The FSA have recently published two consultations in relation to its Remuneration Code. The first relates to a proposal to replace the current four tier proportionality system with three proportionality levels based on total assets and the second introduces proposed new remuneration data reporting requirements.
- The FSA consultation on proportionality changes
On 26 July 2012 the FSA published a guidance consultation on proportionality under its Remuneration Code which could see the end of the four tier system. The current system, under which Code firms are placed into one of four proportionality tiers, based on capital resources, may be replaced with three new ‘levels’, based on total assets. The approach is intended to further clarify how Code firms comply with the Remuneration Code in a manner that takes account of their size, internal organisation and the nature scope and complexity of their activities and will allow the FSA to focus on those firms which pose the greatest risk to financial stability.
The consultation closes on 6 September 2012.
The table below sets out the relevant proportionality levels.
Click here to view table.
The term "relevant total assets" means the average of the firm's total assets on the firm's last three relevant dates. The FSA will need to specifically confirm in its finalised guidance that firms will be able to make an assessment of total assets based on their audited results. For BIPRU firms, the "relevant date" will be the accounting reference date, whereas for third country BIPRU firms, the "relevant date" will be 31 December 2012.
Capital resources and relevant total assets
With the exception of limited licence firms and limited activity firms (which have always fallen within proportionality tier 4), a BIPRU firm's capital resources as at its last accounting reference date is currently the quantitative measurement used to assess which proportionality tier a firm should fall into. Capital resources are calculated based on the relevant capital resource tables set out in the FSA's GENPRU Sourcebook.
It will need to be determined on a case by case basis whether the proposed switch of quantitative measurement, from capital resources to relevant total assets, will have a significant effect on the proportionality level of BIPRU firms. However, the switch to a three year average, as opposed to relying solely on the last accounting reference date, should result in a calculation which is a better reflection of the firm's overall size and business operations than was previously the case.
Third country BIPRU firms
For a third country BIPRU firm (in summary, a firm which would have been a BIPRU firm had its head office not been outside the EEA), its relevant total assets (that is the total assets of the firm that cover the activities of its UK branch) on the last relevant date is currently the quantitative measurement used to determine its proportionality tier. There are two changes proposed under the guidance consultation:
- the relevant total asset amount will be determined by calculating an average over the last three calendar years; and
- the relevant total asset monetary thresholds (as set out in the proportionality level table above) will increase from those currently used for determining the proportionality tiers. The increase in the monetary thresholds should result in fewer firms falling within the top two proportionality levels than is the case under the current proportionality tier system.
Solo firms, group firms and individual guidance
- Solo remuneration firms- For those firms which do not form part of a group which contains on or more other in-scope firm, its proportionality level will depend on its individual characteristics.
- Group remuneration firms – For those firms which are a part of a group in which two or more firms are in-scope, each firm should adopt the highest proportionality level among the group firms (subject to individual guidance).
The FSA acknowledges that the proportionality levels do not provide comprehensive guidance on how proportionality rules apply to particular firms, and firms need to consider the application of the rules to their individual circumstances.
Disapplication of certain remuneration principles
For those firms in Level Three, it will normally be appropriate to disapply the following rules:
- Awards in equity-instruments
- Performance adjustment (malus)
- Establishment of Remuneration Committee (In the proposed guidance, the FSA indicates that it is desirable for a remuneration committee to be established and expect larger Level Three firms to do so. However, the FSA accepts that it may be appropriate for the firm's governing body to act as the remuneration committee in certain circumstances). The FSA has previously issued similar guidance in respect of tier 3 and tier 4 firms.
- Ratio between fixed and variable remuneration - helpfully, the FSA continue to propose that limited licence firms and limited activity firms are able to dis-apply the requirement to set a ratio between fixed and variable components of total remuneration if appropriate.
Pillar 3 Disclosures
The proposed guidance contains a table setting out the FSA's expectations in respect of disclosures under Pillar 3 by BIPRU firms.
All BIPRU firms will be required to produce information concerning the decision making processes used for determining their remuneration policy and structures, as well as aggregate quantitative information on remuneration, broken down by senior management and risk takers. For those firms in Level One, they will also be required to provide details of new sign-on and severance payments made during the financial year, and the number of beneficiaries of such payments, as well as details of the highest severance award made to a single person that financial year.
The proposed reallocation of Code firms from one of four proportionality tiers, based on capital resources, to three new proportionality ‘levels’, based on total assets, is unlikely to have a significant impact on tier 3 and tier 4 firms who are likely to fall within new Proportionality Level Three and will therefore continue to be able to dis-apply many of the Remuneration Code provisions. For certain firms currently within tier 1 or 2, the proposals may result in them being assigned to a lower tier.
- The FSA consultation on new remuneration data reporting requirements
On 1 August 2012 the FSA published a consultation on remuneration data reporting requirements for firms subject to the FSA Remuneration Code. The consultation relates to the introduction of two new reports which certain in-scope firms will be required to produce on an annual basis:
- a Remuneration Benchmarking Information Report; and
- a High Earners Report
The consultation closes on 30 September 2012, but, as set out below in more detail, the new requirements could be in place as early as 31 December 2012.
Under the amended Capital Requirements Directive (CRDIII) member states are required to collect data on remuneration practices and remit it to the European Banking Authority (EBA).
In the UK, these requirements were implemented by the Capital Requirements (Amendment) Regulations 2012. Specifically, the FSA will be required to collect data in order to benchmark remuneration trends and practices and to determine the number of individuals per Code firm that earn €1m or more. The EBA will disclose this information on a member state basis.
In July, the EBA published two sets of guidelines on the data collection exercise regarding high earners and remuneration benchmarking which detail what the EBA expects Code firms to disclose annually. The FSA is introducing the EBA guidelines as new rules in SUP 16 of the FSA Handbook to ensure transparent and consistent application of the data reporting requirements. SUP 16 will require certain firms to submit a Remuneration Benchmarking Information Report and/or a High Earners Report (see below).
The consultation considers the FSA's proposed approach to the collection and reporting of data on remuneration practice pursuant to the new regulations. The FSA have included draft templates for data collection in the consultation in the same way as they did for disclosure pursuant to the remuneration policy statements (RPS) for Code firms in each of the different tiers.
The new disclosure reports
Remuneration Benchmarking Information Report
The Remuneration Benchmarking Information Report will require significant banks, building societies and investment firms, that have total assets of £50bn or greater, to disclose to the FSA information on the structure of the remuneration practices within their group. Some of the disclosed information will relate to all staff and some will be specific to Code Staff.
It is proposed that the report will require firms to publish 25 pieces of data on an aggregated anonymised basis, split between four business areas. The report will require in-scope firms to disclose such information as the total number of staff working for the business areas, the total net profit of that business and the total remuneration paid to those members of staff, together with details of how much of that remuneration is variable. The report will require firms to provide for more detailed information about the remuneration paid to Code Staff, such as the total amount that is paid in shares and share-linked instruments, the total deferred variable amounts paid in cash and shares, and the number of employees that have received guaranteed variable remuneration and the aggregate amount.
High Earners' Report
The High Earners Report will require banks, building societies and investment firms, excluding solo limited licence firms and limited activity firms (i.e. those currently within proportionality tier 4), to disclose to the FSA aggregated anonymised data on all employees in the group (excluding subsidiaries and branches outside of the UK) with total annual remuneration of €1m or more. Once the FSA has received the information, a submission will be made to the EBA each year by the end of August.
The above disclosure are in addition to that which is required to be published pursuant to the Pillar 3 Remuneration Disclosure Requirements.
In the case of groups, the FSA have confirmed that the new regulations will apply where it is the competent authority responsible for the supervision at the highest EEA consolidated level in the group. In which case, firms will be required to complete the reports on a consolidated basis to the highest EEA level of consolidation. Firms that are lead regulated by a competent authority in another EEA state will not be subject to the new regulations and will instead be subject to the regulations of the applicable member state.
From what date do the regulations apply?
The FSA has stated that it will publish a policy statement containing its final rules for the reporting requirements at the end of October 2012 which will come into force on 1 November 2012.
Firms that are required to complete the Remuneration Benchmarking Information Report and/or the High Earners Report will be required to submit data to the FSA for the first time by 31 December 2012.
The FSA has confirmed that the first submission will provide data on remuneration provided to employees in each of the last two complete financial years that ended before the rules come into effect (i.e. on 1 November 2012). Thereafter, firms will be required to submit data to the FSA annually, within two months following the firm's accounting reference date.
Following the publication of the FSA's policy statement in October 2012 containing the final rules of the reporting requirements, those firms caught by the new regulations will only have a maximum of 8 weeks to prepare and disclose the required data in order to comply with the 31 December 2012 deadline.
The FSA have acknowledged that compliance with the benchmarking exercise is likely to impose incremental costs on firms. Although firms are required to publish similar data under the Pillar 3 Remuneration Disclosure Requirements there are differences in the benchmarking exercise that may be significant enough to require additional resources. The High Earners Report, is also likely to impose significant costs on firms.