The FSA’s revised Remuneration Code (PDF) (the “Code”) came into force on 1 January 2011. Those newly within its scope are expected to comply in full by 1 July 2011. Overall, the Code will have a lower impact on fund and asset managers than first feared, but will increase the ever-growing compliance burden as managers have to spend time and resources understanding the Code, why the worst of it doesn’t apply, and then applying the parts that do.
Following the computer game-esque guidance of CEBS (now the all-powerful ESMA) which said that some Principles of the CRD3 (PDF) (on which the Code is based) could be “neutralised” for the smaller firms, the FSA has split all firms caught by its first draft of the Code into four tiers (PDF). The general rule is: the lower your tier, the more provisions of the Code you can avoid – provided you adequately explain yourself to the FSA, of course. Most fund and asset managers, save for full scope BIPRU Firms, will fall into tier four.
Amongst other things, a tier four firm:
Will not have to:
- Appoint a remuneration committee (Principle 4)
- Defer bonuses to ‘Code Staff’ for 3 years (Principle 12)
- Pay 50% of variable remuneration in shares or equivalent (Principle 12)
- Assess performance related pay over a multi year framework (Principle 12) or
- Set ratios between fixed and variable pay (Principle 12)
But will have to:
- Explain why it is dis-applying any of the Principles above;
- Make a list of “Code Staff” (xls) and notify them of what that means;
- Draft a remuneration policy in accordance with the applicable Principles of the Code;
- Stop paying guaranteed bonuses to any staff, other than on an exceptional basis, in the context of hiring new Code Staff and in the first year of service only; (firms will hope those staff don’t leave after a year to get another first year bonus somewhere else!); and
- Make sure golden parachute payments reflect performance and do not reward failure.
Not too bad, you say? Indeed, the FSA’s attempt at implementing the Code proportionately has been described as a ‘regulatory ray of sunshine’ in these times of knee-jerk legislation. But what it essentially means is that it’s not as bad as it could have been for firms that arguably shouldn’t have been caught by this legislation in the first place.
The FSA is currently consulting on draft guidance on the interpretation of the Code, including a template Remuneration Policy Statement (doc) to be used by Tier 3 and 4 firms, a set of FAQ’s (PDF) and the template list of Code Staff linked in above. Responses and comments can be sent to the FSA before 18 May 2011. Asset managers should keep an eye on the FSA’s response to any comments, as it may well be indicative of the way the remuneration provisions of the Alternative Investment Fund Managers Directive (AIFMD), which would apply to all firms within its scope, will be implemented.