New guidance published today by the Financial Services Authority (FSA) sets out the final form of its Code of Practice for employee remuneration by UK financial institutions. The Code follows consultation on proposals made by the FSA earlier this year, and will require large banks, building societies and broker dealers in the UK to establish, implement and maintain remuneration policies and structures which are "consistent with, and promote, effective risk management".

Jocelyn Mitchell, partner in the employment, pensions and benefits practice at international law firm Freshfields Bruckhaus Deringer, comments:

‘There has been a general acceptance amongst financial institutions that there was a need for change in remuneration practices, but there were several aspects of the draft FSA rules that would potentially have put UK firms at a disadvantage to other countries not constrained by the same regulations.

‘One of these was the very prescriptive proposals for structuring bonuses and long term incentives. Whilst the FSA has not backed away from the principle that bonus structures should incorporate appropriate adjustments for risk and mechanisms for deferral, it has recognised that its original proposals were too rigid, particularly as to the proportion of pay to be deferred and the length of the deferral period. Instead of providing specific evidential provisions (EPs) on these aspects the FSA has now expressed them as ‘guidance’ as to what is good practice, which should give financial institutions more freedom for implementation and allow them to tailor arrangements to fit their own specific circumstances.

‘The FSA has also clarified that the Code's rules on remuneration structures are targeted primarily at senior employees and risk takers, and not the broader employee population, which is helpful in that it will reduce the impact of transition.

‘In terms of timing, firms do now have to ensure they take prompt action to comply with the Code. Whilst the time for implementation has been extended, the timetable is still tight. Firms must provide the FSA with their first Remuneration Policy Statement by the end of October this year. Further guidance on what these Statements should contain is expected later this month. Companies must have Code-compliant remuneration policies in place that are effective from 1 January next year, and must have amended contractual arrangements where necessary by no later than the end of next year. The transitional issues may be significant and there will be a number of contractual and employment law issues to be addressed.'