Few will be unaware that the Remuneration Code, originating from G20, codified by the European Commission and enacted by the FSA, is about to strike. The European directive – CRD3 – set the date at 1 January 2011 and all of us in Europe must scramble to comply with that unreasonable timeframe. Now that FSA has published its policy statement we know where we stand. Well, more or less.

Setting aside for the moment the big picture questions of whether the Code achieves its aim of risk limitation and the reduction of the probability of a further banking crisis, the industry needs to consider its position, as it is now revealed to us. Remembering that FSA has anything but a free hand, the Regulator’s use of the proportionality provisions to mitigate the impact on the fund management industry is most welcome. The greatest impositions in the directive have been disapplied to those who do not regularly commit their balance sheets to risk. They will not be compelled to apply deferral measures to bonus payments and they will not have to pay those bonuses substantially in shares. The sigh of relief is audible; a significant threat to the competitiveness of the industry is lifted, for the time being at least.

Time is of essence

It is no surprise really that CP10/19 has received more attention than the FSA’s other eighteen consultation papers this year put together. Remuneration is a big issue and a political hot potato into which the FSA risks being drawn in and melted. By now everyone will be familiar with the main features – deferral and payment in shares – but most will not yet have given serious thought to the practicalities of implementation.

This is a consultation that shows further signs of the Regulator’s growing europeanisation. Not only is the process absurdly rushed, thanks to the European timetable for CRD III, but its wording is obscure and its implementation vague. Appealing as it may be to experience such flexibility in regulation, it is bad regulation and results in uncertainty, subjective assessment and resentment. As europeanisation progresses, we can look forward to much more of the same.

Generally firms expect to be able to be able to hold their fire until they can see the whites of the eyes of the new regulations. Not so this time. The European officials have again demonstrated their disdain for facilitating national consultation, leaving the FSA the task of dragooning the industry to meet the deadline of 1^st January. The flexibility that they proposed is little short of fudge, for which we should grateful even if we don’t like the taste. The use of proportionality as a smoke screen for staggered implementation with key elements held over to after the legal time-limit.

Nevertheless, at least partial implementation is required by 1 Jan. Few firms will find it realistic to wait for the confirmed rules in November before starting the necessary programme of implementation of the “appropriate governance arrangements”.  Some will be lucky or prescient enough to find that they already meet the obligations; most will not. Immediate attention is needed to remuneration policies, to record-keeping, to the remuneration committee, to the involvement of Risk and Compliance, to employment contracts. All of this is the home work prior to the main test of full compliance by 1^st July 2011.

Hidden challenge

But the real challenge lies not in the tight timeframe and not in the volume to activity required, tiresome enough as they may be, but in the judgement call on who is to be covered by the Code. Many will be tempted by the simple approach of rough justice for all. But for quite a large number of firms the de minimis rule will exempt so many of those otherwise caught as to require at least a careful review to ensure that remuneration arrangements are not being unnecessarily complicated at cost to the firm and cost to the recipients.