A round-up of key developments in this area during June 2015.

In summary:


  • No annual return required for share plans in certain limited circumstances.
  • The deadline for registering all share plans online and for submitting online share plan and employment-related securities annual returns for the tax year 2014/15 is 6 July 2015.


The Financial Reporting Council (FRC) has issued a discussion paper on improving reporting by smaller listed and AIM quoted companies.


  • Various representative bodies have published their responses to the European Banking Authority's (EBA) draft guidelines on sound remuneration policies under CRD IV.
  • The Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) have issued a joint policy statement on new rules to strengthen the alignment of long-term risk and reward.

In full:


No annual return required for share plans in certain limited circumstances

Companies are required to supply HM Revenue and Customs (HMRC) with an online return for each registered employment-related securities scheme or arrangement by 6 July following the end of the tax year, including details of any reportable events in the tax year.

HMRC has stated that it has come across instances of companies which are unable to make returns of reportable events in particular circumstances. Where this is the case, for 2014/15, returns of reportable events will not be required if all of the following apply:

  • neither the company, nor any other company in the same group or under the same ownership, is registered for PAYE;
  • the arrangements are not tax-advantaged schemes (that is, not Share Incentive Plan, Save As You Earn, Company Share Option Plan or Enterprise Management Incentive schemes);
  • the company has no obligations to operate PAYE in respect of the reportable event; and
  • the company has no obligation to operate PAYE in respect of anything else it does.


FRC discussion paper on reporting by smaller listed and AIM companies

During 2014, the FRC undertook a project looking at whether the quality of reporting matters to investors in smaller quoted companies and, if it does, how the FRC could support companies to improve the quality of their reporting.

The first phase of the project involved gathering and assessing evidence of the issues and challenges in order to gain a better understanding of the barriers to higher quality reporting and exploring ways in which the FRC can support such companies to help them improve their reporting and increase their attractiveness to investors.  The discussion paper sets out the findings from this first phase.

In respect of remuneration issues, finance directors who responded to the FRC's survey frequently cited share-based payment rules for accounting purposes and the regulations governing preparation of the directors' remuneration report as requirements that "gave them most difficulty, took up a substantial part of their time and which they did not consider to be particularly relevant or useful".  However, this was in contrast to investors who reported that they do pay attention to companies' disclosures regarding management incentives and to remuneration disclosures generally (although commenting that the remuneration reporting requirements did include information that was not relevant for investors). 
The FRC has noted a number of ways in which it could help smaller quoted companies to improve the quality of their financial reporting and the discussion paper sets out ways in which the FRC may be able to help facilitate this.

A copy of the discussion paper can be found here.


Responses to the EBA's draft guidelines on sound remuneration policies under CRDIV

You will recall that the draft guidelines issued by the EBA in March 2015 (Draft Guidelines) set out the governance process for implementing sound remuneration policies across the EU, as well as the specific criteria for mapping all remuneration components into either fixed or variable pay. Guidance was also provided on the application of deferral arrangements and the pay-out instruments ensuring that variable remuneration is aligned with an institution's long-term risks and that any ex-post risk adjustments can be applied as appropriate. Comments on the Draft Guidelines were to be submitted by 4 June 2015.

A number of bodies have now published their responses to the Draft Guidelines.  Not surprisingly, they all highlight the issue of proportionality as a key concern in light of the EBA's contention that the remuneration requirements of CRD IV have to be applied without exemptions and exceptions to all financial institutions and that, in particular, the provisions referring to the deferral arrangements, the pay-out in instruments and the application of malus leave no room for exceptions or exemptions. 

A summary of the published responses is set out below:

British Bankers' Association (BBA)

The BBA, whilst broadly supportive of the Draft Guidelines, considers that the existing proportionality principles set out in the current guidelines should be preserved and expresses concerns over the overly prescriptive nature of the regulations. 
Of particular concern to the BBA are the proposed guidelines in respect of the valuation of awards under long-term incentive plans (LTIPs) for the purposes of the variable pay cap.  The BBA is concerned that the proposal to value LTIP awards which are subject to performance conditions at the point of vesting would make using LTIPs unattractive and is likely to make their use less common in remuneration packages in the future: thus, in the BBA's opinion, removing a very useful risk adjustment mechanism.  The BBA suggests that valuing LTIP awards at face value at grant assuming maximum vesting would be a more preferable approach to valuation.

A copy of the BBA's response can be found here.

Alternative Investment Management Association (AIMA)

AIMA's main concerns with the Draft Guidelines are focused around proportionality, the scope of the Draft Guidelines and the potential for unintended tax and regulatory impacts.

AIMA strongly disagrees with the interpretation of the proportionality principle that is presented in the Draft Guidelines believing that the approach set out in the European Commission’s opinion is both contrary to the express wording of the CRD IV text as well as the concept of proportionality under the Treaty of the European Union and case law.  AIMA encourages the EBA to retain the possibility for firms to "neutralise certain provisions of the remuneration principles, on a case-by-case basis, where it is proportionate for them to do so".

In respect of the scope of the guidelines, AIMA also strongly disagrees that the Draft Guidelines on remuneration under the CRD IV should be applicable to staff of delegate entities of a CRD IV group company stating that there is no "mention of certain requirements applying to the staff of entities who are not within the CRD IV group".

AIMA highlights its contention that dividends paid to a CRD IV group company’s shareholders (and profit allocations to partners or members of a CRD IV group company structured as LLPs or limited partnerships) who are also Identified Staff should not be treated as remuneration and should not therefore be subject to CRD IV remuneration regulation. However, in the event that such payments are considered remuneration, AIMA asks the EBA to "consider the fact that the profits of such entities are required for tax purposes to be allocated to the members or partners each year, whether or not the profits are distributed, thus a requirement to defer payment of any such amount will result in an unfunded tax obligation for the relevant member or partner. This unintended result will disproportionately affect the members and partners of LLPs and limited partnerships".

A copy of AIMA's response can be found here.

European Fund and Asset Management Association (EFAMA)

EFAMA expresses similar concerns to AIMA in respect of the Draft Guidelines relating to proportionality and to the scope of the Draft Guidelines.

EFAMA expresses its "deep reservations around the EBA’s interpretation of the proportionality principle, specially with regard to its (non-)application to the variable remuneration principles under Article 94 of CRD IV, as suggested in the present consultation paper".  It believes that the EBA’s Draft Guidelines are "incompatible with the will of the EU Legislator to allow for proportionality with regard to remuneration policies for subsidiaries that are neither credit institutions (i.e. falling expressly within the remit of CRD IV), nor investment firms (i.e. falling within the remit of the MiFID framework)".

EFAMA calls on the EBA and the European Securities and Market Authority to issue a joint consultation on the applicability of the proportionality principle, so as to avoid the risk of a one-sided interpretation of group remuneration policies. 
A copy of the EFAMA response can be found here.

City of London Law Society (CLLS)

The CLLS response focuses on the proportionality aspects of the Draft Guidelines, contending that "the reading of these provisions put forward by the EBA is contrary to the plain words used on the face of the Directive itself, and would (in effect) retrospectively rewrite the basis on which the legislature (i.e. the Council and the Parliament) applied the Proportionality Principle required for legislation by the Protocol to the TFEU to CRD IV (itself reflected in text adopted in the Directive). Accordingly there is no sound legal basis for adopting the changed approach to the interpretation of these provisions set out in the Consultation and we would urge the Authority to reconsider".

A copy of the CLLS response can be found here.

The PRA and the FCA issue a joint policy statement on new rules to strengthen the alignment of long-term risk and reward

Policy Statement

The policy statement issued by the PRA and FCA (SS27/15) contains the final rules and guidance to implement the proposals made in the Consultation Paper issued in July 2014 (PRA CP15/14 FCA CP14/14) in relation to remuneration.  The PRA and the FCA take the view that more should be done to discourage excessive risk-taking and short-termism and to encourage more effective risk management and the proposals on which they consulted sought to build on the existing remuneration framework and further align risk and reward in the banking sector.

The changes to the PRA Rulebook and the FCA Handbook apply to banks, building societies and PRA-designated investment firms, including UK branches of non-EEA headquartered firms. These rules apply to all Material Risk Takers (MRTs) at these firms, including Senior Managers designated under the Senior Managers Regime from 2016.  The provisions on clawback and deferral will apply to variable remuneration awarded for performance periods beginning on or after 1 January 2016. The rest of the requirements will apply from 1 July 2015.

The main changes to the rules following the consultation are:

  • Extending the deferral period (the period during which variable remuneration is withheld following the end of the accrual period) to seven years for senior managers, five years for PRA designated risk managers with senior or supervisory roles, and three to five years for all other staff whose actions could have a material impact on a firm (referred to as material risk takers).
  • The introduction by the PRA of clawback rules for periods of seven years from award of variable remuneration for all material risk takers (these were already applied by the PRA).  Both the PRA and FCA clawback rules will be strengthened by a requirement for a possible three additional years for senior managers at the end of the seven year period where a firm or regulatory authorities have commenced inquiries into potential material failures. 
  • Prohibiting variable pay for non-executive directors.
  • Making it explicit that no variable pay (including all discretionary payments) should be paid to the management of a firm in receipt of taxpayer support.
  • Strengthening the PRA requirements on PRA dual-regulated firms to apply more effective risk adjustment to variable remuneration.

A copy of the policy statement can be found here.

PRA Supervisory Statements

In addition, the PRA has issued a new Supervisory Statement on remuneration which, together with the existing statements on remuneration standards (see below), clarifies the PRA's expectations on how firms should comply with the requirements of the Remuneration Part of the PRA Rulebook.

A copy of the Supervisory Statement on remuneration (SS27/15) can be found here.

In the light of the publication of SS27/15, the PRA has updated its Supervisory Statement on the application of proportionality (LSS8/13) and its Supervisory Statement on the application of malus to variable remuneration (SS2/13) to reflect the references in the new Remuneration Part of the PRA Rulebook.  A copy of these Supervisory Statements can be found here and here.

FCA Guidance

In addition, the FCA has published guidance on the application of malus and clawback to variable remuneration (having consulted on the final guidance in March 2015) and guidance on proportionality relating to the dual-regulated firms Remuneration Code (SYSC 19D).  A copy of these guidance notes can be found here and here.

The FCA has also published a webpage on SYSC 19D.

The guidance is intended to share the latest good practice observed in the 2014 remuneration round and clarify the FCA's expectations on how relevant firms should meet the Remuneration Code requirements on ex-post risk adjustment. Both sets of guidance come into force on 1 July 2015.

Buy-out awards

The original Consultation Paper issued in July 2014 (PRA CP15/14 FCA CP14/14) requested views on a number of options for addressing the issue of buy-outs, in which a firm compensates a new employee for any unpaid remuneration that is cancelled when they leave their previous firm. In the light of responses to the Consultation Paper, the PRA and the FCA will explore further the option of requiring buy-out rewards to be held in a form that permits them to be subject to malus by the previous employer.