On August 12, the UK Financial Services Authority (FSA) introduced a remuneration code of practice (the Code). It requires UK banks with regulatory capital exceeding £1 billion (approx. $1.65 billion) and investment firms with regulatory capital exceeding £750 million (approx. $1.24 billion) to establish, implement and maintain remuneration policies consistent with effective risk management. Currently 26 firms fall within the Code’s regulatory capital scope.

The Code introduces a new rule that requires firms within its scope to have in place remuneration policies consistent with effective risk management. The FSA has also added eight principles to the Systems and Controls (SYSC) module of its handbook designed to clarify how the FSA will assess compliance with the Code.

Although the Code applies directly only to the largest UK regulated firms, the FSA has indicated that it expects all banks, broker-dealers, investment managers and building societies to take note of its provisions since it represents the FSA’s view on good practice for all firms.

The FSA stated that the fundamental objective of its remuneration policy is to sustain market confidence and promote financial stability through removing the incentives for inappropriate risk taking by firms, and thereby to protect consumers. It considers the need to ensure that remuneration policies and practices are consistent with and promote effective risk management to be fundamental. The FSA expects firms’ boards of directors and senior management to focus on ensuring that the total remuneration amounts distributed by firms are consistent with good risk management and that individual compensation practices provide the “right incentives.”

Changes to policies and procedures should be fully in place by January 1, 2010, and changes to remuneration structures and contracts should be implemented with effect from January 1, 2010.

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