Deciphering the Remuneration Codes
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Introduction
Pay in the financial services sector used to be so simple. You agreed a package with the employee and that was it. If your company was listed there might be a code of corporate governance that had some bearing on this, but those provisions were light and went more to the process for setting pay than how pay should be structured. Then came the financial crisis. The regulators and politicians decided that one of the causes of this was an excessive bonus culture in the banking sector. Result: new rules on remuneration.
The Financial Services Authority (FSA) was an early adopter of a remuneration code, subsequently revising this when Europe caught up with the implementation of the Third Capital Directive (CRD III). The adoption of the Fourth Capital Directive (CRD IV) has more recently caused some further changes and has led to the Financial Conduct Authority (FCA) dividing firms previously affected by its old Remuneration Code into firms affected by its (revised) Remuneration Code (essentially affecting banks and building societies) and a new "BIPRU Remuneration Code" for other MiFID firms.
What was good for the banks must, it was assumed, also be good for investment managers and the next opportunity was taken to introduce similar rules under the Alternative Investment Funds Managers Directive (AIFMD) applying similar rules to managers of alternative investment funds. UCITS funds are now catching up with the recent passing of the Fifth Directive on Undertakings for Collective Investment in Transferable Securities (UCITS V), although we will need to wait for the European Securities and Markets Authority (ESMA) and the FCA to produce their guidance on how the directive requirement is to be applied before this is translated into binding regulation.
In this paper, we take stock of where the different regimes have got to, consider the similarities and differences between the regimes, and look at some of the difficulties in applying the regimes.