UK: FSA Issues Final Form Guidance On Remuneration Code

Last Updated: 21 November 2011
Article by Robert Collard and David Berman

The FSA has published further guidance on the Remuneration Code (the Code) including:

  • final forms of the templates to be used when compiling the annual Remuneration Policy Statement required under the Code (including a template list of Code Staff);
  • specific guidance on retention periods, guaranteed variable remuneration and buy-out awards;
  • updated general FAQs on the Code; and
  • draft letters to be sent shortly to all firms covered by the Code.

All the guidance is accessible on the FSA website. This note is not intended to summarise all of the guidance but rather to highlight certain points of interest.


The templates are intended to help firms to comply with their obligations under the Code to prepare an annual Remuneration Policy Statement. Use of the template format is not mandatory. However, the FSA has made clear that it expects firms to provide all of the information requested in the templates. In practice, therefore, we anticipate that most firms will opt to complete the templates.

For firms in Tier One, the chairman of the remuneration committee will be required to certify that the firm's policy is compliant with the Code. This is an unusual approach – it is rare in a UK corporate governance or regulatory perspective for an individual officer to be required to certify compliance. The guidance does not include the form of certification required, but this approach potentially raises issues of personal responsibility and liability which remuneration committee chairmen will need to understand.

For firms in Proportionality Tiers Three and Four, the information required is relatively limited. The templates should serve to provide firms with a useful guide to the FSA's thinking on the proportionate application of the Code and its expectations of Tier Three and Four firms.

Payment in shares or equivalent non-cash instruments

The FSA issued guidance in June giving unlisted firms more time to comply with the requirement to provide a proportion of variable remuneration in the form of shares or equivalent noncash instruments. Those firms should now be considering how they propose to satisfy this requirement.

The new guidance sets out what the FSA considers will be equivalent non-cash instruments for these purposes. In their view, for a phantom award referable to unlisted shares or other membership interests to be an acceptable instrument it will be necessary for the firm to obtain a third party valuation of the relevant security (both at the time of grant and on vesting). This could add materially to the costs of compliance with the Code.

The new guidance also sets out the conditions required for awards under long-term incentive plans (LTIPs) to count towards the deferred proportion of variable remuneration for the purposes of the Code (which will enable a firm to increase the proportion of the annual bonus paid in cash):

  • explicit approval for the scheme has been obtained from shareholders (or members, as appropriate);
  • awards made under the LTIP are subject to risk adjustment in line with the general provisions of the Code on risk adjustment, including in particular the ability to reduce unvested awards in the event of employee misbehaviour or a downturn in performance; and
  • the performance conditions of the LTIP are such as to allow the realistic possibility of a zero payout.

Even listed firms do not need shareholder approval for all LTIP schemes so the first of these requirements could be problematic. It is not clear why shareholder approval is relevant to the ability to count an LTIP as a deferred award.

Firms in Tier 3 should note that although they are not subject to the requirements as to deferral and payment in shares they are subject to Principle 8, which requires any performance measures used to calculate variable remuneration to be subject to risk adjustment. The FSA takes the view that LTIPs are generally variable remuneration and that the performance conditions must therefore contain appropriate risk adjustment measures. They also take the view that LTIP awards should vest as to 50 per cent after at least five years with the balance vesting after at least three.

Retention periods

The guidance on retention periods relates to appropriate retention policies for the purposes of Remuneration Principle 12(f) (on remuneration structures – retained shares or other instruments). The guidance makes clear that the FSA would normally consider a retention period of six months to be sufficient, "provided that other risk management techniques within the firm are operating to secure sound and effective risk management." Helpfully, the FSA has clarified that, where all tax owed is deducted at source (for example, through the PAYE system), the rule on retention may be applied on a "net of tax" basis.


Guidance published in July gave advice on the reasonable steps to be taken to ensure compliance with the Code when "buying-out" deferred awards held by a new hire. A firm must take reasonable steps to ensure that the award contains at least a similar proportion of non-cash instruments as the deferred award from the previous employer. To this end they must take reasonable steps to obtain evidence of the award by the previous employer. There is a limit as to what firms may be able to do here, given the inherent potential commercial sensitivities.

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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