Today, the U.K. Financial Services Authority (FSA) introduced a new code of practice, effective January 1, 2010, that requires large U.K. banks, building societies and broker-dealers to adopt remuneration policies consistent with effective risk management. The new code was designed with two principles in mind: ensuring that total remuneration is in line with good risk management principles and firm sustainability, and providing appropriate incentives with respect to individual compensation.

Specifically, the code cites guaranteed bonuses of more than one year as incompatible with good risk management policy, and also calls for the bonuses of senior employees to be spread over three years. As mandated by the FSA’s letter issued in July 2009, firms must submit a remuneration policy statement to the FSA by the end of October 2009. The policy statement must be approved by the firm’s remuneration committee prior to submission. Those firms that fail to comply may face enforcement action or be subject to additional capital requirements.