Oliver Lodge, OWL Regulatory ConsultingFew
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

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.

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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