UK: Final Version of the FSA’s Revised Remuneration Code Published

Last Updated: 23 December 2010
Article by Nicholas Stretch, Anthony Fincham and Isabel Pooley

The FSA has published the final version of its revised Remuneration Code affecting pay for many companies in the financial sector. 

As anticipated, it has been brought into line with the Committee of European Banking Supervisors (CEBS) guidelines published last month, including their requirement that where firms and relevant individuals are affected, both upfront and deferred payments include shares and share equivalents, and that retention policies apply to all share and share equivalent payments. 

The FSA has also given clarification in a number of other areas, and provided a paper on "proportionality" showing how particular firms within the wide spectrum of those covered by the extended Remuneration Code are expected to comply with various provisions, addressing such issues as what happens in group situations and where full compliance is not necessary. The FSA has also published the final version of its rules on the public disclosure of firms' remuneration policies.

These new rules all come into effect on 1 January 2011, although there are transitional provisions.

Click here for a link to the FSA's final proposals.

We intend to publish a fuller analysis of the new Code and the disclosure provisions in due course.

To view the article in full, please see below:

Full Article

Application to Firms

A copy of our previous Law Now on the draft version of the Remuneration Code, as set out in the FSA's consultation paper in July, can be found here. The final version of the revised Code is substantially the same as the version published in the summer. This Law-Now just highlights key differences.

The FSA has confirmed that the Remuneration Code will apply to approximately 2,700 firms including all banks and building societies, most hedge fund managers and all UCITS investment firms, as well as others including some firms which engage in corporate finance venture capital or the provision of financial advice, brokers and multilateral trading facilities (CAD investment firms). UK branches of EEA firms will still be excluded (because they will be subject to the EU rules in their home state) but UK branches of non-EEA firms will be caught.

It also remains the case that only the largest firms already subject to the Remuneration Code introduced in 2009 will be required to comply with all aspects of the revised Remuneration Code.

The FSA has provided further guidance on how the proportionality principle will be applied. Firms will be divided into four tiers based primarily on their regulatory capital and type of regulatory licence or permission. Each will be subject to the Remuneration Code to a differing degree as follows:

  • Tier 1 firms – This tier will include the largest banks and building societies and BIPRU firms. Their remuneration policies and practices will be subject to annual review by the FSA. All of the rules in the Remuneration Code will apply, although it may not always be necessary to establish a UK remuneration committee if there is an overseas parent, providing the UK governing body has sufficient oversight of remuneration policies and can act independently.
  • Tier 2 firms – All of the Remuneration Code's rules will apply as for Tier 1 firms except that unlisted firms and building societies may also be able to show that it is inappropriate for them to have to issue 50% of variable remuneration in the form of shares or alternative instruments, although individual guidance should be sought. Firms will be required to submit an annual data return to the FSA, and their remuneration policies and practices will be subject to review as part of any ARROW review.

Together, the Tier 1 and Tier 2 firms cover the 27 firms already subject to the Remuneration Code.

  • Tier 3 firms – This tier includes small banks and building societies and firms which may occasionally take overnight or short term risks with their balance sheet (it is also the default category, capturing all firms not caught by tiers 1, 2 and 4). These firms may also be able to disapply the requirement to establish a remuneration committee (although the FSA considers that it is desirable for larger firms to have a remuneration committee), the requirement to pay at least 50% of variable remuneration in the form of shares or alternative instruments, and also the deferral requirement (although firms should consider using deferral on a firm-wide basis) and the requirement to adjust deferred remuneration to reflect performance. Like Tier 2 firms, these firms will be required to submit an annual data return and their remuneration policies and practices will be subject to ARROW reviews.
  • Tier 4 firms – This tier will include all limited licence and limited activity firms, who will be required to submit an annual data return. In addition to those rules which may be disapplied for Tier 3 firms, these firms may be able to disapply the requirement to set an appropriate ratio between the fixed and variable components of total remuneration. They will also be able to take into account the nature of their own activities in determining how to apply the rules relating to the risk adjustment of performance measurements and the requirement to measure performance over more than one year.

Code Staff

The Remuneration Code will apply to "Code Staff", ie senior managers, risk takers, staff engaged in control functions and staff whose remuneration takes them into the same pay bracket as senior managers and risk takers and whose activities have a material impact on the firm's risk profile.

The FSA has provided that employees who join part way through the year may not be subject to all of the pay rules, for example in relation to deferral, although this will depend on how much of the year they are employed for and the nature of the awards they receive.

Employees whose variable pay is less than 33% of their total remuneration and whose annual total remuneration is £500,000 or less are not subject to the rules on deferral, retention and guaranteed bonuses. All firms will be able to apply this de minimis rule.
The FSA has clarified that secondees who are not risk takers will not be treated as Code Staff. Those who are risk takers will be treated in the same way as part-year staff.

Remuneration Structures

There has been little change to the rules relating to how remuneration should be structured, except where the FSA has needed to bring the Remuneration Code into line with the CEBS' guidelines. In particular:

  • Deferral – at least 40% of variable remuneration for Code Staff should be deferred over a period of at least 3 years, rising to 60% where total remuneration is more than £500,000 or in other appropriate cases. Where a firm is required (on the proportionality principle) to apply deferral, it must be applied on the basis of these minimum levels; lower levels cannot be used – they have been fixed by CEBS and the FSA has no power to vary them.
  • Payment in shares – for relevant Code Staff at least 50% of variable remuneration should be paid in shares or other equivalent non-cash instruments and this split should apply to both upfront and deferred variable remuneration (the FSA had previously proposed that this did not need to apply to the upfront payments, provided that the overall package complied). Further, shares and other instruments will be subject to appropriate retention policies. What these policies are will require further discussion; this has been a neglected area of debate which will now have to be addressed. Concern has also been expressed that this may leave employees with an unfunded tax liability where they receive only 40% of their remuneration upfront and are required to pay income tax and NICs on both the upfront cash and shares received, but can't sell the shares. It had been hoped that the FSA would expressly state that the requirement for shares to be retained would not prevent the sale of shares to pay tax. However, the FSA has side-stepped the issue and said that firms and employees will need to make their own arrangements for dealing with such tax liabilities. We would be happy to discuss our own ideas with you.
  • Guaranteed bonuses – the provisions relating to guaranteed bonuses will apply to all staff, not just Code Staff. The FSA has confirmed that guaranteed bonuses should only be paid to new hires in exceptional circumstances and only for the first year of service and subject to specific requirements regarding deferral and risk adjustment. There have, however, been some concessions where retention bonuses are paid to staff where the firm is going through difficult circumstances.

Transitional provisions

Firms that are already subject to the Remuneration Code are expected to be compliant by 1 January 2011, although they will have until 1 July 2011 to comply with the requirement to pay 50% of variable pay in the form of shares or equivalent instruments.

Firms which are newly subject to the Remuneration Code will be expected to comply with most of the provisions by 1 January 2011 and to identify and remedy shortcomings by 31 January 2011. However, they will have longer to comply with the specific requirements relating to remuneration structures (eg deferral) and should do so as soon as practicable and by 1 July 2011 at the latest. For most, therefore, they will only need to comply with these rules in relation to the 2011/12 remuneration round.

Disclosure rules

The FSA has also published the final version of its rules on the public disclosure of remuneration policies, which also come into effect on 1 January 2011. The rules largely mirror the draft published by the FSA in November (a copy of our earlier Law-Now on the draft disclosure rules can be found here). There has still been no announcement on the fate of the more controversial proposals to publish pay bands etc proposed by the former Government.

The FSA has confirmed that disclosure will need to be made at least annually. Firms will need to publish their first report by 31 December 2011. However, the FSA has not prescribed the form that the disclosure should take. Disclosure can therefore be in the form the firm considers most appropriate (for example, listed companies may incorporate it into their annual report) provided that it is easily accessible to users and provides cross references to other disclosures where appropriate. Firms that will not have time to produce a report in time to include it in their annual report published in the 2011 calendar year may be able to consider publication by putting this on their website, but this is not entirely clear yet.

Action to be taken

Firms that are going to be caught by the Remuneration Code for the first time should put in place review and compliance programmes as soon as possible, if they have not already done so.

Firms that have already begun to take the new rules into account on the basis of the draft version of the Remuneration Code published in July 2010 should take into account the final version of the Remuneration Code to reflect changes which have been made, including, for example, the requirement to have appropriate retention policies.

Those firms which have not previously been subject to the Remuneration Code should ensure that they can comply with those aspects of the rules with which they must be compliant by 31 January 2011 and with the remaining rules by 1 July 2011.

Click here to access the final version of the Remuneration Code.

Click here to access the final version of the disclosure rules.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 21/12/2010.

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