Update on the Regulation of Pay in Financial Services

Pay in the financial services sector continues to provide ample material for the media, with high-profile bank executives seemingly queuing up to waive their bonuses, whether out of a sense of honour or necessity. Generally bankers’ bonuses, after something of a resurgence in 2010, have fallen from pre-credit crunch levels, although in reality the impact of this on individuals has been softened by a widespread “rebalancing” of pay from variable to fixed in the meantime.

Meanwhile, the regulation of pay in the sector has continued to develop rapidly since the Financial Services Authority (FSA) published its revised Remuneration Code in December 2010. In part, this has been driven by the inevitable bedding-in of the FSA regulations, which has brought the need to clarify and tweak aspects of the Code.

E-reward commissioned Andrew Menhennet, Principal Consultant at Yellow Hat Limited, specialist reward and communications training consultancy, to update his two previous in-depth reports for us from 2009 and 2011 summarising the current position in the ongoing development of the regulatory framework for remuneration in financial services.

*** To purchase a copy of this 51-page report (along with the previous updates from 2009 and 2011), please email your invoice details to paul@e-reward.co.uk. We will then invoice you and email your reports in PDF format on receipt of payment. The total price of the three reports is £75 + VAT @ 20%. Also available as part of an annual subscription, starting at £255 + VAT. ***

Changes to the structure of proportionality

One of the most significant developments has been the change to the structure of proportionality levels through which the FSA prioritises its regulatory effort. In its finalised guidance on proportionality, issued September 2012, the FSA reduced the number of levels from four to three and recalibrated the criteria that determine which level a firm should fall into, reducing the number of firms that fall into the highest proportionality levels in the process, and thereby easing the regulatory burden on many organisations. Our report summarises those changes and assesses their impact in section 1.

Additional guidance on the Remuneration Code

The proportionality guidelines impact not just the extent to which the Remuneration Code applies to a firm, but also the amount and granularity of the data which firms must disclose under the FSA’s final rules on disclosure. These requirements have not changed since they were published in December 2010.

However, during this time the FSA has issued a number of new documents that firms required to comply with the Remuneration Code must take into account. There are additional sets of guidance, tools and templates to assist firms with self-assessment of their compliance with the Code, and some changes to the rules and guidance provisions of the Code itself.

Our report summarises – in section 2 (“Dear CEO” letters and FAQs), section 3 (Remuneration Policy Statement templates) and section 4 (GVR, retention periods, buy out awards, voiding) – the changes and additional guidance issued in the last two years since the last e-reward report on the subject, published in issue no. 79, April 2011.

Data collection

Developments have continued at a European level too, with the 2012 European Banking Authority (EBA) guidelines on data collection sparking a new Policy Statement from the FSA. Our report summarises in section 5 how this development will bring additional reporting requirements for many FSA-regulated firms.

FSA guidance on financial incentives

In the last few months the FSA has turned its attention to the impact of remuneration on retail sales staff in financial services, in response to a growing conviction that ill-conceived sales incentive plans have been a root cause in many of the mis-selling scandals that have been so damaging to the industry in recent years.

In January 2013 the FSA published its finalised guidance Risk to Customers from Financial Incentives, with the promise of further rules-based action if firms do not act on the guidance.

In section 6, our report sets out the key features of this guidance, and looks ahead to potential future developments as European regulation, being drafted by the European Securities and Markets Authority (ESMA), once again plays catch-up with the FSA.

Changes to the regulatory framework

Last but not least, the regulatory framework within which financial services HR teams must operate is also evolving, alongside the regulations themselves. Section 7 in our report provides an update on two areas of regulatory development that will impact reward managers, the future structure of financial services regulation in the UK as the FSA splits into two, and the next iteration of European regulation, CRD4 (Capital Requirements Directive).


Section 8 includes a listing of the terms and abbreviations used in this report.

>>> To download the contents page and summary in PDF format, click here.

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