What are the key provisions of the Code?
The Code does not apply to all firms in the same way and smaller ones are not subject to all the requirements of larger ones. In accordance with guidelines of the FSA (now FCA) and the European Banking Authority (which has replaced the Committee of European Banking Supervisors), requirements concerning deferral and variable remuneration, and the payment of a proportion of variable remuneration in an appropriate non-cash form, may be applied proportionately.
The FCA’s approach to proportionality
The Remuneration Code (SYSC 19A) & Pillar 3 disclosures on remuneration (BIPRU 11) create four different proportionality “tiers” for an FCA regulated entity, each with different minimum requirements depending on their size and scope. : Firms within the same tier may apply aspects of the Code with different degrees of sophistication depending on the complexity of their businesses:
Tier one larger banks, building societies (with capital resources of over £1 billion) and broker dealers (with capital resources of over £750 million) that engage in significant proprietary trading/investment banking activities and firms with branches outside the EEA where total assets for UK branch is over £25 billion. Comply with Code in full.
Tier two larger banks, building societies ( with capital resources between £50 million and £1 billion) and broker dealers that engage in significant proprietary trading/investment banking activities (with capital resources of between £100 – £750 million) and those with and branches outside the EEA with total assets for UK branch of over £20 billion. Comply with Code in full except the requirement that at least 50% of variable remuneration should be in an appropriate non-cash form (ie. shares, or other securities) and subject to a retention period.
Tier three consists primarily of small banks and building societies and firms that may occasionally take overnight/short-term risk with their balance sheets. Comply with Code, but no need to: have a remuneration committee, deliver at least 50% of variable remuneration in an appropriate non-cash form (ie, shares, or other securities) subject to a retention period, or defer a proportion of Code Staff variable remuneration, adjust/reduce deferred variable remuneration to reflect performance.
Tier four firms that generate income from agency business without putting their balance sheets at risk. Firms will be expected to comply with the Code as for tier three, except that tier four will also generally: not be required to specify appropriate limits for the proportion of variable remuneration, and will be able to take into account their specific activities when applying rules on profit-based measurement and risk adjustment of variable remuneration, and multi-year performance periods for the assessment of variable remuneration.
However the FCA propose to amend the ‘General Guidance on Proportionality’, which sets out the proportionate approach to implementing the Code and the Pillar 3 remuneration disclosure rules. The proposed new framework would replace the current four-tier structure (based on capital resources) with three new ‘levels’ (based on total assets). The proposed approach would allow the FCA to focus its resources on the most significant firms who pose risks to financial stability.