FSA pay code throws firms into confusion

FIRMS are scrambling to comply with a raft of new regulations on bonuses after the Financial Services Authority gave some just eight days to adjust to a revised remuneration code brought out on Friday.

The FSA was responding to a finalised set of rules published by the Committee of European Banking Supervisors (CEBS) on 10 December. But the FSA’s revised code, which was meant to clarify its interpretation of the new rules, has thrown financial firms into confusion ahead of their coming into effect on 1 January.

British Bankers’ Association chief executive Angela Knight told City A.M.: “It has left a lot of worry around the fringes as to whether you’re in or out, and some of that is in the asset management industry.”

The FSA said earlier this year that it was expanding coverage of its Remuneration Code to include 2,700 firms, as opposed to 26 previously, but it said on Friday that the rules would apply only to certain kinds of staff – effectively excluding some of the firms, but leaving confusion as to exactly which ones.

It has also left it to those affected by the rules to deal with their complex tax implications, saying they “should make their own arrangements to deal with the tax liability that will arise when shares that are still subject to a retention policy vest”.

The retention policy refers to CEBS’s requirement that any shares awarded as part of a bonus must be retained – that is, not sold – for a certain period of time. But it is still not clear how individuals should pay the tax on this portion of their bonus and how this will apply in non-EU tax jurisdictions.

Firms had argued for more time to comply with the bonus rules, which will affect 2010’s bonus round, to be awarded in January or February. But the FSA decided to apply the rules almost immediately.

AT A GLANCE: THE NEW BONUS RULES
● SHARES VERSUS CASH
At least 50 per cent of the bonus must be in “non-cash instruments”.

● DEFERRAL
In addition, at least 50 per cent of the bonus must be deferred over three to five years, with the length of time depending upon the “risk profile” of the job.

● RETENTION
Of the proportion paid in shares, recipients will be forced to hold onto the shares for a “retention period” of several years, in order to avoid converting shares straight into cash.

● UPFRONT CASH
Taken together, the rules mean that no more than 30 per cent of a bonus can be paid in cash upfront, shrinking to 20 per cent for high bonuses.

● RATIO
Regulators have not mandated what proportion of an employee’s pay should be paid in base salary versus bonus, but have said that the ratio should be taken into account if there is cause to examine remuneration procedures.

● CLAWBACK
Contracts will have to include provisions for firms to “claw back” bonuses from those whose decisions are later thought to have caused losses.

● SCOPE
The FSA has divided firms into four categories, each with different minimum requirements depending on their “risk profile” and systemic importance. Overall, it has formally extended its Remuneration Code to apply to 2,700 firms next year, but the rules only apply to “code staff” within those firms, effectively exempting many of them.

● TIMING
Firms to which the FSA code already applied have only eight days to comply with it; others have until the end of July 2011.

● GUARANTEED BONUSES
The FSA has decided to extend the ban on guaranteed bonuses beyond the first year of employment to everyone in a firm and not just “code staff”.