FSA Proposes Revamp on Boundary Between Tiers 2 & 3 for Banks and Building Societies

Jack Humphrey, Regulatory journalist
October 31, 2011 /

Thr Financial Services Authority has released a guidance that relates to the Remuneration Code, Disclosure – remuneration requirements, and
General guidance on proportionality.

This guidance is likely to be of most relevance to all FSA-authorised banks, building societies and Capital Adequacy Directive (CAD) investment firms.

The FSA’s revised Remuneration Code came into force on 1 January 2011, implementing the rules on remuneration contained in the Third Capital Requirements Directive (CRD3).

The remuneration principles proportionality rule recognises that a firm must comply with the principles of the Code in a way and to the extent that is appropriate to its size, internal organisation and the nature, the scope and the complexity of its activities.

The FSA set out in the General guidance on proportionality a four-tiered framework for applying the Code proportionately.

The proportionality framework provides a starting point to help firms understand the general expectations of what constitutes adherence to the Code.

Recognising the nature of the proportionality principle, the FSA will consider a firm’s specific risk characteristics when deciding whether the proportionality tier determined for it by the proportionality framework is appropriate to that firm’s individual circumstances.

In light of its review of firms’ applications for individual guidance to change proportionality tiers, in FSA’s view banks and building societies with capital resources between £50mn and £100mn present a sufficiently low remuneration risk as to warrant tier 3 treatment.

“We are therefore proposing a change to the boundary between tiers 2 and 3 for banks and building societies. This paper recommends that this boundary is raised from £50mn capital resources to £100mn for banks and building societies, aligning it with the corresponding boundary for BIPRU 730K firms (that is a full scope BIPRU investment firm),” the FSA stated.

The key cost-benefit issues have been considered in earlier consultations and are still valid. The FSA is only changing the boundary.

This change to the boundary will reduce the regulatory burden on the affected firms. Therefore, no cost-benefit analysis is required.

The FSA is inviting public views until 28th November 2011.


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