The Financial Services Authority (FSA) is consulting on whether to incorporate its Code of practice on remuneration into the FSA Handbook. The Code has a general requirement that “a firm must establish, implement and maintain remuneration policies, procedures and practices that are consistent with and promote effective risk management.”

The latest draft Code makes clear that:

- it covers all aspects of remuneration, "including wages, bonus, long term incentive plans, options, hiring bonuses severance packages and pension arrangements";

- express duties of a firm's remuneration committee have been expanded to include, "approving and periodically reviewing the remuneration policy and it adequacy and effectiveness";

- the remuneration of employees in risk management and compliance functions should be structured so that the variable component of their remuneration is a significantly smaller proportion of total remuneration than for employees in other business areas and that their remuneration should be "sufficient to attract and retain staff with the skills, knowledge and expertise to discharge those functions"; and

- "management accounts should provide profit data at such levels within the firm's structure as enables a firm to see as accurate a picture of an employee's contribution to a firm's performance as is reasonably practicable."

The consultation paper sets out proposals to ban major financial companies from providing financial incentives and benefits (including pensions) which encourage risky behaviour in employees. The consulting period on implementation of the Code for larger banks and broker dealers will run until 18 May 2009. The consultation period on the possibility of extending the Code to other entities regulated by the FSA will run until 18 June 2009.

View the consultation paper.