EL SISTEMA DE SERVICIOS PUBLICOS

On 17 December 2010, the FSA published its policy statement on revising the Remuneration Code,82 containing the final rules and incorporating feedback from the July 2010 consultation. This policy statement was delayed until December so that the FSA could take account of the CEBS guidelines83 on remuneration.84 The new Code was set out in Chapter 19A of the FSA’s SYSC. The aims of the Remuneration Code are to force boards of directors to focus more closely on the consistency between the distribution of remuneration and effective risk management and sustainability as well as ensuring that individual remuneration practices provide the right incentives.85 The most important features of the Code will be discussed here, and thus will not feature in the later discussion of the Remuneration Codes in the context of the new regulators and what they inherited from the FSA.

The FSA defined the scope of the Code in relation to the elements of the remuneration as follows:

[T]he Remuneration Code covers all aspects of remuneration that could have a bearing on effective risk management including salaries, bonuses, long-term incentive plans, options, hiring bonuses, severance packages and pension arrangements.86

Unlike the previous Code, which only applied to about 26 of the larger financial institutions, the new Code was expected to be applied to over 2,500 firms as a result of implementing CRD III.87 This extension, which is maintained under CRD IV, has helped to reduce lobbying by large financial institutions, as they had claimed that they were at a competitive

82 _{Financial Services Authority, Revising the Remuneration Code: Feedback on CP10/19 and final rules}

(PS10/20, December 2010), (FSA, PS10/20).

83 _{Committee of European Banking Supervision, “Guidelines on Remuneration policies and practices” (10 Dec}

2010) 13 (CEBS Guidelines on Remuneration).

84

Arora, “Remuneration practices in banks: part 2” (n 44) 132.

85 _{ibid 133.}

86 _{SYSC, 19A.2.2(2).} 87

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disadvantage and would lose their employees to competitors unaffected by the scope of the Code.88

However, as with the previous Code, UK branches of the EEA are not required to apply the Code as they will be required to comply with their home state regulation, which will have similar provisions to those under CRD. Moreover, UK groups and UK subsidiaries of a third country need to apply the Code globally,89 regardless of whether they are required to apply similar provisions under other jurisdictions or not. In the case of divergence in implementing the P&S, this will increase the burden on those firms if they have to conform to two different sets of rules and might put them at a competitive disadvantage if the other state has a more lenient set of rules which also encourages talented staff to leave and benefit from the regulatory arbitrage. Moreover, they might find themselves in a position where it is impossible to comply with two different sets of rules in addition to the employment law of a third country if there is a conflict between them.

All the principles of the new Code will be applied to defined personnel known as “Code Staff”. This represents a shift from the previous Code, which was applied to the firm generally except for P8, which was aimed at a specific group of employees. However, this does not mean that non-Code Staff will not be subject to any principles, as the Code urges firms to give consideration to the remuneration principles on a firm-wide basis in the light of the general rule and in accordance with proportionality. The Code requires firms to specifically consider Principle 12(c), which is related to guaranteed variable remuneration, and Principles 1-4, 8-10 and 12(e) and (g) on a firm-wide basis.90

The term “Code Staff” refers to the group of employees to which the Remuneration Code is applied. Code Staff are linked to those individuals who have a material impact on a firm’s risk profile, as the main objective behind the Code is to achieve effective risk management.91 Firms were expected to set their own metrics in order to identify their risk takers.92 The

88 _{ibid para 2.26.} 89

Note that a UK subsidiary need only apply the Code in relation to its activities from an establishment in the UK and its global subgroup.

90 _{SYSC, 19A.2.3(2) & (3).} 91 _{FSA, CP10/19 (n 20) para 3.17.} 92

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guidance from CRD III stated that the Remuneration Code is to apply to the persons who perform significant influence functions (SIF), the senior managers and all staff whose total remuneration takes them into the same bracket as senior management and risk takers, and whose professional activities could have a material impact on a firm’s risk profile. However, since it was not clear on what basis an employee falls into “the same bracket” as senior management,93 the FSA stated that it expected individuals who perform a role as a head of a significant business, line, or a support and control function, to be part of the Code Staff. It provides a non-extensive list of who might be considered “Code Staff” to ensure consistency between firms in applying the Code.94 Under the CRD IV the European Banking Authority (EBA) is charged with identifying the persons to whom the Remuneration provisions apply as will be discussed later in the context of the chapter concerning the EU.

Secondees and employees who become Code Staff for part of a year, and consultants or advisors of authorized firms are also subject to the terms of the Code. However, this will only apply if the secondees’ performance involves material risk-taking regardless of which firms are paying their remuneration. If they are work-shadowing or training and do not have a material impact on a firm’s risk profile, they will not be considered as Code Staff.95

A person who has been considered as a Code Staff member for any part of the year will be treated as Code Staff for the whole of the year. However, the regulator will have regard for proportionality and decide whether the provisions regarding the remuneration are to be disapplied or applied to only a proportion of variable remuneration depending on the length of service as a Code Staff member. The regulators differentiate between someone who becomes Code Staff for no more than three months and someone who becomes Code Staff for more than three months.96 Firms also need to consider whether their consultants and advisors fall within the definition of Code Staff. As the regulators’ definition of “employee” is quite broad, it could also incorporate personnel if they are classified as an “employee receiving total remuneration that takes them into the same remuneration bracket as senior management

93

Arora, “Remuneration practices in banks: part 2” (n 44) 135.

94 _{FSA, CP10/19 (n 20) paras 3.12, 3.14 & 3.16.} 95 _{FSA, PS10/20 (n 82) 15.}

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and risk takers, whose professional activities have material impact on the firm’s risk profile”.97

Proportionality is used to avoid a formulaic “one size fits all” approach to the regulation of remuneration policies, meaning that the implementation of the rules can be tailored to institutions according to their nature, scale, scope, internal organization and the complexity of their activities98 and, accordingly, the level of supervision will be different in each case. The aim is to match remuneration policies and practices with an individual institution’s risk profile, strategy and risk appetite.99 This is in addition to the proportionality approach regarding employees which limits the application of the Code to Code Staff and exempts certain employees from having Principle 12 applied, as it contains provisions with regard to the structure of remuneration, when they meet the de minimis concession under principle 12. The reason for this is that the FSA recognized that applying the full Code to all firms might be inappropriate and burdensome for some companies.100 A proportionality principle will allow for differences between firms in applying the Code.

However, some large banks have highlighted the risk of losing their key staff to their competitors as a result of this approach, whilst some investment firms have emphasized that they will be at a competitive disadvantage in comparison to non-CRD or international peers if they apply the full Code.101 Therefore, the FSA asserted that it would make sure that similar firms will be treated in a similar fashion and prepared a four-tier system. The FSA focused on the systemic importance and risks posed by different firms and their business models when formulating the metrics and thresholds for the four tiers.102

The FSA relied on capital resource as a threshold in determining the tiers. However, due to the difficulties in applying this threshold to third-country BIPRU firms, total branch assets were used. This guidance on proportionality was updated in December 2011 and again in September 2012. The latter update has created a three-tier rather than a four-tier division. 97 _{Snowdon (n 49) 26.} 98 SYSC, 19A.3.3(2). 99_{FSA, PS10/20 (n 82) para 3.11.} 100 _{FSA, CP10/19 (n 20) 7.} 101 _{FSA, PS10/20 (n 82) para 2.55.} 102

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This approach will “allow the [regulator] to focus its resources on the firms who pose the most significant risks to financial stability”.103 Moreover, the FSA used total assets as a measure for the three levels in relation to all the firms in the scope of the Remuneration Code and stopped using capital resource for local firms, as was its previous approach.

Due to the significant increase in total assets, many third-country firms which used to be in tier oneare most likely to be in level two under the new guidance. However, if a firm is part of a group, then each Remuneration Code firm must determine its own level; if they then fall into different levels, each firm in the group will be placed at the level of the highest overall. However, individual guidance is still available as a firm can be classified as being upper or lower level as identified by the guidance depending on its characteristics. Therefore, the guidance is not comprehensive and firms on the same level may require different responses to the Remuneration Code.104 The Proportionality levels now form part of the work of the new regulators in monitoring compliance with the Remuneration Code.

Level one firms include banks, building societies, investment firms and IFPRU 730k firms (which are investment firms regulated by the FCA)105 with total assets exceeding £50 billion on the relevant date. However, if the total assets of these firms are in the range from £15 billion to £50 billion, they will be generally classified as level two firms. Level three will apply to firms with total assets of up to £15 billion on the relevant date and to IFPRUlimited licence and limited activity firms.

Level one and two firms have to apply the Remuneration Code in a similar manner. However, the supervisory approach is less intensive for level two.106 Level three firms can disapply the remuneration principles related to retained shares or other instruments, deferral and performance adjustment. Full scope IFPRUregulated by the FCA and IFPRU limited licence

103 _{Financial Services Authority, “Proposed review of general guidance on proportionality for remuneration” (26}

July 2012) Available at: <http://www.fsa.gov.uk/library/policy/guidance_consultations/2012/gc1210> accessed 4 May 2014.

104 _{Fincial Conduct Authority, “General guidance on proportionality: the remuneration code (SYSC19A)”}

(December 2013) paras 26 & 27.

105

This has changed according to the new classification of the FCA in applying the CRD IV.

106 _{Linklaters, “FSA Remuneration Code: consultations on proportionality tiers and remuneration data}

collection” (3 August 2012) Available at: <http://www.linklaters.co.uk/Publications/Employment-and- Incentives/Corporate-governance/Pages/FSA-Remuneration-Code-consultations-proportionlity-tiers- remuneration-data-collection.aspx> accessed 14 February 2014.

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and limited activity firms may also disapply rules related to the ratios between the fixed and variable components of total remuneration:107 “Such firms may also take into account the specific features of their types of activities in applying the requirement on the multi-year framework”.108