UK: Revised Remuneration Code

Last Updated: 14 February 2011
Article by Marco Bragazzi

The revised remuneration code came into effect on 1 January 2011. Marco and Nick consider how this affects those firms in tiers three and four.

In our last newsletter we commented on Consultation Paper 10/19 (CP10/19), issued in July 2010, about revising the remuneration code. On 17 December 2010 a policy statement was issued following the responses to CP10/19. This article comments on the key themes arising from the revised remuneration code and how it applies to 'smaller firms' as defined by the code. The revised remuneration code will apply to more than 2,500 firms that were not previously under the scope of the original remuneration code.

Policy statement

The revised code came into force from 1 January 2011 and will be applied from that date. For firms applying the code for the first time, transitional provisions apply in respect of Principle 12 and firms must comply with this Principle, where applicable, by 1 July 2011.

Approach to proportionality

Given the range of firms now coming into the scope of the code, i.e. all BIPRU investments firms, the FSA recognises the importance of following a proportionate approach to adopting the code. The policy statement introduces four 'proportionality tiers', based around capital resources and, for non-UK BIPRU firms only, total assets thresholds.

In this article, we focus on the relevant tiers for smaller firms and our typical client base: proportionality tiers three and four.

Proportionality tier three firms include:

  • any bank and building society with capital resources of less than £50m
  • any full scope firm with capital resources of less than £100m
  • third-country BIPRU firms with total assets (for the branch) less than £2bn.

Proportionality tier four firms include:

  • all limited licence and limited activity firms, irrespective of size, including third BIPRU firms within equivalent permissions.

The positive news derived from the policy statement is that tier three and four firms may disapply a number of aspects of the code that have been commented on heavily during the consultation phase following the publication of CP10/19, assuming the firm considers it appropriate to do so in the context of the spirit of the code.

Areas that relevant firms may disapply include the principles around the deferral of variable pay, inclusion of retained and other instruments within variable remuneration and the performance adjustments around remuneration that can be found in Principle 12 of the code.

Although disapplied, the FSA has included a caveat that where code staff fall above the de-minimis limits for being applicable to the code, i.e. earning remuneration in excess of £500,000 and including at least 33% of the total as variable remuneration, then even tier four firms should consider whether from a risk perspective they should be applying Principle 12 in full.

Pillar 3 disclosures

By proportionality tier, there are now new disclosure requirements under Pillar 3 for the remuneration policy of BIPRU firms. The rule reference governing these new disclosures can be found in BIPRU 11.5.18 and the extent of disclosure required is again dependent upon what tier the firm is categorised as. The main requirements which are applicable for all tier firms include the following.

  • Information concerning the decisionmaking process used for determining the remuneration policy.
  • Information on the link between pay and performance.
  • Aggregate quantitative information on remuneration, broken down by business area.
  • Aggregate quantitative information on remuneration, broken down by senior management and members of staff whose actions have a material impact on the risk profile of the firm. For most firms this will equate to considering disclosure of directors' emoluments within the Pillar 3 disclosure.

The last two requirements would need to be considered in the context of materiality and confidentiality, which are two approaches to justify not making a disclosure under the Pillar 3 regime.

In addition, firms need to document their remuneration policy and maintain a list of people that fall within the definition of code staff. This can include those who are not employees of the firm but undertake a role which affects the risk of the firm, for example secondees.

Tier three and four firms do not have to have a remuneration committee, although the FSA considers it desirable, particular for large firms, to have one.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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