FSA brings Mifid advisers and wealth managers under remuneration code

The Financial Services Authority (FSA) is proposing to widen the application of its remuneration code to financial advice firms under Mifid and fund managers, forcing staff that fall under the rules to defer 40% of any bonuses for three years.

The FSA has expanded the scope of its remuneration code beyond banks, building societies and broker dealers to bring it in line with the European Union’s Capital Requirements Directive (CRD3) and the Financial Services Act 2010. 

Investment and financial adviser firms who have opted into Mifid will be caught by the new code, according to Andrew Strange (pictured), policy director for the Association of Independent Financial Advisers.

‘The vast majority of IFAs will not be affected but the reality is that only a year ago this only applied to 27 banks but has now spread to 2,500 firms,’ said Strange. ‘IFAs should be aware of these proposals because these things have a habit of expanding their scope.'

For staff that come under the code, at least 40% of a bonus must be deferred over at least three years, and at least 60% if the bonus is more than £500,000. The FSA is proposing that at least 50% of bonuses must be made in shares, share-linked instruments or 'other equivalent non-cash instruments' of the firm. Firms will be prohibited from offering guaranteed bonuses for more than a year, and guarantees will only be allowed in exeptional circumstances for new hires.

The code will also require firms to ensure that their remuneration levels do not threaten their capital base. 'Total variable remuneration must be significantly reduced in circumstances where the firm produces a subdued or negative financial performance,' it said.

Severance payments should reflect performance over time and 'failure must not be rewarded', the code states.The regulator is consulting on which staff should come under the code. It is proposing that it will apply to 'senior management and anyone whose professional activities could have a material impact on a firm's risk profile'.

It said that the reporting requirements for smaller firms will be less demanding. 'There will be less onerous reporting requirements for smaller firms. We may look at a thematic review but they will not be required to report like larger firms,' said an FSA spokeswoman. She added that any requirement would be 'appropriate and proportionate'.

The FSA said that the onus will be on firms to identify staff that come under the code, but their lists will be subject to review and challenge from the regulator. It will consult on the measures before issuing a policy statement in November 2010, with the rules becoming effective from 1 January 2011.

The FSA introduced its remuneration code last year. It applies to the largest banks, building societies and broker dealers but bringing it in line with CRD3 and the Financial Services Act 2010 will see it apply to more than 2,500 firms, including all asset managers, hedge fund managers, Ucits investment firms, financial advice and stockbroking firms.