May 2011

LEGAL EASE: An appropriate template

Kate_TroupThe UK’s financial regulator, the FSA, issued its promised further guidance on the Remuneration Code on 21 April. It gives additional guidance on retention periods, guaranteed variable remuneration, a useful frequently asked questions (FAQ) leaflet and includes two templates for remuneration policy statements, both with specimen information lists for staff covered by the code, the “code staff ”. The FSA also issued further guidance on share-based awards in chapter 3 of its April 2011 quarterly consultation paper, CP11/7. The template remuneration policy statements indicate in some detail the information the FSA expects companies to include. It recommends that firms should use the templates as a matter of good practice and, while they are not obligatory, if alternative formats are used they should include equivalent information. Accordingly, for most firms it would be sensible to use an appropriate template, at least to begin with, as the templates will be the starting point for the FSA in determining if a business is compliant. As the statements are designed to give the FSA the information it requires to assess compliance, they contain a significant amount of information and will need to be prepared carefully. Firms must complete their policy statements by 1 September, 2011 and for most this will apply to the 2011/12 pay round. As the FSA requires them to be reviewed and approved by the remuneration committee (or equivalent body), work on compiling them (for those which have not already done so) should now be put in hand. Companies which have started the process should consider their policy statements in light of the FSA templates. Completed statements do not need to be sent to the FSA unless requested, most likely ahead of an Arrow (Advanced Risk Response Operating Framework) assessment or as part of a thematic review. The additional guidance on guaranteed variable remuneration confirms that an institution covered by the code – a “code firm” – should apply the code rules on guaranteed variable remuneration to all staff, not only to code staff. It provides guidance on the need for prior notification to the FSA in relation to signing on and retention awards. Prior notification is not required for signing on awards, but it is required for retention awards to code staff. In addition, in certain circumstances guidance may need to be sought from the FSA on whether the retention award is appropriate. There is also further guidance on the appropriate period of retention for shares or share instruments (the FSA would normally consider six months from the date of vesting to be sufficient) and on the tax treatment of awards made in shares or share instruments. Retention would only apply to amounts net of tax where tax is deducted at source. The FAQ leaflet contains useful guidance on a number of topics, including the treatment  of persons who spend only a small part of their time on code firm activities and the classification of fund managers and members of partnerships as code staff. They confirm that a business may allow a proportion of deferred remuneration to vest before the threeto five-year period, provided that such vesting is no faster than on a pro-rata basis. Further to this, firms in tiers 3 and 4 do not have to give reasons for disapplying code rules on deferral and retained shares and, although they do not say so, this is presumably also the case when disapplying performance adjustment requirements and, in the case of tier 4 firms, leverage. Finally, the FSA has put back the deadline for compliance with the requirement to pay 50% of variable remuneration in shares or share instruments for mutuals, non-listed groups and groups with only non-equity shares listed, to 1 July, 2012, at the latest. These requirements are not relevant to companies in tiers 3 and 4 as they can choose to disapply them. We have worked with a number of businesses on implementing the code and there is now limited time for themto complete the process. Kate Troup is a partner in the financialservices team at Speechly Bircham LLP ©2011 funds europe

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