Find out more on Alternative Investment Fund Managers Remuneration Code (SYSC 19B) and how it applies to a full-scope UK Alternative Investment Fund Manager of both UK and non-UK AIFs (full-scope UK AIFMs).
Proportionality
The AIFM Remuneration Code (the Code) sets out the standards and policies that full-scope UK AIFMs must meet when setting pay and bonus awards for their staff.
More details on how full-scope UK AIFMs can comply with the remuneration requirements derived from the AIFMD are set out in the ESMA Guidelines on sound remuneration policies under the AIFMD[1] which continue to apply to the extent they remain relevant. This is consistent with out general approach to guidelines set out in Brexit: our approach to EU non-legislative materials[2].
We have adopted a proportionate approach to implementing the AIFM Remuneration Code. This approach is set out in General guidance on the AIFM Remuneration Code (SYSC 19B)[3]. The guidance explains that the AIFM remuneration proportionality rule in SYSC 19B requires full-scope UK AIFMs to comply with the Code in a way and to the extent that is appropriate to their:
- size
- internal organisation, and
- the nature, scope and complexity of their activities
Our guidance on the AIFM Remuneration Code includes more information on application to partnership structures, payment in units, shares or other instruments, as well as other guidance on remuneration.
Pay-out process rules
Alternative Investment Fund Managers
If an individual would otherwise be identified as a member of AIFM Code staff but isn't employed by the AIFM, the individual is still subject to the pay-out process rules.
The requirement of SYSC19B.1.3R to identify categories of staff whose professional activities have a material impact on the risk profile of the AIFM or the AIF the AIFM manages applies.
Where an AIFM has delegated portfolio risk management, Section 3 of the guidance also makes clear that delegates are to be subject to remuneration requirements that are equally as effective directly or by contractual arrangement in line with paragraph 18 of the ESMA Guidelines.
Carried interest and co-investment schemes
Carried interest plans are considered remuneration for the purposes of the Remuneration Code, as stated in SYSC 19B.1.4R(3). However, this isn't the case where they arise solely from an individual's return on a co-investment arrangement. This is an investment return rather than a form of remuneration and is not subject to the AIFM Remuneration Code as explained in example 7 of the annex to the guidance.
This sets out our view that a case can be made on proportionality grounds for relevant staff in certain circumstances to disapply the pay-out process rules on carried interest.
This would only be the case where a firm is able to demonstrate that:
- existing arrangements satisfy the objectives of alignment of interest with investors (this should include application of many of the same principles)
- appropriate clawback or make-up arrangements are in place
Capital Requirements Directive IV group firms
From 1 January 2022 the MIFIDPRU Remuneration Code came into force. This replaces the IFPRU Remuneration Code (SYSC 19A) in respect of CRD IV firms and group firms. SYSC 19A will remain relevant for a limited period in respect of performance periods subject to SYSC 19A starting prior to 1 January 2022.
In accordance with SYSC 19A.3.1R, a firm subject to SYSC 19A must apply the requirements for material risk takers (MRTs) at group, parent undertaking and subsidiary undertakings levels.
SYSC19B.1.1R explains that the AIFM Remuneration Code applies to the full-scope UK AIFM. Note that, in certain instances, a firm may be subject to more than one of our Remuneration Codes. For example, where an AIFM employee has a material impact on the risk profile of the group, the remuneration rules implementing CRD IV apply.
Employees who only have a material impact on the risk profile of the AIFM subsidiary would not be subject to SYSC 19A and should apply the requirements of the AIFM Remuneration Code (SYSC 19B).
Capital Requirements Directive V group firms
In accordance with SYSC 19D.3.1R, a firm subject to SYSC 19D must apply the requirements for MRTs at group, parent undertaking and subsidiary undertakings levels.
SYSC19B.1.1R explains that the AIFM Remuneration Code applies to the full-scope UK AIFM. Note that, in certain instances, a firm may be subject to more than one of our Remuneration Codes.
Employees who do not have a material impact on the risk profile of the group or on the risk profile of a firm subject to SYSC 19D within the UK consolidation group would not be subject to SYSC 19D and should apply the requirements of the AIFM Remuneration Code.
FCA investment firm groups
There may be circumstances when entities within a consolidation group are subject to more than 1 set of remuneration requirements. For example, where a group contains FCA investment firms (subject to the MIFIDPRU Remuneration Code) and AIFMs without MiFID permissions (subject to the AIFM Remuneration Code).
In such cases, a firm must comply with the most stringent of the relevant provisions (see SYSC 19G.1.20R). For example, an MRT who has a material impact on the risk profile of another entity in the group (or of the assets it manages) or on the risk profile of the group as a whole (or of the assets it manages), should apply the stricter remuneration code or requirements.
If an employee of an AIFM does not have a material impact on the risk profile of the FCA investment firm group or on the risk profile of a firm within the FCA investment firm group subject to SYSC 19G
Non-cash instruments
There may be circumstances where making awards in non-cash instruments linked to the AIF may be impractical or disproportionate and where non-cash instruments linked to the AIFM may be justified instead.
Where a firm can justify that this is the case, it may use suitable non-cash instruments linked to:
- the AIFM or its parent company, or
- to the performance of a weighted average of the AIFs managed by the AIFM
Where the management of AIFs accounts for less than 50% of the total portfolio managed by the AIFM, the requirement to award at least 50% of any variable remuneration in non-cash instruments does not apply.
This means that firms may determine a lower appropriate minimum level for their firm (SYSC19B.1.17R(1)).
For more details on the justifications and types of non-cash instrument that we would consider to be acceptable, please see Section 5 'Remuneration in the form of units, shares or other instruments' of the guidance document.
This doesn't affect our existing guidance, which may allow for the disapplication of certain requirements for a firm that is not significant (see Section 3 of the guidance), or for particular individuals awarded variable remuneration below the thresholds set out in SYSC19B.1.13AG.
Self-assessment template and tables for Alternative Investment Fund Mangers
Use our RPS template for AIFMs[4] to record your remuneration policies, practices and procedures and assess compliance with the Code.
Our RPS table for AIFMs[5] allows you to keep a record of all AIFM Remuneration Code staff identified for the current performance year.
