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Financial Services Special Alert - FSA consults on Remuneration Code

 
Introduction
 

Yesterday the FSA  published Consultation Paper 10/19: Revising the Remuneration Code (CP10/19). In CP10/19 the FSA formally consults on changes to its Remuneration Code (the Code) as set out in chapter 19 of the Senior Management Arrangements, Systems and Controls sourcebook (SYSC 19).

 

Why consult?

 

The FSA is consulting on changes to the Code to take on board remuneration rules required by the amendments to the Capital Requirements Directive (CRD3) and the Financial Services Act 2010 (the FS Act). In CP10/19 the FSA also provides an update on the implementation of the Code so far, and on the progress made in achieving international alignment of remuneration principles in the G20 countries and the EU.

 

What are the proposed changes?

 

In chapter 2 of CP10/19 the FSA explains that the changes it is proposing will:

 

  • Incorporate requirements relating to remuneration in the FS Act. The FS Act requires the FSA to ensure that the Code is consistent with the implementation standards on compensation that were produced by the Financial Stability Board (FSB). Whilst the Code is substantially consistent with the FSB implementation standards, the FSA believes that it needs to make some changes to reflect this requirement. The FS Act also allows the FSA to render void provisions of remuneration agreements that breach specified provisions of the Code, and changes are required to give effect to this.
  • Incorporate the remuneration provisions of the CRD3. Whilst the Code is substantially consistent with the CRD3, the FSA believes that it needs to make changes. It will amend the wording of the Code to ensure that it is fully aligned with the Directive, even where there is no change to the substance of the provision.
  • Adjust the Code to reflect experience gained in implementing the Code since its inception on 1 January 2010.
  • Incorporate a recommendation of The Walker Review of corporate governance in UK banks and other financial institutions, published in November 2009. The FSA believes that the Code is currently well aligned with the Walker Review recommendations.  The one area where it proposes to change the Code is in relation to long term incentive plans.

 

The significant changes that the FSA proposes to make to the Code are set out in chapters 3 and 4 of CP10/19. These include:

 

  • Scope of the Code. As required by the CRD3, this will include all banks, building societies and Capital Adequacy Directive (CAD) investment firms. CAD investment firms includes a large number of asset managers (including most hedge fund managers and all UCITS investment firms), plus some firms that engage in corporate finance, venture capital, the provision of financial advice, brokers, several multilateral trading facilities and others.
  • Recasting of certain existing evidential provisions and guidance into rules, to reflect the binding nature of the CRD3 provisions once they come into force.
  • A commitment to adopt a proportional approach in applying the rules, reflecting CRD3, which says that ‘institutions shall comply with […..] principles in a way and to the extent that is appropriate to their size, internal organisation and the nature, the scope and the complexity of their activities’.
  • New rules that require firms to ensure that total variable remuneration does not limit their ability to strengthen their capital base, and that total variable remuneration must generally be significantly reduced in circumstances where the firm produces subdued or negative financial performance.
  • A new rule to act on the voiding provisions of the FS Act. This rule defines instances where breaches of the Code may render a contract void, and require recovery of payments to be made.
  • New rules on remuneration structures, covering the deferral of variable remuneration, ‘ex-post’ performance adjustment, and guaranteed minimum bonuses.
  • Changes in the group of employees to which the Principles of the Code apply.

 

CP10/19 also contains six annexes and one appendix:

 

  • Annex 1 will provide a cost benefit analysis. This will be published in the first week of September 2010.
  • Annex 2 analyses how the FSA’s proposals are compatible with its statutory objectives and the principles of good regulation.
  • Annex 3 reports on the implementation of the Code since it was incorporated into the FSA Handbook on 1 January 2010.
  • Annex 4 reviews the current state of international alignment in remuneration principles since the publication of the Policy Statement in August 2009.
  • Annex 5 provides the proposals on proportionality.
  • Annex 6 lists the consultation questions.
  • Appendix 1 contains the draft text that is proposed to be used to incorporate the revised draft Code into the FSA Handbook.

Next steps

 

The deadline for comments on CP10/19 is 8 October 2010.

 

The FSA states that in November it will publish the Policy Statement to CP10/9. On 1 January 2011, the FSA Handbook rules come into effect for remuneration in respect of 2010 performance.
 
CP10/19 can be found here.

Kind regards

Norton Rose LLP

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