Scope of the AIFM Remuneration Code
The AIFM Remuneration Code in SYSC 19B applies to a full-scope UK AIFM, for its UK and non-UK funds alike. Small authorised and small registered AIFMs fall outside it.
The principles reach remuneration of any type paid by the AIFM, any amount paid directly by the fund itself including carried interest, and any transfer of the fund's units or shares to the benefit of Code staff.
AIFM Remuneration Code staff
The test is disjunctive: material impact on the AIFM's own risk profile is enough. Control functions are named in the rule, and the bracket limb catches on pay level alone.
Proportionality and the de minimis guidance
An AIFM must comply with the remuneration principles in a way and to the extent appropriate to its size, internal organisation and the nature, scope and complexity of its activities (SYSC 19B.1.4(1)). That qualifier is removed from the remuneration committee requirement.
SYSC 19B.1.13A, Guidance
Where an individual's variable remuneration is no more than 33% of total remuneration and that total remuneration is no more than £500,000, the FCA does not generally consider it necessary for a firm to apply four rules to that person: guaranteed variable remuneration, retained units, shares or other instruments, deferral and performance adjustment. The provision states what the FCA generally considers necessary; it does not disapply those four rules, it applies individual by individual, and the calculation placing each person inside it has to be recorded.
Every other Code requirement applies to the whole population at any level of pay.
Structure of variable remuneration
| Provision | Requirement |
|---|---|
| SYSC 19B.1.12R | Performance-related pay combines individual, business-unit or fund, and firm-wide performance, with financial and non-financial criteria in the individual assessment. |
| SYSC 19B.1.13R | Performance is assessed in a multi-year framework appropriate to the funds' life cycle, and payment spread over a period reflecting their redemption policy and investment risks. |
| SYSC 19B.1.15R | Fixed and variable components are appropriately balanced, with the fixed component high enough to allow paying no variable remuneration at all. |
| SYSC 19B.1.17R | At least 50% of any variable remuneration consists of units or shares of the fund concerned, equivalent ownership interests, share-linked instruments or equivalent non-cash instruments, subject to an appropriate retention policy, for deferred and non-deferred portions alike. The requirement is subject to the fund's legal structure and constituting instrument, and the 50% minimum falls away where management of AIFs is less than 50% of the AIFM's total portfolio. |
| SYSC 19B.1.18R | At least 40% of the variable component is deferred over a period appropriate to the fund's life cycle and redemption policy and in any event of at least three to five years, unless the fund's life cycle is shorter. Deferred pay vests no faster than pro rata. At least 60% is deferred for a particularly high amount, which guidance treats as £500,000, without prejudice to lower sums. |
| SYSC 19B.1.21R | The measurement of performance used to calculate variable components includes a comprehensive adjustment mechanism integrating all relevant current and future risks. |
SYSC 19B.1.19R requires variable remuneration, including any deferred portion, to be paid or to vest only if it is sustainable according to the AIFM's financial situation as a whole and justified by the performance of the fund, the business unit and the individual. Malus and clawback appear in guidance rather than in that rule. The guidance says total variable remuneration should generally be considerably contracted where the AIFM or the fund performs poorly, taking into account both current compensation and reductions in payouts of amounts previously earned, including through malus or clawback arrangements.
Control function remuneration
Outside the Code, FUND 3.7.3(1)(c) makes pay one of three conditions that must hold before the risk function counts as functionally and hierarchically separated.
Governance, further Code requirements and annual report disclosure
- The governing body, in its supervisory function, adopts and periodically reviews the general principles of the policy and is responsible for its implementation (SYSC 19B.1.7R), subject at least annually to central and independent internal review.
- An AIFM significant in terms of its size, internal organisation and the nature, scope and complexity of its activities must establish a remuneration committee whose chairman and members are members of the governing body performing no executive function.
- Guaranteed variable remuneration is prohibited unless it is exceptional, occurs only on hiring new staff and is limited to the first year of service. Discretionary pension benefits are held for five years in 19B.1.17R(1) instruments where an employee leaves before retirement, and paid in those instruments with a five-year retention period on retirement. Employees must undertake not to use personal hedging strategies or remuneration- and liability-related insurance to undermine the risk alignment in their pay. Variable remuneration must not be paid through vehicles or methods that facilitate avoidance of the Code.
Each fund's annual report carries two remuneration items under FUND 3.3.5R(5) and (6). Limb (6) draws its population by material impact on the risk profile of that fund; the Code population, by material impact on the AIFM or on the funds it manages.
Alongside this module
Where this subject is covered elsewhere in the course.