UK's FSA Introduces New Remuneration Code

by Robin Pilgrim, LawandTax-News, London

14 August 2009

The Financial Services Authority (FSA) has introduced a new code that will require large banks, building societies and broker dealers in the UK to establish, implement and maintain remuneration policies consistent with effective risk management.

The new code is designed to achieve two objectives:

• that boards focus more closely on ensuring that the total amount distributed by a firm is consistent with good risk management and sustainability; and
• that individual compensation practices provide the right incentives.

The code makes clear that it is not expected that firms will enter into contracts with individuals which provide guaranteed bonuses for more than one year. It is also expected that for senior employees, two-thirds of bonuses will be spread over three years.

Firms are expected to provide the FSA with a remuneration policy statement by the end of October. This will have to be signed off by remuneration committees and will enable the FSA to check compliance with the code. Non-compliant firms could face enforcement action or, ultimately, be forced to hold additional capital should they pursue risky processes.

The rule and code are consistent with the recommendations of the Financial Stability Board and with the measures being considered by others such as Switzerland and the EU. International negotiations on common guidelines should be concluded in the first half of 2010.

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