UK: Remuneration Reports For Banks, Building Societies And Other Financial Institutions

The Government has recently published draft regulations setting out the form of an annual public report on pay for well-paid employees and directors which large companies in the financial services sector will have to issue from next year.

This follows on from the Walker recommendation that relevant banks and financial institutions issue a public report on the number of employees with pay exceeding £1 million a year (the Government, however, in these regulations proposes a lower threshold of £500,000) and the bands in which those employees fall (where the Government proposes narrower bands in that there would be bands of £500,000 until £5 million with bands of £1 million thereafter). In addition, a fair amount of detail on how pay has been determined and risks addressed will also have to be given and the report will (for listed companies and building societies) be subject to a non-binding shareholder vote.

This article gives more details - including which entities will be caught by the regulations (broadly, only those with 1,000 or more employees and which on an individual or group basis have more than £100 billion in assets) and where group, rather than individual company, reports can be prepared instead, which most groups will want to take advantage of. Many of the terms and concepts are taken from now familiar regulations which have for some years required listed companies to give information on their directors' remuneration and submit the relevant report for shareholder approval.

The Treasury has said that the regulations will apply to annual reports issued in early 2011 and so the first companies likely to be affected are those with year ends at 31 December 2010.

The Government has said that these regulations will be subject to public consultation after the Financial Services Bill becomes law (which is by no means certain to happen before the General Election). Although there are still many variables at play, affected companies would do well to look at the draft regulations and work out how they will comply in due course (and we would be happy to pass on requests for clarification in the drafting) and to dovetail these disclosures with others they are providing to shareholders (in particular, the directors' remuneration report) and regulatory authorities.

To see a copy of the draft regulations please click here .

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Full Article

The Government has recently published draft regulations setting out the form of an annual public report on pay for well-paid employees and directors which large companies in the financial services sector will have to issue from next year.

This follows on from the Walker recommendation that relevant banks and financial institutions issue a public report on the number of employees with pay exceeding £1 million a year (the Government, however, in these regulations proposes a lower threshold of £500,000) and the bands in which those employees fall (where the Government proposes narrower bands in that there would be bands of £500,000 until £5 million with bands of £1 million thereafter). In addition, a fair amount of detail on how pay has been determined and risks addressed will also have to be given and the report will (for listed companies and building societies) be subject to a non-binding shareholder vote.

This article gives more details - including which entities will be caught by the regulations (broadly, only those with 1,000 or more employees and which on an individual or group basis have more than £100 billion in assets) and where group, rather than individual company, reports can be prepared instead, which most groups will want to take advantage of. Many of the terms and concepts are taken from now familiar regulations which have for some years required listed companies to give information on their directors' remuneration and submit the relevant report for shareholder approval.

The Treasury has said that the regulations will apply to annual reports issued in early 2011 and so the first companies likely to be affected are those with year ends at 31 December 2010.

The Government has said that these regulations will be subject to public consultation after the Financial Services Bill becomes law (which is by no means certain to happen before the General Election). Although there are still many variables at play, affected companies would do well to look at the draft regulations and work out how they will comply in due course (and we would be happy to pass on requests for clarification in the drafting) and to dovetail these disclosures with others they are providing to shareholders (in particular, the directors' remuneration report) and regulatory authorities.

To see a copy of the draft regulations please click here .

Who is caught?

One of the frustrations for financial services firms is that the criteria for the bank payroll tax, the FSA's Remuneration Code and the pay disclosure regulations are all different.

Walker limited his recommendations to banks and large financial institutions. However, the relevant clauses of the Financial Services Bill going through Parliament provide for regulations affecting pay to apply to any authorised persons selected by the Treasury. With the increase in public interest in remuneration, concern has been growing as to which firms would actually be covered by the pay regulations, as it was feared that the Treasury might significantly widen the scope of the Walker proposals.

It is therefore welcome that the draft regulations apply only to companies that are authorised to perform certain types of regulated activity and are of a sufficiently large scale.

They catch companies with authority to accept deposits (other than where that permission is ancillary to another regulated activity) or to be an investment firm. While the draft regulations are principally aimed at banks and building societies as deposit takers, the use of "investment firm" captures companies within the scope of MiFID - a wide range of companies which does not (at least at the moment) include pension funds, insurance companies and collective investment schemes. Note that a company is judged by the scope of its authorisation, not by what it actually does.

Secondly, for a company to be caught there must be (taken as an average over the year) more than 1,000 employees in the company and either the company or the group in which the company sits must have gross assets of over £100 billion for the relevant financial year (presumably measured at the end of the year). There are two alternative definitions of group provided, one looking simply at whether the parent or a majority of a parent company's subsidiaries are financial services companies and the other at the parent or a group's principal activities. It is no doubt part of the consultation exercise to determine which one will finally be used.

UK parents also have special rules and in practice it is likely that most reports will be prepared by parents rather than subsidiary companies as a parent report removes the need for separate subsidiary reports. Whether partnerships will be caught and the extent to which foreign companies with UK operations or foreign groups and parent companies will also be caught are still unclear, although UK subsidiaries of foreign companies are definitely caught by the draft regulations.

So, in practice, the result is that only the very large banks, building societies and financial institutions will be caught, as recommended by Walker.

If a company is caught, what are the obligations?

If a company is caught, a remuneration report must be prepared covering matters affecting relevant employees set out in the draft regulations. Relevant employees are employees, directors and consultants earning more than £500,000 in remuneration in a financial year. Remuneration covers amounts earned for that period, whether paid in that period or later. Measuring salary and bonus is straightforward, but it is still very unclear from the regulations how share options and long-term incentives are to be valued and further clarification will have to be provided. If a company or group does not have any relevant employees there appears to be no obligation to produce a report, but this still needs to be clarified.

A parent will also be required to prepare a group report if it is a parent company of a group that contains two or more companies caught by the draft regulations. If a parent company prepares a report covering relevant employees at companies in the group which are caught by the draft regulations, then there is no need for individual companies within that group to prepare a report. The majority of groups are likely to proceed on this basis.

Many companies caught by the draft regulations will have as their parent company a listed company that will already be complying with the requirements of what were originally known as the Directors' Remuneration Report Regulations, and on which the draft regulations are largely based. The Directors' Remuneration Report Regulations require remuneration for directors to be tabulated, explanations given to shareholders and an annual shareholder vote - all in a very similar way to the draft regulations.

Accordingly, much of the information and many of the terms required by the draft regulations will be familiar to those companies, but an important difference is that the Directors' Remuneration Report Regulations require a report to be prepared only by a listed company, covering remuneration for directors of that listed company only. The draft regulations cast a far wider net. Listed companies will, however, want to take advantage of provisions that effectively allow the two reports to be combined, so that they can present a composite group report.

The key aspects of the report required by the draft regulations (which in many ways go further than the Directors' Remuneration Report Regulations) are:

• an overall policy statement of remuneration for relevant employees.
• a description of performance conditions applied to variable remuneration for relevant employees and why they were chosen or not applied, as the case may be.
• how the deferral policy for relevant employees has been chosen.
• how remuneration for relevant employees is adjusted to ensure effective management of risk.
• an explanation of the decision making process and a statement from the remuneration committee as to whether performance conditions are appropriate and its remuneration policy is risk compatible.
• the explanations above are to be provided by the remuneration committee (if there is one) or the directors as a whole (if there is not). However, the report itself comes from the directors.
• the number of relevant employees falling within each relevant band of remuneration (broadly, each £500,000 band above £500,000 until £5 million, when the bands become bands of £1 million) split between total amounts of salary, bonuses (split between cash and shares), share options and long-term incentives, and any pension contributions and entitlements. Note that the starting point of £500,000 is lower than Walker's recommendation of £1 million and the bands are much narrower than he proposed, but there is (still) no requirement to give individual names and details.

The report must be:

• circulated to shareholders and debenture holders (which would include holders of hybrid capital) and any other person entitled to receive notice of a general meeting. Where a quoted company has to produce this report, more attention will need to be paid to the logistics of this than if it is private. It must be prepared at least 21 days before an annual general meeting, which raises an interesting issue in the unlikely event that a private company (which as a rule no longer needs to hold annual general meetings) needs to produce a report at all! The report needs to be signed by a director or the company secretary.
• made publicly available on a website (even if the company is not publicly quoted) until the next report is produced.
• included as an item on the AGM agenda (as is already the case with the directors' remuneration reports) for listed companies or building societies so that shareholders or members can vote on the report. However, as with the Directors' Remuneration Report Regulations, it is made clear that members voting down a report does not of itself have any legal consequences. The resolution must be proposed as an ordinary resolution and a single resolution approving the report and the directors' remuneration report is permitted, which listed companies will probably want to follow.
• filed at Companies House (or with the FSA in the case of building societies).

Although the report is separate from confidential reports on remuneration submitted to the FSA, the public and confidential reports should clearly dovetail.

Criminal sanctions apply for officers whose companies do not comply with the regulations.

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 23/03/2010.