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The Financial Services Authority (FSA) has today published a consultation on the implementation of remuneration disclosure requirements based on those set out in the Capital Requirements Directive (CRD3).

CRD3 requires firms to disclose information on their remuneration policies and pay-outs on an annual basis. This is to be included in their disclosures under Basel Pillar 3. Many important elements of these requirements are derived from the Financial Stability Board’s principles and standards on remuneration disclosure.

The FSA is consulting on the following:

• Items to be disclosed - in brief, these are:
  • information on the remuneration decision-making process;
  • the link between pay and performance;
  • the most important design characteristics of the remuneration system;
  • performance criteria for assessment of remuneration;
  • the main parameters and rationale for variable compensation; and
  • aggregate quantitative information on total remuneration, variable remuneration, deferred remuneration, and sign-on and severance payments, in respect of senior management and staff with a material impact on the firm’s risk profile.
• Frequency of disclosure - Firms will need to disclose details of their remuneration policies at least on an annual basis. The FSA will require firms to make their first disclosure in respect of 2010 remuneration as soon as practicable, and no later than 31 December 2011.
• Form of disclosure - Disclosure may take the form of a stand-alone report or may be included in a firm’s annual report and accounts.
• Proportionality - CRD3 permits regulators to apply the rules on a proportionate basis, taking account of firms’ size and complexity. The FSA intends to divide firms into four tiers based primarily on their regulatory capital and type of regulatory licence or permission. Each group will be subject to a different degree of disclosure as follows:
  • Tier 1 firms - Full disclosure of all items under CRD3 – This will include around 26 very significant groups. The FSA expects firms of this size and complexity to observe the highest standards of disclosure.
  • Tier 2 firms - Disclosure of most qualitative items (including design characteristics of remuneration) and selected quantitative items - The FSA expects this category to include some 200 major firms which will be expected to provide a high degree of disclosure, although some finer details need not be disclosed.
  • Tier 3 firms - Disclosure of most qualitative items (excluding design characteristics of remuneration systems) and selected quantitative items - The FSA expects this category to include around 300 firms, which will be expected to provide a high degree of disclosure, although details such as the design characteristics of remuneration need not be disclosed.
  • Tier 4 firms - Disclosure of basic qualitative and quantitative items only - The FSA expects this category to comprise over 2,000 firms with limited regulatory licences or permissions. These firms will be expected to disclose only basic qualitative and quantitative information on remuneration.

In addition, the FSA is seeking feedback on whether there would be any meaningful disadvantages in extending the scope of disclosure requirements to include non-EEA firms operating as branches in the UK.

The consultation period closes on 8 December 2010 and the FSA intends to publish a policy statement on remuneration disclosure in mid-December.

Separately, the FSA will publish a policy statement in response to wider changes to its Remuneration Code in December, following the finalisation of the CEBS guidelines on the implementation of the Code. The revised Remuneration Code will come into force on 1 January 2011. It will apply to awards paid out in respect of the 2010 remuneration round. Firms coming into the scope of the Code for the first time will be able to make use of transitional provisions to implement certain provisions of the Code over a period of six months

Notes for editors

1. CP10/27: Implementing CRD3 requirements on the disclosure of remuneration is available on the FSA website.
2. FSB’s standards and principles are available.
3. CEBS Guidelines can be found on their website.
4. FSA’s consultation paper CP10/19 ‘Revising the Remuneration Code’ can be found on the FSA website.
5. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.