30/07/2010 Author: Ben Haidari

FSA announces tough new rules on bonuses

The FSA is to update its Remuneration Code as it absorbs the rules required by the EC’s Capital Requirements Directive (CRD3) and the UK’ s Financial Services Act 2010 (FS Act).

The FSA’s current Code applies to the largest banks, building societies and broker dealers. However, CRD3 will bring additional firms within its scope, including hedge funds.

Although, the FSA does not intend the updated its code to be exactly equivalent with CRD3, changes will broadly align with the Directive’s remuneration guidelines.  The proposed changes include:

• The scope of the code – as this expands, the FSA will ensure that its approach remains proportional with regard to ‘size, internal organization and the nature [of the companies] and the complexity of their activities’.

• At least 40% of bonuses will be deferred over a period of at least three years. If the bonus exceeds £500,000 ($779,150), at least 60% must be deferred.

• At least 50% of bonuses must be paid in shares, share-linked instruments or non-cash instruments of the firm and will be subject to a minimum retention policy.

• Firms will be prohibited from guarantying bonuses of more than one year and will only be given in exceptional circumstances to new hires (for the first year of service).

• Preliminary provisions have been made so that violations of the code can render a contract void and/or require recovery of payments made.

• Service payments will be no longer be ground for rewards and will be used to reflect performance.

• Enhanced discretionary pension benefits should be held for at least five years in the form of shares or share-like instruments.