Legislation passed in 2010 gives the FSA power to provide that particularly serious breaches of the Remuneration Code (the “Code”) lead to the relevant remuneration term automatically being void.
Since 1 January 2011, these powers have only been applied on a transitional basis to three breaches of relevant Code provisions. Also, they only apply to breaches by the 26 or so firms who were subject to the original Code prior to its mass extension on 1 January 2011 and then only insofar as they affect their higher paid Code Staff. Code Staff whose variable remuneration is no more than 33% of their total remuneration and whose total remuneration does not exceed £500,000 are not subject to the voiding rules.
The relevant Code provisions to which the voiding rules apply are:
- guaranteed variable remuneration;
- the requirement for at least 40% (or 60% in the case of higher earners) of variable remuneration to be deferred; and
- replacing the recovery of payments made or property transferred as a result of the application of the voiding rules.
In addition to being unenforceable (relevant, for example, to stop the employee suing for it if the FSA finds out about the remuneration), a firm is also required to take reasonable steps to recover any payments made under void remuneration provisions. “Voiding” therefore represents the ultimate sanction.
Technically, the limitation of these voiding rules just to 26 or so firms expires on 1 January 2012 and so, without further amendments to the Code, the voiding provisions would apply to all firms subject to the Code from that date.
As part of its most recent quarterly consultation, the FSA is therefore consulting on what the new proposed voiding provisions should be.
Its proposal is that the voiding provisions will still continue only to apply to the three categories of remuneration mentioned above (which the FSA clearly regards as the most serious structural breaches of the Code) and still only to remuneration provided to higher paid Code Staff, but the scope of firm to which voiding rules apply is being slightly changed.
The FSA is, from 1 January 2012, proposing to apply the voiding rules to the largest UK banks, building societies and other firms in its tier one categorisation for Code purposes but also to those firms and branches (including third country branches) who fall into proportionality tiers one to three on their own basis but which form part of the same group as a tier one entity. Further details are contained in paragraphs 9.13-9.15 of the consultation document.
The FSA is also consulting on whether pre-existing provisions in agreements should become void as soon as the firm and/or member of staff become subject to the voiding provisions in the Code or whether such provisions should be excluded or “grandfathered” unless subsequently amended.
The consultation on these changes closes on 6 October 2011.
The consultation on the changes to the Remuneration Code are contained in Chapter 9 and Appendix 9 of the FSA’s Quarterly Consultation (No. 30) which is available here.