYSC 19G.6.29 R

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.6.30 R

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.6.31 R

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.6.32 R

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.6.33 G
  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.6.34 G
  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.6.35 R
  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.6.36 R

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.6.37 G

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.6.38 R

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.

SYSC 19G.7 Remuneration committee

SYSC 19G.7.1 G
  1. (1)

    1MIFIDPRU 7.3.3R(1) requires a non-SNI MIFIDPRU investment firm to establish a remuneration committee, unless MIFIDPRU 7.3.3R(2) applies.

  2. (2)

    The FCA encourages non-SNI MIFIDPRU investment firms that are not required to establish a remuneration committee under MIFIDPRU 7.3.3R(1) to consider whether establishing and maintaining a remuneration committee would contribute to the better alignment of risk and individual reward across the firm.

SYSC 19G Annex 1 Other instruments for use in variable remuneration

SYSC 19G Annex 1R

Purpose

11.1

G

SYSC 19G.6.19R requires that at least 50% of variable remuneration must be paid in eligible instruments. Under SYSC 19G.6.19R(3), eligible instruments include instruments that meet the requirements set out in this Annex. The instruments within the scope of this Annex include additional tier 1 instruments, tier 2 instruments and other instruments which can be fully converted to common equity tier 1 instruments, or written down, and that adequately reflect the firm’s credit quality.

Requirements for instruments

11.2

R

An instrument under SYSC 19G.6.19R(3) must satisfy the following requirements

(1)

the instrument must be issued by the firm;

(2)

the instrument must not be secured or subject to a guarantee or any other arrangement that enhances the seniority of the claims of its holder in insolvency;

(3)

the terms of the instrument must provide that any distributions on the instrument will be paid on at least an annual basis and will be paid to the holder;

(4)

the instrument must be priced at its value at the time of issuance under the accounting framework applicable to the firm;

(5)

the valuation of the instrument in (4) must be subject to independent review;

(6)

if the instrument is part of an issuance which has the sole purpose of being used for variable remuneration, the price at which the instrument is redeemed, called, repurchased or converted must be subject to an independent valuation in accordance with the accounting framework applicable to the firm;

(7)

if the instrument is not perpetual, at the time at which it is awarded as variable remuneration, the remaining period before the maturity of the instrument must be at least equal to the sum of any deferral and retention periods that would apply to the staff member to whom the instrument is awarded;

(8)

the instrument must not be subject to redemption, call or repurchase during any deferral and retention periods that would apply to the material risk taker to whom the instrument is awarded;

(9)

any right to redeem, call or repurchase the instrument must be exercisable only at the sole discretion of the firm;

(10)

the holder of the instrument must have no rights to accelerate the future scheduled payment of interest or principal, except in the insolvency or liquidation of the firm;

(11)

the terms of the instrument must provide that the claim on the principal amount of the instrument is wholly subordinated to the claim of all non-subordinated creditors;

(12)

one of the requirements in SYSC 19G Annex 1.3R must be satisfied; and

(13)

the instrument must be either:

(a)

a convertible instrument, in which case the requirements in SYSC 19 Annex 1.4R and SYSC 19 Annex 1.5R must be satisfied; or

(b)

a write-down instrument, in which case the requirements in SYSC 19 Annex 1.6R must be satisfied.

11.3

R

(1)

An instrument under SYSC 19G.6.19R(3) must meet either the conditions in (2) or the conditions in (4).

(2)

The first set of conditions is as follows:

(a)

the instrument must be part of an issuance which has the sole purpose of being used as variable remuneration; and

(b)

the terms of the instrument must ensure that any distributions payable on the instrument are paid at a rate which is:

(i)

consistent with market rates for similar issuances issued by other firms with comparable credit quality; and

(ii)

subject to (3), no higher than 8% above the Consumer Price Index 12-month rate as published by the UK Office of National Statistics from time to time.

(3)

If the instrument has been awarded to a member of staff whose professional duties are predominantly performed outside the UK and the instruments are denominated in a currency other than pound sterling, a firm may substitute another similar independently-calculated consumer price index for a relevant third country in place of the rate specified in (2)(b)(ii).

(4)

The second set of conditions is that, at the time at which the instrument was awarded as variable remuneration, at least 60% of that class of instrument in issuance was:

(1)

issued other than for use as variable remuneration; and

(2)

not held by any person who has close links to:

(i)

the firm;

(ii)

the firm’sgroup; or

(iii)

a connected undertaking included within the firm’sinvestment firm group.

Additional requirements for convertible instruments

11.4

R

A firm must satisfy the following requirements in relation to an instrument referred to SYSC 19G.6.19R(3) that is a convertible instrument:

(1)

the instrument must contain a trigger event which, if it occurs, results in the full principal amount of the instrument being converted into common equity tier 1 capital of the firm;

(2)

the trigger event in (1) must occur where the common equity tier 1 capital of the firm falls below a specified level that is no lower than 64% of the firm’sown funds requirement;

(3)

the firm issuing the instrument must ensure the following to the extent necessary to give full effect to the required conversion following the trigger event in (1):

(a)

where applicable, the firm has sufficient authorised share capital;

(b)

the firm has all necessary permissions, authorisations and corporate authorities; and

(c)

there are no other restrictions in the firm’s constitutional documents, contractual arrangements or applicable national law that would prevent the firm from issuing the required common equity tier 1 capital instruments.

11.5

R

The rate of conversion of the principal amount into common equity tier capital of the firm specified in the terms governing an instrument under SYSC 19G.6.19R(3) that is a convertible instrument must be set at a level that ensures that the value of the common equity tier 1 capital received by the holder upon conversion:

(1)

would not be higher than the value of the instrument at the time that it was originally awarded as variable remuneration; and

(2)

if the convertible instrument is part of an issuance which has the sole purpose of being used as variable remuneration, would not be higher than the value of the instrument at the time of conversion.

Additional requirements for write-down instruments

11.6

R

A firm must satisfy the following requirements in relation to an instrument under SYSC 19G.6.19R(3) that is a write-down instrument:

(1)

the instrument must contain a trigger event which, if it occurs, results in the principal amount of the instrument being written down;

(2)

the trigger event in (1) must occur where the common equity tier 1 capital of the firm falls below a specified level that is no lower than 64% of the firm’sown funds requirement;

(3)

the aggregate principal amount of write-down instruments that must be written down following the trigger event in (1) must be at least equal to the lower of the following:

(a)

the amount required to ensure that the common equity tier 1 capital of the firm referenced in the trigger event is restored to a level that is higher than the specified trigger; or

(b)

the full principal amount of the instrument;

(4)

any write-down in the principal amount of the instrument following the trigger event in (1) must:

(a)

apply on a pro rata basis across all write-down instruments that contain the same trigger event;

(b)

generate items that, under the accounting framework applicable to the firm, qualify as common equity tier 1 capital;

(c)

result in a proportional reduction in the holder’s entitlement to receive:

(i)

distributions paid in connection with the instrument;

(ii)

payment if the instrument is called or redeemed; and

(iii)

repayment in the insolvency or liquidation of the firm;

(5)

any write-down in the principal amount of the instrument following the trigger event in (1) may be permanent or temporary, but if it is temporary, any subsequent write-up must comply with the following requirements:

(a)

it cannot increase the principal amount of the instrument beyond its level before the write-down occurred;

(b)

it must be at the absolute discretion of the firm;

(c)

the firm must have a reasonable basis to conclude that the write-up is appropriate, having regard to the following factors, among others:

(i)

the importance of effectively aligning the interests of the recipient with the longer-term interests of the firm, its clients and its creditors;

(ii)

the financial position of the firm and the effect of the write-up on the firm’sown funds; and

(iii)

if the firm or any member of its group has been subject to exceptional government intervention, whether the write-up is consistent with the objective of ensuring the timely exit from that support;

(d)

it must be applied on a pro rata basis between all recipients of instruments falling under SYSC 19G.6.19R(3) that are write-down instruments where those instruments have previously been subject to a write-down.