UK: Final Version Of The FSA’s Remuneration Code

On 12 August 2009, the FSA published the final version of its proposed Handbook Rule and supporting Code on employee remuneration for large companies in the financial services sector. These will take effect on 1 January 2010 in time for payments of bonuses next year based on this year's financial performance.

The final version of the Code is substantially the same as the draft produced in March in terms of the processes which those companies affected by the Code must follow, but is accompanied by a detectable change of tone. The FSA appears less likely to be prescriptive on the types of remuneration arrangements that companies should put in place. Nonetheless, there still remains an expectation that at least two thirds of sizeable bonuses should be deferred and there is a new insertion that it is expected that guaranteed bonuses for more than one year will not be risk-compliant.

The FSA has said that this Code will apply from the end of this year but now only apply to the top 26 not the top 47 institutions as had previously been proposed. The FSA will report in October this year on its consultation on whether and to what extent the Code should apply to other FSA-regulated businesses.

Those 26 affected by the Code this year will shortly be contacted by the FSA on the report which will be expected in October this year on how they are proposing to implement the Code.

Click to view the revised Code and the accompanying press release.

To view the article in full, please see below:


Full Article

In March this year, the FSA proposed a draft Handbook rule change requiring relevant financial institutions to ensure that their employee remuneration structures adequately reflected the risk inherent in the activities being conducted and did not incentivise excess risk to be taken. A draft Code was produced which went into some detail recommending the procedures and corporate governance affected companies should adopt and particular types of remuneration practices that were encouraged and discouraged. There was then a consultation period on the contents of the Code and which financial institutions should have to comply with it.

We issued a Law-Now at the time on these proposals. Click here to read that Law-Now.

Since then, there have been many developments in this area including:

  • European Commission recommendations on listed company director pay and remuneration in the financial services sector as well as proposals for capital sanctions for companies that breach remuneration rules.
  • Lord Turner and Sir David Walker have written reports on the UK financial services industry. Sir David Walker made a number of proposals affecting remuneration (click here for our Law-Now on the Walker recommendations)
  • Banks have returned to pre-credit crunch areas of profitability in some areas generating sizeable bonus pools, which were not expected earlier this year.
  • Political pressure for bonus capping and calls for sensitivity to pay have increased as the recession has taken further grip in other areas of the economy.
  • Guaranteed bonuses for more than one year (so called multi-year bonuses), which were not referred to in the March draft of the Code, have come to the fore of the debate.

Amendments To The Code

In the revised Code published on 12 August, which takes account of consultation responses and developments since March, the proposed Handbook rule on remuneration has not been changed, but there have been a number of changes to the detail of the Code and its application. Relevant points are set out below.

Who Will The Code Apply To?

Although the FSA never named those companies to whom it proposed the Code would automatically apply, it suggested that about 47 companies would be involved. Now only the 26 largest UK companies will be caught because non-UK firms will be removed from the scope unless they are part of a group that contains UK banks or building societies that have total regulatory capital exceeding £1 billion or BIPRU 730k firms that have total regulatory capital exceeding £750 million.

The FSA will report in October on whether other financial services companies should have some express remuneration-related rules applied to them.

Corporate Governance And Relevant Procedures

There are no significant changes here as to the way that companies will have to achieve and monitor compliance with the Code. The FSA has confirmed that reports to it on how risk etc have been addressed in remuneration will be confidential and reports to shareholders and employees can be separate – although it advocates that relatively full disclosure is publicly made to comfort investors and other stakeholders.

Implementation Date

The implementation date for the Code has been delayed by a couple of months from 6 November 2009 to 1 January 2010. However, as the Code will still be in force for the next bonus year, this will probably not make a great deal of difference to those payments but at least it means that companies will not have to undertake unnecessary formal compliance reviews for just a few months in 2009.

There is also an extension given to deal with Code non-compliant terms in employment contacts which were entered into before the March draft Code was published. Where a firm can amend them itself, they should be amended by 31 March 2010, but in any event offending practices should cease by 31 December 2010.

Employees Caught By The Code

The Code now makes clear that the only employees specifically covered by the Code are those with a "significant influence function" or an employee whose activities have, or could have, a material impact on the firm's risk profile. This makes the Code more proportionate. The Code also now says that bonus deferral issues and subjecting the deferral to a long-term performance requirement only arise where a significant part of total remuneration (whether by proportion or in absolute terms) is performance-related.

Detail Of Remuneration

Here is where the main changes have been made. However, it is more a question of tone than substance.

There is now just to be one principle (not 3) requiring that remuneration for relevant employees individually caught by the Code should be consistent with risk management. The previous proposals on how long-term bonuses should be determined and paid, the proportion between bonus and salary and bonus deferral are now relegated to guidance.

However, in essence the guidance remains the same as the previous principles (including the controversial recommendation as to deferral of at least two thirds of bonuses, although this is now referred to as merely a "reasonable starting point") but at least companies will have greater ability to justify why any particular proposals are consistent with risk management.

Guaranteed bonuses were not covered in the March draft Code. Since then, however, occasional use and intense discussion of guarantees spanning more than one year (so-called "multi-year" bonuses) has meant that the Code could not ignore them. The FSA indicated last month that in its view there was a presumption that guaranteed bonuses for more than one year were inconsistent with good risk management, but in the Code itself (see 19.3.17(7)) the FSA restrict their comments to guidance only and so companies should be able to put up a good defence for them in appropriate cases by demonstrating that "risk" is taken into account in other ways.

There is an element of compromise to all of this, and only time will tell if this formula will allow banks to offer these deals in rare circumstances without having to offer up extra regulatory capital, which is what the FSA is saying will be required if non-compliant deals are offered. However, by the time a guarantee has been reported and discussed with the FSA, it may be too late for any effective action to be taken.

Going Forward

The Code is now in final form and is being put forward for implementation.

The relevant 26 companies will soon be contacted with details of what should be contained in reports which they are being asked to submit in October on their compliance with the proposed Code. However, while this may mark the final regulatory pronouncement on pay for the top 26 companies for some time (other financial services companies need to await an announcement scheduled in October for how they will be affected) there is likely to be continuing wide debate, both in the UK and globally, as to the way forward on pay in the financial services sector and additional informal guidance is likely to emerge.

References:

FSA Renumeration Code
Press release

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

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 12/08/2009.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.