GEN App3 GEN App3 Best Practice Relating to Corporate Governance and Remuneration[Amended] DFSA RM95/2012 (Made 14th June 2012). [VER29/06-12]
GEN A3.1 GEN A3.1 Best practice relating to corporate governance[Amended] DFSA RM95/2012 (Made 14th June 2012). [VER29/06-12]
GEN A3.1.1 [Deleted][Deleted][VER8/04-06]
GEN A3.1 Guidance
Roles of the Governing Body and the senior management1. The
Governing Bodyshould adopt a rigorous process for setting and approving and overseeing the implementation of, the Authorised Person'soverall business objectives and risk strategies, taking into account the long term financial safety and soundness of the firm as a whole, and the protection of its customers and stakeholders. These objectives and strategies should be adequately documented and properly communicated to the firm's senior management, Persons Undertaking Key Control Functions(such as the heads of risk management and compliance) and all the other relevant Employees. Senior management should ensure the effective implementation of such strategies in carrying out the day-to-day management of the Authorised Person'sbusiness.2. The Governing Body, with the support of the senior management, should take a lead in setting the "tone at the top", including by setting the fundamental corporate values that should be pursued by the Authorised Person. These should, to the extent possible, be supported by professional standards and codes of ethics that set out acceptable and unacceptable conduct. Such professional standards and codes of ethics should be clearly communicated to those individuals involved in the conduct of business of the firm.3. The Governing Bodyshould review the overall business objectives and strategies at appropriate intervals (at least annually) to ensure that they remain suitable in light of any changes in the internal or external business and operating conditions.4. The Governing Bodyshould also ensure that the senior management is effectively discharging the day-to-day management of the Authorised Person'sbusiness in accordance with the business objectives and strategies that have been set or approved by the Governing Body. For this purpose, the Governing Bodyshould ensure that there are clear and objective performance goals and measures (and an objective assessment against such criteria at reasonable intervals), for the Authorised Personand the members of its Governing Bodyand the senior management to ascertain whether the firm's business objectives and risk strategies are implemented effectively and as intended.
Internal governance of the Governing Body5. The
Governing Bodyshould have appropriate practices and procedures for its own internal governance, and ensure that these are followed, and periodically reviewed to ensure their effectiveness and adequacy. These policies and procedures should cover a formal and transparent process for nomination, selection, and removal of the members of the Governing Body(see paragraph 2.2.14 of the RPP Sourcebook), and a specified term of office as appropriate to the roles and responsibilities of the member, particularly to ensure the objectivity of his decision making and judgement. Appropriate succession planning should also form part of the Governing Body's internal governance practices.6. The Governing Bodyshould meet sufficiently regularly to discharge its duties effectively. There should be a formal schedule of matters specifically reserved for its decision. The working procedures of the Governing Bodyshould be well defined.7. The Governing Bodyshould also ensure that when assessing the performance of the members of the Governing Bodyand its senior managers and Persons Undertaking Key Control Functions, the independence and objectivity of that process is achieved through appropriate mechanisms, such as the assignment of the performance assessment to an independent member of the Governing Bodyor a committee of the Governing Bodycomprising a majority of independent members. See paragraph 2.2.15(b)(iii) of the RPP Sourcebook for the independence criteria for Authorised Firms and paragraphs 2.2.16 and 2.2.18 of the RPP Sourcebook for the independence criteria for Authorised Market Institutions.
Committees of the Governing Body8. To support the effective discharge of its responsibilities, the
Governing Bodyshould establish its committees as appropriate. The committees that a Governing Bodymay commonly establish, depending on the nature, scale and complexity of its business and operations, include the audit, remuneration, ethics/compliance, nominations and risk management committees. Where committees are appointed, they should have clearly defined mandates, authority to carry out their respective functions, and the degree of independence and objectivity as appropriate to the role of the committee. If the functions of any committees are combined, the Governing Bodyshould ensure such a combination does not compromise the integrity or effectiveness of the functions so combined. In all cases, the Governing Body remains ultimately responsible for the matters delegated to any such committees.
Independence and objectivity9. The
Governing Bodyshould establish clear and objective independence criteria which should be met by a sufficient number of members of the Governing Bodyto promote objectivity and independence in decision making by the Governing Body. See paragraph 2.2.15(b)(iii) of the RPP Sourcebook for independence criteria).
Powers of the Governing Body10. To be able to discharge its role and responsibilities properly, the
Governing Bodyshould have adequate and well-defined powers, which are clearly set out either in the legislation or as part of the constituent documents of the Authorised Person(such as the constitution, articles of incorporation and organisational rules). These should, at a minimum, include the power to obtain timely and comprehensive information relating to the management of the firm, including direct access to relevant persons within the organisation for obtaining information such as its senior management and Persons Undertaking Key Control Functions(such as the head of compliance, risk management or internal audit).
Role of user committees11. An
Authorised Market Institutionshould consider all relevant stakeholders' interests, including those of its Membersand other participants, and issuers, in making major decisions, such as those relating to its system's design, overall business strategy and rules and procedures. An Authorised Market Institutionwhich has cross-border operations should ensure that full range of views across jurisdictions in which it operates is appropriately considered in its decision-making process.12. In some instances, an Authorised Market Institutionmay be required under the applicable Rules to undertake public consultation in relation to certain matters, such as any proposed amendments to its Business Rulesunder AMI Rule 22.214.171.124. Effective mechanisms for obtaining stakeholder input to the Authorised Market Institution'sdecision-making process, including where such input is mandatory, include the establishment of, and consultation with, user committees. As opinions among interested parties are likely to differ, an Authorised Market Institutionshould have clear processes for identifying and appropriately managing the diversity of stakeholder views and any conflicts of interest between stakeholders and the Authorised Market Institution.14. Where an Authorised Market Institutionestablishes user committees to obtain stakeholder input to its decision making, to enable such committees to be effective, an Authorised Market Institutionshould structure such committees to:a. have adequate representation of the Authorised Market Institution's Membersand other participants, and stakeholders including issuers. The other stakeholders of an Authorised Market Institutionmay include clients of its Membersor participants, custodians and other service providers;b. have direct access to the members of the Authorised Market Institution's Governing Bodyand members of the senior management as appropriate;c. not be subject to any direct or indirect influence by the senior management of the Authorised Market Institutionin carrying out their functions; andd. have clear terms of reference (mandates) which include matters on which the advice of user committees will be sought. For example, the criteria for selecting Members, setting service levels and pricing structures and for assessing the impact on Membersand other stakeholders of any proposed material changes to the Authorised Market Institution'sexisting arrangements (section 4.3 of AMI) and any amendments to its Business Rules(AMI Rule 5.6.4); ande. have adequate internal governance arrangements (such as the regularity of committee meetings and the quorum and other operational procedures).
Exclusions Exclusions [Deleted][Deleted][VER8/04-06]
GEN A3.1.2 [Deleted][Deleted][VER8/04-06]
GEN A3.1.3 [Deleted][Deleted][VER8/04-06]
GEN A3.1.4 [Deleted][Deleted][VER8/04-06]
GEN A3.1.5 [Deleted][Deleted][VER8/04-06]
GEN A3.1.6 GEN A3.1.6 [Deleted][Deleted][VER8/04-06]
GEN A3.1.6 Guidance [Deleted][Deleted][VER8/04-06]
GEN A3.2 GEN A3.2 Best practice relating to remuneration
GEN A3.2 Guidance
Development and monitoring of the remuneration structure1. To ensure that the remuneration structure and strategies of the
Authorised Personare appropriate to the nature, scale and complexity of the Authorised Person'sbusiness, the Governing Bodyshould take account of the risks to which the firm could be exposed as a result of the conduct or behaviour of its Employees. The Governing Bodyshould play an active role in developing the remuneration strategy and policies of the Authorised Person. A remuneration committee of the Governing Bodycould play an important role in the development of the firm's remuneration structure and strategy.2. For this purpose, particularly where remuneration structure and strategies contain performance based remuneration (see also Guidance no 7 and 8 below), consideration should be given to various elements of the remuneration structure such as:a. the ratio and balance between the fixed and variable components of remuneration and any other benefits;b. the nature of the duties and functions performed by the relevant Employees and their seniority within the firm;c. the assessment criteria against which performance based components of remuneration are to be awarded; andd. the integrity and objectivity of the process of performance assessment against the set criteria.3. Generally, not only the senior management but also the Persons Undertaking Key Control Functionsshould be involved in the remuneration policy-setting and monitoring process to ensure the integrity and objectivity of the process.
Who should be covered by remuneration policy4. An
Authorised Person'sremuneration policy should, at a minimum, cover those specified in Rule 5.3.31(1)(c). Accordingly, the members of the Governing Body, the senior management, the Persons Undertaking Key Control Functionsand any major risk taking Employeesshould be included in the firm's remuneration policy. With the exception of the 'senior management', all the other three categories attract their own definitions. Although the expression "senior management" carries its natural meaning, Rule 5.3.30(3) describes the senior management's role as the "day-to-day management of the firm's business…" Guidance No. 3 under Rule 5.3.3 gives further clarification as to who may perform senior management functions.
Remuneration of Persons Undertaking Key Control Functions5. Any performance based component of remuneration of
Persons Undertaking Key Control Functionsas well as other Employeesundertaking activities under the direction and supervision of those Persons should not be linked to the performance of any business units which are subject to their control or oversight. For example, where risk and compliance functions are embedded in a business unit, a clear distinction should be drawn between the remuneration structure applicable to those Persons Undertaking Key Control Functionsand the Employeesundertaking activities under their direction and supervision on the one hand and the other Employeesin the business unit on the other hand This may be achieved by separating the pools from which remuneration is paid to the two groups of Employees, particularly where such remuneration comprises performance based variable remuneration.
Use of variable remuneration6. Where an
Authorised Personincludes in its remuneration structure performance based variable components (such as bonuses, equity participation rights such as share based awards or other benefits), especially if they form a significant portion of the overall remuneration structure, or remuneration of any particular Employeesor class of Employees, the Governing Body should ensure that there are appropriate checks and balances relating to their award. This is because, while such performance based remuneration is an effective tool in aligning the interests of the Employeeswith the interests of the firm, if used without necessary checks and balances, it could lead to inappropriate risk taking by Employees.7. Therefore, the Governing Bodyshould, when using any performance based variable component in the Authorised Person'sremuneration structure, ensure that:a. the overall remuneration structure contains an appropriate mix of fixed and variable components. For example, if the fixed component of remuneration of an Employeeis very small relative to the variable (eg. bonus) component, it may become difficult for the firm to reduce or eliminate bonuses even in a poor performing financial year;b. there are clear and objective criteria for allocating performance based remuneration (see below in Guidance note (7);c. there are appropriate adjustments for the material 'current' and 'future' risks associated with the performance of the relevant Employee, as the time horizon in which risks could manifest themselves may vary. For example, where practicable, the measurement of performance should be set in a multiyear framework. If this is not practicable, there should be deferral of vesting of the benefits or retention or claw-back arrangements applicable to such components as appropriate;d. there are appropriate prudential limits, consistent with the Authorised Person'scapital management strategy and its ability to maintain a sound capital base taking account of the internal capital targets or regulatory capital requirements;e. in the case of Employeesinvolved in the distribution of financial products whose remuneration is commission based, there are adequate controls and monitoring to mitigate marketing which is solely commission driven; andf. the use of guaranteed bonuses is generally avoided as such payments are not consistent with sound risk management and performance based rewards. However, there may be circumstances where such guaranteed bonuses may be paid to attract new Employees(for example to compensate bonuses forfeited from the previous employer).
Performance assessment8. The performance criteria applicable, particularly relating to the variable components of remuneration, as well as the performance assessment against such criteria, contribute to the effectiveness of the use of performance based remuneration. Therefore, the
Governing Bodyshould ensure that such criteria:a. are clearly defined and objectively measurable;b. include not only financial but also non-financial elements as appropriate (such as compliance with regulation and internal rules, achievement of risk management goals as well as compliance with market conduct standards and fair treatment of customers);c. take account of not only the individual's performance, but also the performance of the business unit concerned and the overall results of the firm and if applicable the Group; andd. do not treat growth or volume as an element in isolation from other performance measurements included in the criteria.
Severance payments9. Where an Authorised Person provides discretionary payouts on termination of employment ("severance payments", also called "golden parachutes"), such payment should generally be subject to appropriate limits or shareholder approval. In any case, such payouts should be aligned with the firm's overall financial condition and performance over an appropriate time horizon and should not be payable in the case of failure or threatened failure of the firm, particularly to an individual whose actions may have contributed to the failure or potential failure of the firm.[Added] DFSA RM95/2012 (Made 14th June 2012). [VER29/06-12]