Category Archives: City Regulation/Risk/FSA

Looking at City Regulation with an emphasis on the financial services sector.

Shared Parental Leave – what could it mean for the City?


The advent of shared parental leave will bring about a major cultural change.  HR practitioners will no doubt be keen to learn from countries that have already successfully implemented shared parental leave schemes such as Canada, and Denmark; and this may lead to an exchange of ideas between financial institutions in the City. The proposed merger between TMX Group (which operates the Toronto Stock Exchange) and the London Stock Exchange may become a further catalyst for dialogue between HR professionals across the Atlantic on this very issue.

 HR practitioners in the City will follow the forthcoming consultations closely to see how the Government intends to introduce a system to request shared parental leave, and the grounds upon which such a request may be refused. The central issues in the City will be trying to balance a system that is flexible and fair for staff, but also sufficiently certain for business purposes.

 Challenges could include how to deal with an employee who requests to take chunks of leave (if indeed this is permitted) over a period of weeks or months, and how to cover for staff in this way.  All organisations will need to update their existing employment policies and procedures and train staff in due course.

 The Government’s research (contained in the Final Impact Assessment for additional paternity leave) provides a snap shot of some of the factors affecting take up of shared leave in other countries. In Finland, for example, it was found that overall parental leave is shared more often in families where both spouses have a high level of education and middle sized or good income – which may initially indicate that the take-up in the City will be high. However, it is likely that the level of take up will be guided by several factors, including the level of parental leave pay, and of course whether it suits the needs of employees.  Shared parental schemes are already in operation in the UK; last year Santander published plans to offer shared parental leave to staff, and details of their internal consultations may be of interest to the City HR community

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Filed under Ch ch ch changes, City Regulation/Risk/FSA, employment law, Government proposals, HR Tips, Office Policies

A New Years resolution or a new problem?


A recent story from BBC news that UK banks are to pay billions in bonuses (although down from last year) has attracted a lot of media attention and I have been asked for my views:

The reality may be that the reduced bonus payments are more reflective of market conditions than a new years resolution from the financial services sector to tow the line of the governments scratched record pledge to tackle “unacceptable bonuses”; and lets not forget the recent rush to increase the basic remuneration of some bankers in an attempt to pre-empt the recent EU bonus cap announcement. 2011 should slowly usher in a new prudent regime which eschews risk, and rewards staff by awarding deferred compensation, rather than cash bonuses.

However, I predict that the reaction to the donkey bray from the Government for the sector to show restraint in awarding unacceptable cash bonuses will actually have the effect of promoting a shift towards promoting increasingly high levels of deferred compensation. The level of deferred compensation awarded in 2011 could set a dangerous precedent; and if not supervised could spawn an entirely unexpected new problem in the future.

The recent announcement about bonus levels will usher in a new season of banker bashing; but before gathering pitchforks in the market we should look to the recent developments in the financial services sector, which have not been very well publicised: On New Years day HM Treasury announced a newpermanent levy on banks’ balance sheets(0.05 per cent, rising to 0.075 per cent from 2012 onwards); the FSA has published a new remuneration Code; the European banking Authority (EBA) came into being (in London) on new years day. With the new bank levy predicted to bring in an additional £2.5bn to the HM treasury coffers; and a recent report from an accountancy firm recording that more than 11 per cent of the UK’s total tax last year came from the UK’s financial services industry many banker bashers will realise that we need to be careful not to kill the goose that lays the golden eggs; and the regulators will also need to ensure that the industry does not allow high levels of deferred compensation to fatten up that same golden goose, leaving the UK tax payers with a new type of fois gras.

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FSA – Revising the Remuneration Code


In a July 2010 consultation, the FSA outlined its proposals to amend the Remuneration Code (“the Code”). The consultation contained a number of proposals which will bring more financial firms, and more highly paid employees, under its regime and seek to further promote an underlying principle of “effective risk management[1] throughout the financial sector.

The consultation refers to the pending implementation of the latest amendments to the Capital Requirements Directive (“CRD3”)[2], stating that although the Code in its current form is “substantially consistent with CRD3”, the Code will require amendment “to ensure it is fully in line with the Directive”.

In terms of domestic legislation, the consultation states that the implementation of sections 4 to 6 of the Financial Services Act 2010 which empower the FSA to require the disclosure of certain executives remuneration packages, and to regulate their remuneration “in accordance with a remuneration policy”. These provisions will also require the FSA to “consult on changes to the Code.”

The consultation proposes a number of alterations to the Code by way of general application to firms, staff and groups, including the following:

  • Application to firms

The implementation of CRD3 on 1 January 2011 will require the Code to widen the definition of firms which fall under its regime to include “all banks, building societies and certain investment firms including asset managers.” This will “significantly increase” the number of firms subject to the Code to “over 2,500”.

  • Application to staff

The definition of the staff to whom the Code will apply is also proposed to widen from the “P8 employee” definition to a new group referred to as “Code staff”. This new group will include the following:

a)     A person who performs a significant influence function for a firm;

b)     A Senior Manager; and,

c)     All staff whose total remuneration takes them into the same bracket as senior management and risk takers, whose professional activities could have a material impact on a firm’s risk profile.[3]

This definition is significantly wider than the definition of “P8 employee”, the previous definition being:

1)      A person who performs a significant influence function for a firm; and,

2)      An employee whose activities have, or could have, a material impact on the firm’s risk profile.[4]

Under the P8 definition, the FSA “reviewed the deferral arrangements for 4,300 P8 employees.” The widened “Code Staff” definition will, one would think, place more staff within the scope of the Code.  The consultation also proposes that firms “compile a list of Code staff ahead of the bonus allocation period” and make this list available to the FSA for review.

  • Application to Groups

The territorial scope of the Code is proposed to extend as follows:

  • UK groups should apply the code globally to all their regulated and unregulated entities; and,
  • UK subsidiaries of third country groups must apply the Code in relation to all entities within the subgroup, including the entities based outside the UK.

In addition to widening the scope of the Code, the consultation also proposes a new set of 12 Remuneration Principles:

  1. Risk management and risk tolerance,
  2. Supporting business strategy, objectives, values long term interests of the firm,
  3. Avoiding conflicts of interest,
  4. Governance,
  5. Risk and compliance function input,
  6. Remuneration and capital,
  7. Exceptional government intervention,
  8. Profit based measurement and risk adjustment,
  9. Enhanced discretionary pension benefits,
  10. Personal Investment Strategies,
  11. Avoidance of the Code, and
  12. Remuneration structures.

By addressing issues such as “risk management and governance[5] and “rules on capital, government intervention, pensions, hedging and avoidance[6] the Code incorporates Principles which are ostensibly designed to alter the business practices of financial firms in the longer term, but it is Principle 12 which is most likely to cause concern for those expecting to continue to benefit from the now ubiquitous bonus payment. Principle 12 is accompanied by further guidance designed to reign in a firm’s ability to pay cash bonuses. The guidance includes:

  • Deferral of at least 40% of a bonus “vesting over a period of at least 3 years for all Code Staff”, with a suggested 60% deferral in the case of “particularly high” amounts.
  • A rule requiring “at least 50%” of a bonus to be paid by way of “shares, share-linked instruments, or other equivalent non-cash instruments of the firm”.
  • A performance adjustment provision – providing that a reduction is made to a deferred bonus award for poor performance.
  • A rule preventing firms from guaranteeing bonuses of more than one year except to new employees in their first year of service, and in other exceptional circumstances.
  • A de minimis provision – the Code proposes that Code staff earning less than £500,000 a year and whose bonus is less than 33% of their total remuneration would be exempt from the above provisions.

Breaching the Remuneration Principles

Section 6 of the Financial Services Act provides the FSA with “express powers” to:

  • Prohibit a firm from remunerating its staff in a specified way;
  • Render void any provision of an agreement that contravenes such a prohibition; and,
  • Provide for the recovery of payments made, or properly transferred in pursuance of a void provision.

The consultation notes that these measures “are only likely to be effective where the effect of the prohibition can be clearly ascertained in advance.” For this reason, the consultation proposes to use the section 6 provisions only in relation to deferral arrangements, and guaranteed bonuses.

The policy statement and final rules are expected to be published in mid-November 2010, with the rules expected to come into effect from 1 January 2011.


[2] The final text of CRD3 is expected to be published towards the end of 2010. CRD3 will amend the EU Banking Consolidation Directive (2006/48/EC) and Capital Adequacy Directive (2006/49/EC).  http://www.fsa.gov.uk/pubs/cp/cp10_19.pdf

[4] As defined by FSA Rule 19.3.15: http://www.fsa.gov.uk/pubs/policy/ps09_15.pdf

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