The FSA's remuneration code came into effect on 1 January. How will this affect your firm?
During August 2009, the FSA issued Policy Statement PS09/15, Reforming remuneration in financial services, which sets out its remuneration code (the Code) for large banks, building societies and broker dealers.
Application
The Code came into force on 1 January 2010 and impacts remuneration awards granted in respect of the 2009 performance year. It applies to firms that meet at least one of the following conditions.
- The firm is a UK bank or building society that had capital resources exceeding £1bn on its last accounting reference date.
- The firm is a BIPRU €730k firm that had capital resources exceeding £750m on its last accounting reference date.
- The firm is a full credit institution, a BIPRU €730k firm or a third country BIPRU €730k firm, is part of a group and on the firm's last accounting reference date total capital resources held within the group by UK banks or building societies exceeded £1bn, or by BIPRU €730k firms exceeded £750m.
The Code has been incorporated as a new chapter in the Senior Management Arrangements, Systems and Controls (SYSC) Handbook, with the general requirement that "A firm must establish, implement and maintain remuneration policies, procedures and practices that are consistent with and promote effective risk management." There are eight principles in the form of evidential provisions covering governance, performance measurement including non-financial metrics and risk adjustment, and remuneration structures. Satisfying these tends to show compliance with the general requirement.
The Code covers all aspects of remuneration that could have an impact on effective risk management including wages, bonuses, long-term incentive plans, options, hiring bonuses, severance packages and pension arrangements.
It is concerned with the risks created by the way remuneration arrangements are structured, not with the absolute amount of remuneration, which the FSA sees as a matter for firms' remuneration committees. However, the FSA may ask such committees to provide evidence of how well the firm's remuneration policies meet the Code's principles, in addition to expecting relevant firms to use the principles in assessing their exposure to risks arising from their remuneration policies as part of their internal capital adequacy assessment process.
Smaller Firms
In chapter six of CP09/10, the FSA invited feedback on whether the code should be extended to other FSA authorised firms. During December 2009, a feedback statement on the matter was published.
At this stage, the FSA has stated that it does not intend on introducing any new rules, nor does it plan on extending the existing rules to any new sectors as there are a number of EU directives on remuneration that are yet to be finalised, in addition to the recently published recommendations in the Walker Review. Instead, it has committed to reviewing the effectiveness of the Code in mid-2010 and will take the opportunity to consider these points, before reaching a final decision on whether to extend the Code to other authorised firms.
Going Forward
In the meantime, the FSA has announced that it expects all firms to continue to focus on remuneration risk management, and that it will continue to address the issue as part of its normal supervisory activity.
If your firm is outside of the scope of the Code, best practice dictates that you consider the Code and apply it proportionately by ensuring that you have a remuneration policy which is proportionate, not too costly to implement and does not put the organisation at a competitive disadvantage.
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.
