In August 2009, the FSA published its new Remuneration Code of Practice. The Remuneration Code is intended to deal with some of the criticism of the incentive practices of large banks and other financial institutions that has been aired in the media in recent months. There has been widespread concern that certain incentive structures have encouraged excessive risk-taking and, as a result, contributed to the financial crisis and its economic impact. The FSA aims to promote risk as a factor to be addressed in the formation and operation of incentive schemes.
The Remuneration Code largely reflects the FSA's proposals in the consultation paper which it published earlier this year. The Remuneration Code applies to large banks, building societies and broker dealers and contains one general rule backed up by eight principles, which are to be used as evidence of compliance with the general rule. The general rule requires remuneration policies and procedures to be consistent with, and to promote, effective risk management. The supporting principles include the following:
- assessments of financial performance for the purpose of bonuses should be based principally on profits adjusted for current and future risk;
- focus should be more on longer-term performance where performance related remuneration is a significant part of an employee's total remuneration;
- non-financial performance measures, including adherence to effective risk management and regulatory compliance, should form a significant part of assessing performance; and
- the structure of remuneration packages should be consistent with, and promote, effective risk managment, for example, it is good practice to defer the vesting of a significant proportion of any bonus for a period of at least three years and guaranteed bonuses should not run for a period of more than one year unless they are based on performance during the performance period.
While the Remuneration Code will initially only apply to large banks, building societies and broker dealers, the FSA will publish its view in October 2009 on whether it should be extended to cover other FSA-authorised firms.
The Remuneration Code will be effective from 1 January 2010. In order to implement the Remuneration Code, relevant firms should change their remuneration policies and procedures by that date and remuneration structures and contracts should also be implemented with effect from 1 January 2010 (although there will be transitional provisions in place for employment contracts entered into before 18 March 2009). In addition, every firm subject to the Remuneration Code must provide the FSA with their first remuneration policy statement by the end of October 2009.
View the FSA's Remuneration Code of Practice (67 page pdf).