By Max Clarke
The FSA’s existing Code requires firms to apply ‘remuneration policies, practices and procedures that are consistent with and promote effective risk management’. It applies to the largest banks, building societies and broker dealers.
The revised Code will not only apply to these firms but will encompass a much larger group of firms including all banks and building societies and CAD investment firms — some 2700 in total.
CRD3 aims to align remuneration principles across the EU. The FSA has worked closely with EU colleagues to prepare for the implementation of CRD3, and will keep in close contact with them — both via the Committee of European Banking Supervisors (CEBS) and bilaterally — to ensure continuing close alignment of supervisory practices in future.
The main changes to the previous proposals which the FSA consulted on are as follows:
* Proportion in Shares — CEBS guidelines state that at least 50% of variable remuneration should consist of shares (or other specified instruments) and that this should be applied equally to both the deferred and undeferred portions.
* Retention period — CEBS guidelines state that variable remuneration paid in shares (or other specified instruments) should be subject to an appropriate retention period.
* Guaranteed bonuses — Provisions on guaranteed bonuses should be applied on a firm-wide basis and not just to ‘Code staff’, in line with both CEBS guidelines and the FSB standards.
A proportionate approach will be applied to implementation of the Code in line with the purpose of the existing code to ensure remuneration policies promote effective risk management. Accordingly there will be four tiers of firms with differing minimum expectations of compliance for each group:
* Tiers one and two - contain credit institutions and broker dealers that engage in significant proprietary trading/investment banking activities — this will include the firms currently within scope.
* Tier three — consists primarily of small banks and building societies and firms that may occasionally take overnight/short-term risk with their balance sheets.
* Tier four — firms generate income from agency business without putting their balance sheets at risk.
Proportionality will also be applied across the range of firms in each tier in order to avoid sharp differences between applying the Code to firms at the lower end of one tier and the higher end of the next.
Further, firms in tiers three and four will not be expected to apply rules where the CEBS guidelines suggest they can be disapplied. The most significant of these are: the requirement to have a UK-based remuneration committee, deferral, and the proportion of variable remuneration paid in shares. For other rules, the FSA will apply a discretionary approach that is likely to result in less-onerous requirements.
Firms already within the scope of the FSA’s Remuneration Code are required to comply in full with the revised Code from 1 January 2011. For other firms that are coming within scope for the first time there will be transitional rules in place. These firms must comply as soon as reasonably possible, and by 31 July 2011 at the latest.
Concurrently, the FSA has also published new rules implementing CRD3’s requirements on disclosure of remuneration. Under these rules, firms will be required to disclose information on their remuneration policies and pay-outs. The FSA consulted on this in a separate consultation paper published on 10 November 2010. The majority of respondents agreed with the FSA’s approach and as such:
* Firms will need to disclose details of their remuneration policies at least on an annual basis.
* The FSA will require firms to make their first disclosure in respect of 2010 remuneration as soon as practicable, and no later than 31 December 2011.
* Proportionality will be applied on the basis of the FSA’s four tiers as previously consulted on. Firms in the top tier will need to make full disclosure, while firms in lower tiers will be subject to less onerous requirements.