23 June 2011

Are you ready for 1 July 2011 (and beyond)?

From 1 January 2011 all MiFID investment firms (except for those exempt under the Capital Adequacy Directive) fell within the scope of the FSA’s revised Remuneration Code, SYSC19A (the ‘Code’). The FSA estimates that around 2,600 firms fall within the scope of the Code.

By now, all firms within scope should have done the following:

  • Determined which proportionality “Tier” of the FSA Remuneration Code applies to them. This is crucial for drafting a Remuneration Policy that is appropriate to the firm, particularly if any principles of the Code are to be disapplied on the grounds of proportionality (such as the requirement to pay at least 50% of bonuses in shares). Firms should seek independent confirmation that their analysis of which Tier they fall into is correct.
  • Identified who their “Code Staff” are and informed them of their status and its implications. Firms are under a regulatory obligation to maintain a list of their Code Staff and notify individuals when they are categorised as Code Staff and what effect this will have on their pay and disclosure.
  • Obtained undertakings from their employees not to use personal hedging strategies or take out insurance in relation to their bonuses: Principle 10 of the Code requires firms to obtain such undertakings from all employees (not just Code Staff) and to have in place a process for ensuring that employees comply with their undertakings. One of the questions in the FSA’s template for self assessment of compliance with the Code is what steps the firm has taken to comply with this obligation.
  • Reviewed existing contracts of employment to ensure that they comply with the Code and, where non-compliant, varied or renegotiated those contracts (specific employment advice may be needed in such situations so as not to breach employee rights). The recruitment process should also include systems to ensure that the firm does not breach the Code’s restrictions on paying guaranteed bonuses.
  • Begun compiling remuneration data to be disclosed by 31 December 2011 and considering how this information should be disclosed. This information must be made available publically either in the firm’s published accounts or on a website.
  • Be close to finalising the firm’s Code-compliant remuneration policy (the deadline to have this in place is 1 July 2011) and educated those responsible for pay and recruitment at the firm to ensure that the policy is adhered to.
  • Have informed your staff about the firm’s remuneration policy. The FSA has said that a firm’s remuneration policy should be accessible to all staff and that staff should know in advance the criteria that will be used to determine their remuneration. The appraisal process should be properly documented and should be transparent to the staff concerned. However, confidential quantitative aspects of the remuneration of staff members should not be subject to internal disclosure.
  • Appointed a Remuneration Committee if appropriate: this is compulsory for Tier  1 and 2 firms and the larger Tier 3 firms. Tier 4 firms might take the view that it   would be appropriate even though it could be argued that it is not proportionate.
  • If required, put in place methods for deferring bonuses, claw-back and post-  award adjustment.

And if you haven’t done all of the above, then you’d better get your skates on!

Record keeping

Throughout this whole process, and the assessment of individuals going forward, it is important to keep accurate records of any decisions which may be subject to regulatory scrutiny following the firm’s public disclosure by 31 December 2011. The draft templates which the FSA has recently published to assist firms in self-assessing their compliance with the Code are a useful tool for a firm to check that its policy contains all the relevant provisions. However, if a firm is queried as to why a particular payment was made to an individual or why a person was not categorised as Code Staff, it should be able to refer to properly documented rationale, to demonstrate to the FSA (if required) that the remuneration policy is being implemented effectively.
The firm’s remuneration policy and procedures should also be kept under review to ensure that they remains up to date and take account of any changes in relation to the risks facing the firm or potential conflicts of interest which may arise.


Remuneration can be a touchy subject for many people. A good remuneration policy handled well can produce a vibrant and motivated workforce which is engaged and committed to the success of its firm. Handled badly, the results can be disastrous, with suspicion of favouritism or prejudice over the level of some bonuses, demoralisation and the loss of key individuals. In an increasingly competitive marketplace it is important that firms dedicate adequate time and resources to getting the right policy in place as soon as possible. This will make compliance with the closely similar remuneration provisions annexed to the recently adopted Alternative Investment Fund Managers Directive all the easier, once that directive is implemented in 2013.


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