The FSA plans to strengthen its Remuneration Code to encompass over 2,500 firms which will include setting firmer rules on bonus structures for key staff.
Currently, the Code applies to the largest banks, building societies and broker dealers. However, the regulator plans to extend this to asset managers, hedge fund managers, UCITS investment firms as well as some firms engaging in corporate finance, venture capital, the provision of financial advice and stockbrokers. These are firms which are now caught by the Capital Requirements Directive (CRD 3).
Firms should know if they come under CRD 3 but if they are unsure they should contact their trade association or refer to their usual supervisory contact at the FSA.
As the scope of the code is extended, the FSA is committed to applying a proportional approach to implementation. This should ensure ‘institutions shall comply with the principles in a way and to the extent that is appropriate to their size, internal organisation and the nature, the scope and the complexity of their activities'.
The FSA is consulting on the group of employees to which the Code applies and these will include senior management and anyone whose professional activities could have a material impact on a firm's risk profile.
Onus will be on firms to identify their Code staff in the first instance, but their lists will be subject to review and challenge by the FSA.
For these key staff, at least 40% of a bonus must be deferred over a period of at least three years. At least 60% must be deferred when the bonus is more than £500,000.
Firms must not offer guaranteed bonuses of more than one year and guarantees may only be given in exceptional circumstances to new hires for the first year of service.
Companies must also ensure their total variable remuneration does not limit the ability to strengthen their capital base.
Severance payments should reflect performance over time and failure must not be rewarded.
The consultation period closes on 8 October 2010 and the FSA intends to issue a policy statement in November 2010 with rules effective from 1 January 2011.
