FCA Handbook - SYSC 19D.2A Remuneration requirements and expectations specific to the FCA

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SYSC 19D.2A Remuneration requirements and expectations specific to the FCA

(1) This section contains rules which are specific to the FCA.
(2) This section also provides guidance on how the FCA expects firms to comply with the dual-regulated firms Remuneration Code.

Notifications

(1) In addition to the notification requirements in the dual-regulated firms Remuneration Code, SUP 15.3 (General notification requirements) explains the general circumstances in which the FCA expects to be notified by firms of matters relating to their compliance with requirements under the regulatory system.
(2) For remuneration matters, those circumstances include both regulated activities and unregulated activities, as well as the activities of other members of a group, and would include each of the following:
1. (a) significant breaches of the dual-regulated firms Remuneration Code. The FCA considers any breach of a rule to which SYSC 19D Annex 1 applies to be a significant breach which should be notified to the FCA. In such a situation, the notification should include information on the steps which a firm or other person has taken or intends to take to recover payments or property in accordance with SYSC 19D Annex 1.7R;
2. (b) any proposed remuneration policies, procedures or practices which could:
  1. (i) have a significant adverse impact on the firm's reputation;
  2. (ii) affect the firm's ability to continue to provide adequate services to its customers and could result in serious detriment to a customer of the firm; or
  3. (iii) result in serious financial consequences for the UK financial system or for other firms;
3. (c) any proposed changes to remuneration policies, practices or procedures which could have a significant impact on the firm's risk profile or resources; and
4. (d) fraud, errors and other irregularities described in SUP 15.3.17R (Fraud, errors and other irregularities) which may suggest weaknesses in, or be motivated by, the firm's remuneration policies, procedures or practices.
(3) Notifications should be made as soon as the firm becomes aware or has information which reasonably suggests that those circumstances have occurred, may have occurred or may occur in the foreseeable future.

Individual guidance

The FCA's policy on individual guidance is set out in SUP 9. Firms should note, in particular, the policy on what the FCA considers to be a reasonable request for guidance (see SUP 9.2.5G). For example, where a firm is seeking guidance on a proposed remuneration structure, the FCA will expect the firm to provide a detailed analysis of how the structure complies with the dual-regulated firms Remuneration Code.

Gender-neutral policies and practices

A firm must ensure that its remuneration policy is a gender-neutral remuneration policy and that the practices referred to in rule 6.1 of the PRA Remuneration Rules are gender-neutral.

(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 should ensure that its remuneration policy complies with the Equality Act 2010.
(2) Firms should ensure that, when they assess individual performance, the assessment process and any variable remuneration awarded in accordance with rule 15.4 of the PRA Remuneration Rules does not discriminate on the basis of the protected characteristics of an individual.

Record keeping

In rule 3.4 of the PRA Remuneration Rules, reference to ‘the Record-Keeping Part’ should be read as instead referring to ‘the general record-keeping requirements (SYSC 9)’.

Exceptional government intervention

(1) The guidance provision at (2) is relevant to rule 10.1 of the PRA Remuneration Rules.
(2) The FCA considers that it would normally be appropriate for the ban on paying variable remuneration to members of the management body of a firm that benefits from exceptional government intervention to apply only to members of the management body who were in office at the time that the intervention was required.

Profit-based measurement and risk adjustment

(1) The guidance provisions in (2) are relevant to rule 11.1 of the PRA Remuneration Rules.
(2) The FCA considers that:
1. (a) a firm should apply qualitative judgements and common sense in the final decision about the performance-related components of variable remuneration pools. This reflects the importance of risk adjustment in measuring performance, and the importance within that process of applying judgement and common sense;
2. (b) good practice is demonstrated by those firms who provide a quantitative reference or starting point that explicitly includes risk-adjusted metrics, before applying more discretionary factors. Common metrics include those based on economic profit or economic capital. Whichever technique is chosen, the full range of future risks should be covered, including non-financial risks such as reputation, conduct, client outcomes, values and strategy;
3. (c) a firm should be able to provide the FCA with details of all adjustments that the firm has made, whether through application of formulae or the exercise of discretion. This will enable the FCA to consider whether the firm's risk adjustment framework is sufficiently robust. Where discretion has been applied, the firm should be able to provide a clear explanation for, and quantification of, such adjustments; and
4. (d) a firm's risk management function should validate and assess risk-adjustment techniques, and attend meetings of the governing body or remuneration committee for this purpose.

Assessment of performance

(1) The guidance provisions at (2) are relevant to rule 15.4 of the PRA Remuneration Rules.
(2) The FCA considers that:
1. (a) the non-financial criteria referred to in rule 15.4(2) of the PRA Remuneration Rules should include:
  1. (i) the extent to which the employee has adhered to effective risk management practices, and complied with the regulatory system and relevant overseas regulatory requirements; and
  2. (ii) metrics relating to conduct, which should comprise a substantial portion of the non-financial criteria;
2. (b) aligning variable awards to sustainable financial performance requires firms to make appropriate ex-ante adjustments to take account of the potential for future unexpected losses. Performance measures commonly used (such as earnings per share (EPS), total shareholder return (TSR) and return on equity (RoE)) are not suitably adjusted for longer-term risk factors and may incentivise highly leveraged activities;
3. (c) non-financial metrics should override metrics of financial performance where appropriate, as poor performance (such as poor risk management or other behaviours contrary to firm values) can pose significant risks for a firm; and
4. (d) a firm should keep in mind that rule 15.4(2) of the PRA Remuneration Rules applies wherever remuneration is performance-related, including when a firm is assessing and setting future remuneration.

Deferral

(1) The guidance provisions in (2) are relevant to rule 15.17 of the PRA Remuneration Rules.
(2) The FCA:
1. (a) considers that deferred remuneration paid in:
  1. (i) shares or share-linked instruments should be made under a scheme which meets appropriate criteria, including risk adjustment of the performance measure used to determine the initial allocation of shares; and
  2. (ii) cash should also be subject to performance criteria; and
2. (b) would generally expect a firm to have a firm-wide policy (and group-wide policy, where appropriate) on deferral. The proportion deferred should generally rise with the ratio of variable remuneration to fixed remuneration and with the amount of variable remuneration.

Performance adjustment

In rule 15.20A(2) of the PRA Remuneration Rules, references to ‘a relevant material risk taker who performs a PRAsenior management function’ should be read as if they instead referred to ‘a relevant material risk taker who performs an FCA-designated senior management function’.

Breaches of the dual-regulated firms Remuneration Code

(1) SYSC 19D Annex 1 makes provision about voiding and recovery.
(2) The voiding provisions in SYSC 19D Annex 1 apply to the rules listed in rule 16.1 of the PRA Remuneration Rules, save in the circumstances specified in rules 16.2 to 16.8 of the PRA Remuneration Rules.

(1) Section 137H of the Act enables the FCA to make rules that render void any provision of an agreement that contravenes specified prohibitions, and that provide for the recovery of any payment made, or other property transferred, in pursuance of such a provision.
(2) SYSC 19D.2A.12R explains the prohibitions that are subject to these voiding arrangements, and SYSC 19D Annex 1 explains how those voiding arrangements work.