A rare ray of regulatory sunshine was recently cast upon asset managers with the Committee of European Banking Supervisors (‘CEBS’) proposing the disapplication (a term referred to as ‘complete neutralisation’) in appropriate circumstances of a number of key principles within the FSA’s revised Remuneration Code (the ‘Code’), specifically the requirement to defer 40% (and in some cases, 60%) of variable remuneration and the requirement to pay at least 50% of variable remuneration in shares or equivalent non-cash instruments. CEBS’s view of which members of staff should fall within the scope of the revised Code is also narrower than that proposed by the FSA.
Back in the summer, the FSA published consultation paper CP10/19 'Revising the Remuneration Code', proposing revisions to the Remuneration Code introduced at the beginning of 2010. The consultation was necessary to implement the remuneration provisions of the latest amendments to the EU Capital Requirements Directive, known as 'CRD3', due to come into force on 1 January 2011. CRD3 extends the scope of the current Remuneration Code to the more than 2,500 UK firms presently subject to the Capital Requirements Directive. CRD3 also empowers CEBS to issue guidelines on its implementation.
The FSA’s policy statement containing the new rules and guidance was originally due out in mid-November. The FSA has now sent out to relevant trade associations a statement on the timing of the final rules which will now not be published until one month later.
The FSA has said that due to CEBS taking longer than expected to publish its final remuneration guidelines (not now expected until 11 or 12 December) this will delay the publication of the revised Code. The FSA’s revised Code must take CEBS principles into account and accordingly may not be finalised and published in advance of them.
We understand the FSA expects that firms who have spent this year already within the scope of the Remuneration Code, (primarily the country’s 27 largest banks, building societies and broker-dealers) will still be required to comply in full with the revised Code from 1 January 2011.
With regard to extended scope firms, such as ‘BIPRU50K’ asset managers, the FSA has reiterated its intention to apply the revised Code in a proportionate manner, taking account of firms’ nature, scale, scope and complexity. The FSA will provide more information on its approach to proportionality before the end of November.
Whilst acknowledging the tight timeframe for responding to the published rules (now compressed from 6 weeks to around 2), the FSA has committed itself to applying the transitional arrangements published in its consultation to the fullest extent. However, it has not proposed any additional or extended transitional arrangements.
Notwithstanding the delay, firms affected by the revised Code should take heart at the possibility of the complete neutralisation of the least desirable of the Code principles, while noting that this is still to be confirmed by the FSA in its release just before Christmas. Furthermore, firms should at this stage still have a general understanding of the extent to which they will be affected by the Code and plan appropriately, commencing with determining the ‘Code Staff’ and identifying any issues arising in respect of their current remuneration arrangements. Thereafter, the main response to the revised Code by an asset manager will amount to documenting a persuasive argument as to why it’s remuneration arrangements do (and perhaps always have) been consistent with and promote effective risk management.