If you are a Tier 2, 3 or 4 firm, there is now less than one month to go to complete your Remuneration Policy Statement (RPS) as required by the FSA Remuneration Code. By 31 December 2011, you will need to have met with your Remuneration Committee (or equivalent body) to gain the necessary approvals and have your RPS drafted and ready for inspection by the FSA.
The most recent RPS templates can be found on the FSA's Remuneration Code webpage.
In order to assist, we have set out below some useful practical points to keep in mind when completing your RPS.
- Have the necessary background documentation to hand – As an aid to completing your RPS it may be useful to put together a pack of the background materials you are likely to need to refer to. As well as the Remuneration Code itself, the applicable template RPS and Code Staff Annex, this is likely to include a copy of your bonus plans, your most recent ICAAP and Pillar III disclosure and any applicable risk policies (for example, your Compliance Manual, Conflict of Interest Policy and Code of Ethics).
- Explain your arrangements in the context of your business – The template RPS includes a number of specific questions in relation to the operation of your bonus plans, but it may be helpful to set out for the FSA some additional detail in relation to the structure of your firm. This will be the case if there is parent level involvement in bonus pool generation or in the decision making process in relation to bonuses. It can also be useful to include a short explanation of the relevant executive teams or committees involved in decisions about remuneration, highlighting whether your risk or compliance functions either sit on or input into those bodies.
- Ensure all types of variable remuneration are included – Bear in mind that any partner profit share or carried interest would be deemed to be variable remuneration for the purposes of the Remuneration Code, so details of these arrangements should be included.
- Highlight the link between risk management and remuneration– When completing the sections relating to risk management, it will be important to refer to your ICAAP and latest Pillar III disclosure; this will ensure that the information presented to the FSA in relation to who is responsible for setting and monitoring the risk management framework is consistent.The FSA will expect firms to demonstrate where risk is taken into account both in the determination of the bonus pool and in the assessment of individual performance. With that in mind, your RPS should make clear the extent to which the relevant decision makers have a power either to reduce bonus pools to take risk into account or to reduce individual awards, for example where there is evidence that risk policies have not been adhered to. You should also include an additional reference to any general power to reduce bonus pools or individual awards on sustainability grounds, regardless of individual performance.Even if you are not required to impose deferral or payment in the form of equity instruments, to the extent that bonus pools are directly or indirectly linked to equity or fund value or growth (and in particular if your bonus arrangements contain a deferral element which reflects this period for growth), this will be useful to include.If any of your bonus pools comprise an element of projected revenues or profits, you might also want to include an explanation of any look-back processes which consider whether projections were accurate.
- Assess your Code Staff carefully– When identifying Code Staff, consideration should be given to Non Executive Directors and parent level SIFs. SIFs and senior managers should be included unless it can be demonstrated that they do not have a material impact of your risk profile. This will require you to assess your risk profile and the activities of the relevant SIFs.Firms are also asked to confirm what measures have been taken to make sure that the Code Staff are aware of what this means for them. You may have written to your Code Staff setting out a brief summary of the purpose of the Code, informing them of their designation as Code Staff and explaining the implications of this, or, you may have decided to provide training to your Code Staff. Whichever method of communication you have chosen, a confirmation should be included in the RPS.
- Consider introducing a Remuneration Policy– If you have a remuneration policy in place, it would be useful to review this in tandem with the preparation of your RPS. If you do not already have one, you might want to consider preparing one – it can be helpful to pull together in one document the key messages you want to communicate relating to remuneration as well as those aspects of the Remuneration Code that the FSA expects to have been communicated to employees (for example the prohibition on adopting personal hedging strategies).Set out below are some examples of the topics that are commonly covered in such policies:
- Introduction and application
- Explanation of decision making bodies
- Regulatory background
- Code staff criteria
- Bonus plans – high level summary
- Remuneration and risk mitigation
- Policy on guaranteed remuneration
- Policy on payments on termination
- Implementation and review
If you have any questions in relation to your RPS or Remuneration Policy, please contact a member of our team who would be happy to discuss.