On 17 December 2010, the FSA published an updated Remuneration Code to account for the changes required by the EU Capital Requirements Directive (CRD 3).  CRD3 aims to harmonise principles of remuneration across the EU.

Whereas the existing code did not apply to insurers, but only to the largest banks, building societies and broker dealers, numbering just 26 in total, the revised code is no longer based on financial thresholds and will apply to differing extents to all banks, building societies and Capital Adequacy Directive (CAD) investment firms.  The FSA estimate that the revised code will apply to some 2700 firms in total.

As is the case with the existing code, the core requirement of the revised code is that a firm “must establish, implement and maintain remuneration policies, procedures and practices that are consistent with and promote effective risk management”.

Under the revised code, firms will be divided into four tiers with minimum levels of compliance required for each group.  A proportionate approach will be applied within these tiers so as to avoid excessive gaps between firms complying at the minimum level of one tier and firms complying to the highest extent in the tier below.

Tiers one and two will contain those credit institutions and broker dealers that engage in the most significant trading and investment activities.  Tier three will be those banks and other firms that occasionally take short term risks in terms of their balance sheets.  Tier four will be limited licence and limited activity firms.

Firms already within the scope of the existing code have until 1 January 2011 to comply with the revised code.  The firms that are within the scope of the revised code for the first time have until 31 July 2011 to comply.

The FSA press release, with links to the relevant documents, can be found here.