Made in response to European Union requirements, the proposals include a significant increase in the coverage of the code from approximately 27 of the largest banks, building societies and broker-dealers to over 2,500 FSA-authorised banks, building societies, asset managers (including hedge funds!) and some firms engaged in corporate finance, venture capital, the provision of financial advice and stockbrokers. 

In contrast, Australia’ APRA has only regulated remuneration for deposit taking institutions, general insurers and life insurers.  While ASIC is likely to regulate commission pay for financial planners, it is highly unlikely to ever venture into the regulation of remuneration for traders or asset managers.  In any case, the Australian regulation is nowhere near as prescriptive as the UK regulation.

The FSA consultation paper can be found HERE.

The revised, highly prescriptive, Code will be effective from 1 January 2011 for remuneration awarded or paid on or after that date, while the consultation period ends in October.

Subject to guidance from the Committee of European Banking Supervisors (“CEBS”) (see HERE for our article on CEBS’ response to remuneration regulation), the FSA may tweak the Code to allow for “proportional application” of three groups of rules:

(i) Minimum requirements expected of all firms;

(ii) Rules that could be applied proportionally in line with a firm’s nature, scale, scope and complexity; and

(iii) Rules that could be applied on a ‘comply or explain’ basis.

At present the FSA proposes to include, for asset managers, potentially problematic provisions, such as the deferral requirements and restrictions on guaranteed bonuses, in the ‘comply or explain’ category.

Under the revised Code, the Principle 8 employee group would be replaced with a similar group referred to as “Code staff”, which is expected to include senior management, persons who perform a significant influence function for the firm, and staff receiving total remuneration that takes them into the same remuneration bracket as senior management and risk takers and whose professional activities may have a material impact on the firm’s risk profile.  Limited partners are considered to be subject to the Code, which could be seen as surprising in that they are not employees receiving remuneration and significant tax issues could arise where deferral is required.

At least 40% of the variable remuneration of Code staff must be deferred for at least three years.  It is currently proposed that this would increase to 60% where remuneration exceeds £500,000.

At least 50% of the variable remuneration (deferred or non-deferred) of any Code staff must be delivered in shares or share-linked instruments and (where appropriate) capital instruments that reflect the credit quality of the firm.  The equity instruments must be subject to a minimum retention policy.

Guaranteed bonuses can only be offered to new hires for the first year of service in exceptional circumstances.  The payments should not be more generous in either amount or term than the variable remuneration awarded or offered by the previous employer and should be subject to performance adjustment.

Total variable remuneration must not limit the firm’s ability to strengthen its capital base, and must be significantly reduced if the firm’s financial performance is subdued or negative. This would limit the deferred profit share on a carried interest basis for some asset managers when their risky investment plays bomb in following years.  The impact this would have on hedge fund and other asset managers’ choice of domicile cannot be underestimated.

The approach of the UK and European Union to regulating asset managers and hedge funds is markedly different from the approaches in Australia and Canada (and the US and Switzerland, among others).  While there is evidence that traders and hedge funds contributed to the GFC, it has been argued that they merely took advantage of markets that were poorly regulated and unsupervised.  In Australia and Canada, where there was both good regulation and active supervision of deposit taking institutions, the impact of the GFC was negligible in comparison.  While the US Dodd Frank bill (see HERE) will ensure that the US complies with the Financial Stability Board remuneration principles it (with Australia’s APRA) helped draft (see HERE), it will not attempt to regulate asset manager remuneration.  The Bill will, however, regulate other aspects of asset manager operation, including transparency requirements for derivative trading – which ASIC has shown no signs of replicating.

The global regulatory arbitrage that results may see Australia better able to attract and retain asset manager talent.

Back to all articles