FINANCIAL SERVICES
PwC reaction to FSA revised remuneration code
Following the publication of the Financial Services Authority’s code on remuneration, PricewaterhouseCoopers issued the following statement on 17 December 2010.
Jon Terry, remuneration partner at PwC, said: “The UK financial services industry now has the world’s toughest pay rules. Retaining talent in a sector where financial reward is often the main motivator and workers are internationally mobile will be more challenging than ever. It remains to be seen how London’s lure as Europe’s dominant financial centre will be affected as the reality of the pay changes begins to bite. A critical factor will be how quickly other EU states act to implement CRD3 and how regulation develops outside the EU.
“To the extent that there is good news for the industry, it is that the FSA has only made very limited changes to the Code wording in light of the CEBS Guidelines. Firms will still need to take CEBS into account, but by sticking with the original CRD III wording the FSA has more leeway for sensible interpretation on some of the more contentious issues relating to retention periods for shares, and dealing with tax liabilities on shares that cannot be sold."
Terry added: “The changes since July’s draft remuneration code will mean a greater number of individuals are affected by the regulation and to a larger extent. While the group of employees classified as ‘code staff’ has been limited to material risk takers, there is confirmation that some rules will now be applied on an institution-wide basis. These include the restriction of bonus guarantees to new hires for the first year of employment only and the expectation that deferral policies should apply in some form across firms.
“The FSA have provided a good deal of clarity as to how firms can apply the rules around remuneration structures proportionally according to their size and risk profile by breaking down the industry into a number of tiers. All but the smallest banks, building societies, credit institutions and broker dealers will find themselves unable to escape the strict requirements around deferral and payments in shares. However, asset managers and other firms not engaging in proprietary activity will breathe a collective sigh of relief at not having to comply with these areas of the code.
“Despite extensive lobbying, the enforcement date remains 1 January. This leaves firms just eight working days to implement the rules, including changing pay structures at the height of the bonus season. Thankfully there are some transitional arrangements for firms that were not subject to the code before the July draft.”
PwC analysis of main developments
Deferral of up to 60% of variable pay confirmed for the most senior risk takers.
A 20% cash cap confirmed for senior risk takers - half of any non-deferred bonus must be paid in shares or other instruments.
Ban on guaranteed bonuses of more than a year to apply firm-wide.
Original CRD III wording largely retained, with few updates for CEBS guidance, leaving FSA with flexibility on interpretation for issues such as retention periods for vested shares and dealing with tax liabilities on bonuses paid in shares.
Appropriate ratio(s) of variable to fixed pay should be set by firms, but no specific guidance or caps given.
Although there have been no carve outs, many investment managers and businesses operating an agency model will escape the specific requirements to defer remuneration and pay bonuses in shares.
Application of the Code has been extended essentially in full to all but the smallest banks and building societies.
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