The FSA has increased its focus on remuneration practices within regulated firms as part of the fallout from the credit crunch. For example, this now forms part of its Arrow Programme. An important element of this is the eagerly awaited FSA Code of Practice on remuneration policies, which was published last Wednesday. Whilst the final version of the Code does not contain any surprises, the FSA has watered down several proposals.
The Code will be of particular interest for larger banks, building societies and broker dealers as it applies specifically to them. However, the Code is also an important issue for all FSA regulated firms, trade bodies and consumer groups as it sets out the FSA’s position on financial services pay practices. Many financial institutions will want to be seen to be exercising good practice even if the Code does not apply to them directly. In addition, in October 2009, the FSA will report on whether to extend the Code to apply directly to all FSA regulated firms.
What impact does the Code have?
The main principles remain broadly the same as the draft consultation published in March 2009. However, the FSA has given firms greater leeway in devising remuneration packages than anticipated. As a result the final version of the Code is much less prescriptive than the March draft. The key aim remains to get firms to establish remuneration policies that are consistent with and promote effective risk management.
The FSA has softened its approach on the implementation of low risk remuneration structures by reducing the applicability from all employees to employees in a “senior influence function” or employees whose activities could have a material impact on the firm’s risk profile. In addition three of the Code’s proposed “rules” have been amalgamated and their status reduced to “guidance”. Whilst there may now be scope for firms to interpret this guidance more widely, it must still be taken into account when deciding how to meet the rule.
Three key highlights of the Code on remuneration structures are:
- firms must not offer guaranteed bonuses for more than one year;•
- at least two thirds of any bonus payment should be deferred and spread over • at least a three year period for senior employees in circumstances where such bonus is significant when compared with the fixed part of such employee’s remuneration; and
- remuneration awards should be based on an appropriate combination of factors • including the future performance of the firm and a division or business unit. The FSA has stated that it intends to police compliance with the Code and enforcement action will be taken where appropriate.
Who is effected by the Code?
The FSA believes the Code will apply to around 26 banks, building societies and broker dealers operating in London rather than the 47 originally anticipated. The Code will not apply to UK branches of firms headquartered elsewhere in Europe as responsibility for controls in those cases is for the appropriate home country authorities. However, the Code will apply to overseas branches of UK firms (both inside and outside Europe) where certain tests are satisfied. Concerns have been raised that the Code could have adverse competitive implications for the UK, if other countries do not implement similar or identical principles.
At present the FSA has not published a list of the firms affected but will contact them in writing shortly. Firms who believe that are caught by the Code, but who do not receive a letter, should contact the FSA.
When does the Code take effect?
The implementation date has been delayed from 6 November 2009 to 1 January 2010. The FSA expects changes to policies and procedures to be fully in place by 1 January 2010 and changes to remuneration structures and contracts being implemented with effect from the same date.
Some additional time is offered for terms in contracts of employment, which were entered into before 18 March 2009, where these are not compliant with the Code. These must be amended by 31 March 2010, with all offending practices ceasing by 31 December 2010.
Prior to the implementation date, affected firms will need to submit remuneration policy statements to the FSA by 31 October 2009. These will have to be signed off by remuneration committees and are intended to enable the FSA to check compliance with the Code.
The extent to which the City bonus culture contributed to the ongoing market turmoil has been the subject of much debate and discussion. The FSA concedes that the Code is not going to change “bonus culture” overnight. Commentators have questioned whether the Code will make any impact on remuneration practices at all.
Hector Sants, Chief Executive of the FSA, appeared to shift responsibility for controlling City pay away from the FSA to the Government. In a recent interview on BBC Radio 4, he stated that “there may well be a debate as to whether bankers should be paid multiples of [the pay of] doctors or others but that debate is for Government”. It has been suggested that the only way to stop the City maintaining the “bonus culture” is for Parliament to adopt legislation dealing with the issue. With reports circulating of certain banks anticipating large bonus pools for 2009 we are certain that this issue will continue to generate debate and further scrutiny.