Few will be unaware that the Remuneration Code, originating from G20, codified by the European Commission and enacted by the Financial Services Authority (FSA), is about to strike. The European directive – CRD3 – set the date at 1 January 2011 and all of us in Europe must scramble to comply with that unreasonable time frame. Now that the FSA has published its policy statement we know where we stand. Well, more or less.
Setting aside, for the moment, the questions of whether the code achieves its aim of risk limitation and the reduction of the probability of a further banking crisis, the industry needs to consider its position, as it is now revealed.
Remembering that FSA has anything but a free hand, the regulator’s use of the proportionality provisions to mitigate the impact on the fund management industry is most welcome.
The greatest impositions in the directive have been disapplied to those who do not regularly commit their balance sheets to risk. They will not be compelled to apply deferral measures to bonus payments and they will not have to pay those bonuses substantially in shares.
The sigh of relief is audible; a significant threat to the competitiveness of the industry is lifted, for the time being at least.
This outcome, most welcome as it is, does not come as a complete surprise. The FSA has been able to utilise to full advantage the broad concessions made by the Committee of European Banking Supervisors (CEBS) earlier in the month. But where CEBS refused to concede that the time frame should be extended, FSA has stuck to its own position and has provided, come what may, an extra six months for implementation.
The key to all recent developments in this saga is the use of proportionality. Some will say that FSA has grossly over-engineered this simple principle, so succinctly expressed in the directive. But that overlooks the scale and significance of setting aside the main obligations embedded in the directive.
If firms had been left to make implementation decisions on an individual basis, few could have risked disapplications on this scale. They would have known that their decisions would be second-guessed by the regulator and they would have had to face either inconsistent application by supervisors or the application of hidden benchmarks, which the industry has correctly decried in the past.
So, cumbersome as it may look, the proportionality guidance is undoubtedly the best bit of this unwelcome code.
This may sound like early release, but those affected will need to avoid assuming that there is now nothing left for them to do. Proportionality may disapply key elements; it does not disapply the code itself.
The Revised FSA Remuneration Code, a one-day conference with FSA remuneration project manager David Raikes, is hosted by City & Financial in central London on January 20 2011. More information at www.cityandfinancial.com