MISHCON DE REYA
CITY bonus rounds are always an interesting time, but this year’s promises to be more fascinating than most. This is because it is the first time we will see the impact of the new version of the Financial Services Authority (FSA) Remuneration Code. The first version of the code, which was introduced earlier this year, applied to 26 of the largest banks, building societies and broker dealers in the UK.
But the new version will be far more wideranging, and is expected to cover over 2,500 FSA authorised firms, including hedge funds. We’ll see very soon what the new code will look like – consultation on the proposals will come to a close on 8 October. The new rules will come into effect on 1 January 2011, but will apply retrospectively to remuneration paid on or after that date for services performed in 2010.
So what can we expect in the code? Firstly, it sets out both general requirements in respect of firms’ remuneration policies, which apply to all employees, as well as specific principles which apply to the remuneration of those individuals that the FSA categorises as “code staff” – senior managers and risk takers whose bonuses are more than 33 per cent of their total remuneration and whose total remuneration is more than £500,000. In respect of non-code staff, the FSA proposes to issue guidance explaining that the firm should give consideration to the remuneration principles that will apply to code staff.
Secondly, it deals with bonuses. The code does not include any specific requirements on the amount that can be paid to staff in bonuses. But it will require that a minimum of 50 per cent of the code staff’s bonuses are paid in shares (or the equivalent) with between 40 per cent and 60 per cent deferred for between three and five years. Firms should also retain the ability to make (downward) adjustments to unvested individual awards and to awards that have vested but which the individual has to repay.
Deferred bonuses and payment in shares were being used by the banks before the crisis but they apparently did little to avert excessive risk taking in the past. However, it will be interesting to see whether, absent another crisis, the banks are willing to please the FSA and alienate their staff in future years by aggressively using the power to claw back bonuses which most individuals will still view as rewards for past performance.
Ultimately, much will depend on whether the banks are truly committed to the new pay structures and embrace the theory that these changes are needed for the long term prosperity of the industry. As interesting as that, though, will be the FSA’s behaviour. It is determined to take a hard line, even if regulators elsewhere do not. Many will watch with interest just how much it dares to flex its muscles in dealing with non-compliance.