Remuneration Disclosure (CP10/27)

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The FSA has published CP10/27 (“Implementing CRD3 requirements on the disclosure of remuneration”) which describes how it expects disclosures in relation to remuneration to be made by asset managers (and all other firms that fall under the Capital Requirements Directive “CRD”).

Purpose

Underlying these recommendations is the view that stakeholders will benefit from greater clarity regarding firms’ remuneration practices, notably whether and how these practices support effective risk management.

There is also the view that investors should be given the opportunity to understand how a firm’s remuneration practices affect its ability to pay an adequate risk-adjusted return on capital.

The main driver behind the timetable for implementation is CRD3, which obliges EU member states to implement disclosure requirements on remuneration by 1 January 2011.

Timing and mechanism of disclosure

Disclosure will be in accordance with Pillar 3  requirements and will be required at least on an annual basis with the first disclosure due by 31 December 2011.

Pillar 3 disclosure means that:

  • firms may determine the appropriate medium, location and means of verification;
  • firms must provide all disclosures in one medium or location where feasible;
  • equivalent disclosures made under other requirements (e.g. accounting) may be deemed to constitute compliance (provided firms can demonstrate that disclosure is ‘equivalent’ to that required by CRD3); and
  • if disclosures are not included in financial statements, firms must indicate where they can be found

What will need to be disclosed?

In order to implement proportionately, the FSA have proposed four tiers of firm.  If a firm is a member of a consolidated group, disclosure will be required at the highest tier that would apply within the group. So, for example, if on a standalone basis the group contains firms in both Tiers 1 and Tier 4, consolidated disclosure will be required to meet Tier 1 standards. 

Tier 1 Firms: Tier 1 Firms will be required to make full disclosure of all items under CRD3.  Tier 1 will include banks and building societies with capital resources in excess of £1bn, and Full Scope BIPRU Investment 730K firms with capital resources in excess of £750m and is expected to include the 26 largest groups.

Tier 2 Firms: These firms will be required to disclose most of the qualitative items (including design characteristics of remuneration) and selected quantitative items.  Tier 2 Firms will include banks and building societies with capital resources of between £50m and £1bn, and Full Scope BIPRU Investment 730K firms with capital resources between £100m and £750k and is expected to include approximately 200 firms.

Tier 3 Firms:  Tier 3 Firms will be required to disclose most of the qualitative items (but excluding design characteristics of remuneration systems) and selected quantitative items. This category will include banks and building societies with capital resources of less than £50m, Full Scope BIPRU Investment 730K firms with capital resources of less than £100m and is expected to include around 300 firms.

Tier 4 Firms: Tier 4 Firms will only be required to disclose the basic qualitative and quantitative items. Tier 4 will include all BIPRU Limited Licence and Limited Activity firms and will include over 2,000 firms. Most investment management firms are Limited Licence firms. 

The basic qualitative and quantitative information that will need to be disclosed by Tier 4 Firms is as follows:

  • Information concerning the decision-making process used for determining remuneration policy, including if applicable, information about the composition and the mandate of any remuneration committee and/or external consultant whose services have been used for the determination of the remuneration policy, and the role of all other relevant stakeholders involved in determining remuneration policy;
  • Information on the links between pay and performance.  This will include a description of the main performance metrics utilised at firm, separate business line, and individual staff levels;
  • Aggregate quantitative information on remuneration, broken down by business area.  The guidance recognises that some institutions may only have one or two business areas and the FSA indicate that the reference to business areas can be interpreted as separate and significant business activities such as retail banking, investment banking, stock-broking, asset management and others; and
  • Aggregate quantitative information on remuneration, broken down by senior management and members of staff whose actions have a material impact on the risk profile of the firm (i.e. “Code Staff” in accordance with the Remuneration Code).  It is hoped that this means that aggregate remuneration will only need to be split between the two groups and that disclosure of compensation amounts by individual staff member is not required.  Industry representative bodies are seeking clarity on this from the FSA. 

They are also requesting that the FSA do not automatically dismiss issues of immateriality, proprietary information or confidentiality as valid reasons for non-disclosure in appropriate but exceptional circumstances.
Also with regard to the disclosure of aggregate quantitative information between senior managers and other Code Staff, it is worth noting that following details do not have to be provided by Tier 4 Firms:

  • The split of remuneration for the financial year between fixed and variable remuneration;
  • The amounts and form of variable remuneration, split into cash, shares and share-linked instruments and other;
  • The amounts of outstanding deferred remuneration, split into vested and unvested portions;
  • The amounts of deferred remuneration awarded during the financial year, paid out and reduced through performance adjustments;
  • New sign-on and severance payments made during the financial year, and the number of beneficiaries of such payments; and
  • The amounts of severance payments awarded during the financial year, number of beneficiaries, and highest such award to a single person.

Next Steps

The FSA has invited responses to the consultation paper by 8 December 2010, with its preference being that responses are directed through relevant trade associations.  The final form of the rules is due for publication in Mid-December 2010 coming into effect on 1 January 2011.


Trevor Brown
16 November 2010


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