The Remuneration Code was introduced in August last year to ensure the remuneration policies of the 26 large banks, building societies and broker dealers deemed to have the most systemic impact on economy were consistent with risk management.
Among other provisions, the code called for a significant proportion of bonuses to be deferred and for pay to be aligned to risk adjustment measures.
The changes will bring over 2,500 firms under the scope of the Code. These include all banks and building societies, a large number of asset managers (including most hedge fund managers and all UCITS investment firms), plus some firms, which engage in corporate finance, venture capital, the provision of financial advice, brokers, several multilateral trading facilities and others. The FSA has committed to adopt a proportional approach to implementation, so that institutions shall comply with the principles as appropriate to their size, scope and the complexity of their activities.
The FSA is consulting on the group of employees to which the Code applies. These will include senior management and anyone whose professional activities could have a material impact on a firm’s risk profile.
At least 40% of a bonus must be deferred over a period of at least three years for all ‘code staff’. At least 60% must be deferred when the bonus is more than £500,000.
At least 50% of any variable remuneration components must be made in shares, share-linked instruments or other equivalent non-cash instruments of the firm. These shares will need to be subject to a minimum retention policy.
Firms must not offer guaranteed bonuses of more than one year. Guarantees may only be given in exceptional circumstances to new hires for the first year of service.
Firms must ensure their total variable remuneration does not limit the ability to strengthen their capital base. Total variable remuneration must be significantly reduced in circumstances where the firm produces a subdued or negative financial performance.
Severance payments should reflect performance over time and failure must not be rewarded and the changes state that enhanced discretionary pension benefits should be held for five years in the form of shares or share-like instruments.
Tom Gosling, reward partner at PricewaterhouseCoopers, said: "Aligning the various international remuneration regulations has been no easy feat and it is likely that certain aspects of the remuneration code will be up for further review. It is encouraging that the FSA has committed to adopting a proportional approach to implementation. While the code contains many sound principles, applying the rules in blanket form across the financial services industry would have been like using a sledge hammer to crack a nut.
"However, the extension of the code in some form to many additional firms risks putting those affected organisations at a competitive disadvantage for recruitment and retention. There is a danger of a two-tier system emerging, between large and small banks, the individuals within them, and also between EU and non-EU players."
"Affected firms that were worried about the apparent strength of the deferral requirements in CRD III will be pleased that the FSA interpretation is in line with the Financial Services Board (FSB) implementation standards which were agreed through the G20.
"Ultimately all firms across the financial services industry need to consider how the revised code and new remuneration landscape might affect them, particularly as the scope of the code is likely to be extended further in the future."
