Although approximately 2,500 financial services firms are caught
by the Remuneration Code, a number of its key features only apply
to larger and more complex firms.
The FSA's approach to date when categorising firms for this purpose has been to divide relevant firms into four tiers.
Firms in tiers 1 and 2 have the most onerous obligations. Firms in tiers 3 and 4 are not required to adopt many of the Remuneration Code's toughest structural requirements for pay. Categorisation is also relevant to the amount of public disclosure required, as well as the information which must be privately submitted to the FSA and the level of general FSA supervision. However, there is not a great deal of practical difference between falling into tiers 3 and 4.
In this Law-Now, we set out by way of reminder the current position and then the proposed changes.
To determine which tier a firm falls into, UK BIPRU firms are judged on the basis of their activities as well as their capital resources (where relevant) at the most recent accounting date. Third country BIPRU firms are also assessed on their activities but their financial test (where relevant) looks at the relevant total assets related to the branch's UK activities rather than their capital resources.
In more detail, the current position regarding proportionality is as follows:
- BIPRU limited licence or limited activity firms fall within
tier 4. This accounts for the vast majority of firms caught by the
Remuneration Code. Of the remainder:
- UK banks and building societies are in tier 1 if they have
capital resources exceeding £1 billion, as are BIPRU 730k
firms that are full scope BIPRU investment firms if they have
capital resources exceeding £750 million;
- UK banks and building societies are in tier 2 if they have
capital resources of between £50 million and £1
billion, as are BIPRU 730k firms that are full scope BIPRU
investment firms if they have capital resources of between
£100 million and £750 million; and
- Any other UK bank, building society or full scope BIPRU
investment firm falls within tier 3.
- UK banks and building societies are in tier 1 if they have capital resources exceeding £1 billion, as are BIPRU 730k firms that are full scope BIPRU investment firms if they have capital resources exceeding £750 million;
- Third country BIPRU firms which are limited licence or limited
activity firms also fall within tier 4. Again, this accounts for
the vast majority of relevant non-UK firms. Other third country
BIPRU firms are in tier one if they have relevant total assets for
their UK branch exceeding £25 billion, tier 2 if they have
relevant total assets between £2 billion and £25
billion and tier 3 in other cases.
- The position for groups with more one than one firm caught by
the Remuneration Code is more complicated. Here the starting point
is that all firms in the group fall within the most onerous tier
which applies to any member of the group, a so-called levelling up
approach, but concessions can be obtained from the FSA.
The FSA is proposing to simplify the position as follows:
- It proposes that the financial tests for both BIPRU and third
country BIPRU firms be the same, looking at relevant total assets
rather than capital resources and a three year historic average
will also be used instead of the most recent position which is
currently used. In the case of a non-UK firm, this will continue to
look at the UK branch's position.
- "Tiers" are being renamed "levels" and tier
4 is now being abolished as a separate tier with members of tier 4
now effectively becoming level 3 members.
However, the key change is that financial limits will now increase significantly.
In the new regime, UK banks, building
societies and BIPRU 730k firms that are full scope BIPRU investment
firms will be in level 1 if their average relevant total assets
exceed £50 billion and level 2 if their average relevant
total assets are between £50 billion and £15 billion.
Other UK banks, building societies and full scope BIPRU investment
firms will join all limited licence and limited activity firms in
level 3. Non-UK firms will value their relevant total assets by
reference to their UK branch as is currently the case.
Some firms previously within tier 2 will now be in level 3 which they will generally welcome as this distinction is a significant one because it marks the dividing line between compulsory deferral into shares etc. and more intrusive supervision of pay. It is possible, however, that the change in financial limit tests may cause some firms to move to a more onerous category which will be less welcome for them.
The group test remains as before.
The FSA has not provided any detailed press release on why it is making these changes but a cover announcement refers to a more risk-based approach and a desire to simplify the structure of its categorisation system.
The FSA is consulting on these proposals until 6 September 2012. No implementation date is given, but our understanding is that it may be as early as September 2012.
To read the consultation paper, click here.
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 01/08/2012.