New Remuneration Code

The FCA and PRA have issued a joint Consultation Paper: ‘Strengthening the alignment of risk and reward; new remuneration rules’ (CP14/14 – or CP15/14 from a PRA perspective).

As will be known, SYSC 19 currently concerns the Remunerations Codes for IFPRU firms (SYSC 19A); full-scope UK AIFMs (SYSC 19B); and BIPRU firms (SYSC 19C) – although the recently introduced SYSC 19C.1.1A relieves BIPRU firms that are also full-scope UK AIFMs from having to demonstrate compliance with SYSC 19C (unfortunately the same is not true of those AIFMs that happen to be IFPRU firms – see 3.40 of Handbook Notice 13).

The proposed new remuneration changes have largely been brought about following publication last year by the Parliamentary Commission on Banking Standards and so will affect banks and building societies as well as the (currently nine) dual regulated investment firms (‘designated investment firms’); there will also be some modest knock-on effects for other firms as a result of changes that will be made to the Handbook.

The impact of the proposals will be to remove the banks and building societies and the dual regulated investment firms from SYSC 19A and to provide them with their own dedicated chapter: SYSC 19D. As a consequence SYSC 19A, which will be renamed ‘IFPRU Remuneration Code’, will only apply to IFPRU investment firms and certain overseas firms.

The proposed Rule and Guidance changes for FCA regulated firms can be found in Appendix 5 whilst Proportionality Guidance for those dual regulated firms subject to SYSC 19D as well as the consequential changes to the Proportionality Guidances for firms subject to SYSC 19A and SYSC 19C can be found in Appendix 7. The consultation period ends 31 October with the intention that all the new Rules will come into force for awards made for performance periods starting on or after 1 January 2015.

Whilst the changes are fairly modest for those firms remaining subject to SYSC 19A or SYSC 19C, obviously those firms that will fall under SYSC 19D should review the requirements in the light of their current processes, controls and procedures to ascertain what changes may be required e.g. a variable remuneration deferral period of up to seven years (SYSC 19D.3.59(1)(b), a clawback period of at least seven years, and in certain circumstances, a period of at least ten years (SYSC 19D.3.61(3)&(4)) etc.

This will expand SYSC 19 to four separate chapters and possibly it will be enlarged further when UCITS V and its associated remuneration requirements come into force.

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