The Government has now published its much-touted Financial Services Bill which, according to the HM Treasury press notice, includes "tougher rules on pay and bonuses that will ensure remuneration policies do not contribute to excessive risk taking".
Among the key features of the Financial Services Bill are legislative provisions on pay that follow the Walker review of corporate governance (the final version of which will be published on 26 November 2009) and the G20 agreement on remuneration, including:
- a duty for the Financial Services Authority ("FSA") to make binding rules implementing the G20 pay agreement (following further detail from the Financial Stability Board in Spring next year);
- giving the FSA power to void any individual contract that contravenes specified rules, and to make provision for the recovery of payments made under any such contract which is contrary to those rules; and
- bringing an end to multi-year guaranteed bonuses, or large bonuses paid out as a cash lump sum at year-end, with all bonuses being subject to claw-back.
The Financial Services Bill contains 3 clauses relevant to the remuneration of executives of FSA-authorised persons.
Two of these clauses (clauses 9 and 10) will enable the Treasury to make regulations requiring the preparation of a remuneration report disclosing information on the remuneration paid to officers and employees of any "authorised person" (and to others with a specified connection to the authorised person). In addition to enabling the Treasury to require the remuneration report to contain that information which quoted companies are already required to include in a directors' remuneration report, the Treasury may also require the disclosure of comparative information, such as the ratio between the highest and lowest paid employees. The FSA is entitled to publish reports filed with it.
The third relevant clause (clause 11) is much more controversial. The FSA will now have a duty to make rules requiring authorised persons to implement a remuneration policy. The FSA is also obliged to ensure, through such rules, that remuneration policies required by the rules are consistent with effective risk management and with the Financial Stability Board's Implementation Standards for Principles for Sound Compensation Practices. In making rules about remuneration, the FSA must have regard to any other relevant international standards about remuneration which are in force.
The Treasury will have power to make a direction that the FSA should consider whether the remuneration plans of a particular authorised person comply with the requirements imposed by the FSA in relation to remuneration policies (the FSA must be consulted before the Treasury makes such a direction).
Where the FSA considers that a remuneration policy fails to meet these requirements, the FSA must take such steps as it considers appropriate to deal with the failure (including requiring revision of the relevant remuneration policy).
The FSA rules may impose specific prohibitions on the way in which a person may be remunerated. They may provide that any provision of an agreement (eg, an employment contract or bonus scheme) which contravenes such a prohibition is void and so unenforceable, and provide for the recovery of any payment made or other property transferred under such a provision.
The Government has already faced criticism over plans to hand the FSA some of the powers contained in the Financial Services Bill. It remains to be seen whether intervention by the FSA will trigger litigation, either from banks or bankers claiming they have been unfairly treated.
Leaving aside the question of whether and in what form the Financial Services Bill will finally be enacted, there are various issues that could arise for employers if the Financial Services Bill is enacted in its current form. These include whether to seek an appeal through The Financial Services and Markets Tribunal system or a judicial review that the FSA has acted unreasonably in intervening in a particular authorised person's remuneration policy (depending on how the relevant regulations are drafted) and whether individuals might sue their employers for withholding payments following intervention from the FSA.