FSA consults on pay disclosure in financial services firms

FINANCIAL SERVICES

FSA consults on pay disclosure in financial services firms

The Financial Services Authority has published a consultation paper on the implementation of remuneration disclosure requirements based of the recently amended Capital Requirements Directive (CRD III).

The information to be disclosed includes detail on decision-making around pay, the link between pay and performance, the characteristics of the remuneration system and performance criteria. The FSA is also consulting on frequency, form and proportionality of disclosure. Many important elements of these requirements are derived from the Financial Stability Board’s (FSB) principles and standards on remuneration disclosure.

Comment

Tom Gosling, reward partner at PwC, said: “The Treasury has passed the disclosure baton to the FSA and the result has been a less onerous regime than originally feared. The consultation sets out largely sensible disclosure requirements relating to banks' remuneration policies for senior management.”

He added: “The information should help shareholders make informed judgments about how remuneration takes account of risk in banks. The proposals do not include some of the more prescriptive elements of previous proposals, such as disclosure by pay bands. This should help prevent the unintended consequences that can sometimes follow pay disclosure, for instance pay ratcheting."

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What is the FSA consulting on?

The FSA is consulting on four key issues:

1. Items to be disclosed

  • Information on the remuneration decision-making process

  • Link between pay and performance

  • Most important design characteristics of the remuneration system

  • Performance criteria for assessment of remuneration

  • Main parameters and rationale for variable compensation

  • Aggregate quantitative information on total remuneration, variable remuneration, deferred remuneration, and sign-on and severance payments, in respect of senior management and staff with a material impact on the firm’s risk profile.

2. Frequency of disclosure

Firms will need to disclose details of their remuneration policies at least on an annual basis. The FSA will require firms to make their first disclosure in respect of 2010 remuneration as soon as practicable, and no later than 31 December 2011.

3. Form of disclosure

Disclosure may take the form of a standalone report or may be included in a firm’s annual report and accounts.

4. Proportionality

CRD III permits regulators to apply the rules on a proportionate basis, taking account of firms’ size and complexity. The FSA intends to divide firms into four tiers based primarily on their regulatory capital and type of regulatory licence or permission. Each group will be subject to a different degree of disclosure as follows:

  • Tier 1 - Full disclosure of all items under CRD III: This will include around 26 very significant groups. The FSA expects firms of this size and complexity to observe the “highest standards of disclosure”.

  • Tier 2 - Disclosure of most qualitative items (including design characteristics of remuneration) and selected quantitative items: The FSA expects this category to include some 200 major firms which will be expected to provide a “high degree of disclosure, although some finer details need not be disclosed”.

  • Tier 3 - Disclosure of most qualitative items (excluding design characteristics of remuneration systems) and selected quantitative items: The FSA expects this category to include around 300 firms, which will be expected to provide a “high degree of disclosure, although details such as the design characteristics of remuneration need not be disclosed”.

  • Tier 4 - Disclosure of basic qualitative and quantitative items only: The FSA expects this category to comprise over 2,000 firms with limited regulatory licences or permissions. These firms will be expected to “disclose only basic qualitative and quantitative information on remuneration”.

In addition, the FSA is seeking feedback on whether there would be any meaningful disadvantages in extending the scope of disclosure requirements to include non-EEA (European Economic Area) firms operating as branches in the UK.

Policy statement

Separately, the FSA will publish a policy statement in response to wider changes to its Remuneration Code in December, following the finalisation of the CEBS guidelines on the implementation of the Code.

Timetable

The revised Remuneration Code will come into force on 1 January 2011. It will apply to awards paid out in respect of the 2010 remuneration round. Firms coming into the scope of the Code for the first time will be able to make use of transitional provisions to implement certain provisions of the Code over a period of six months.

Want to know more?

Title: CP10/27: Implementing CRD3 requirements on the disclosure of remuneration, Financial Services Authority, November 2010.

The consultation period closes on 8 December 2010 and the FSA intends to publish a policy statement on remuneration disclosure in mid-December.

Availability: You can download the 51-page consultation paper CP10/27 from the FSA web site at www.fsa.gov.uk/pages/Library/Policy/CP/2010/10_27.shtml.

 

--> Consultation Paper on Guidelines on Remuneration Policies and Practices (CP42), Committee of European Banking Supervisors (CEBS), 8 October 2010:
www.c-ebs.org/documents/Publications/Consultation-papers/2010/CP42/CP42.aspx [Downloads 84-page PDF]

--> Thematic Review on Compensation: Peer review report, Financial Stability Board, 30 March 2010:
www.financialstabilityboard.org/publications/r_100330a.pdf [Downloads 39-page PDF]

--> CP10/19 Revising the Remuneration Code, Financial Services Authority, 29 July 2010:
www.fsa.gov.uk/pages/Library/Policy/CP/2010/10_19.shtml.

The Financial Services Authority regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system. For more information visit www.fsa.gov.uk.