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Financial sector pay - the latest instalment

Last week’s news coverage was prompted by the passing of amendments by the European Parliament to the Capital Requirements Directive (CRD), which affects credit institutions and investment firms, in the form of an amending Directive known as CRD3. CRD3 is now almost finalised at the European level. However, this is just the first of many Directives likely to contain remuneration provisions. Not only do they feature in the Alternative Investment Fund Managers (AIFM) Directive expected to be passed in September but remuneration provisions are also anticipated for the Undertakings for Collective Investments in Transferable Securities (UCITS) IV and under Solvency II Level 2 Directive implementing measures.

What really matters now though is how the FSA chooses to amend and/or extend its Remuneration Code in response to and anticipating all these developments, which in some cases exceed the G20 remuneration proposals. The remuneration restrictions clearly capture all firms subject to CRD (which means credit institutions and the majority of MiFID firms) but crucially the provisions are to be applied in a proportionate way. In particular, according to the recital of CRD3, certain types of MiFID firm may not be subject to all of the principles. While most media and European Parliamentary reports have been about “capping” and “preventing bonuses”, the underlying European legislation is more flexible than has been portrayed and is required to be implemented proportionately. However, it is possible that the FSA will apply the CRD3 proposals strictly and CRD3 gives the FSA considerable discretion to do so. In addition, the Financial Services Act implemented earlier this year would generally seem to allow relevant changes to be made by the FSA without any further primary legislation.

The FSA had already promised to consult this summer on changing its Remuneration Code and extending its application. It also wants to respond to market developments since it published its Remuneration Code last year and international developments at the G20 level, where the G20 principles were published after the FSA produced its own code. We understand that a paper from the FSA is expected by the end of July with proposals to take effect from 1 January 2011.

The attached article gives more details of the current position and other relevant European developments. However, until further guidance is issued at EU level and the Treasury and FSA publish their proposals it will not be clear how CRD3 will be implemented in practice in the UK. However, one thing is for certain, pay will now be a hot regulatory topic across the financial services sectors in the next year or so.