UK: FSA publishes remuneration code of practice

The Financial Services Authority has today published its remuneration code of practice for banks, building societies and broker dealers. The code comes into force on 1 January 2010. It contains the general requirement that firms must "establish, implement and maintain remuneration policies, procedures and practices that are consistent with and promote effective risk management". This is supported by eight principles and further guidance, including information on the requirement for firms to produce a remuneration policy statement (about which the FSA will shortly be writing to remuneration committee chairs).

With regard to the structure of bonuses, the Code is less prescriptive than that originally published by the FSA and instead contains, in principle 8, the requirement for the remuneration structures of senior employees and risk takers to be consistent with and promote effective risk management. The Code does, however, contain this guidance: 

'Guaranteed minimum bonuses' which run for a period of more than one year and similar payments in addition to an employee’s salary that are not based on performance during the performance period under review are likely to be inconsistent with Remuneration Principle 8". 

The level of bonuses paid within banks remains controversial (see, e.g., the letter in today's Guardian newspaper written by a group of UK university business school professors). With regard to the amount of remuneration paid, the Code states that it is:

... concerned with the risks created by the way remuneration arrangements are structured, not with the absolute amount of remuneration, which is a matter for firms’ remuneration committees".

The eight principles cover the following areas:

1. Role of the bodies responsible for remuneration policies and their members (e.g., the remuneration committee, the remuneration policy statement).
2. Procedures for setting remuneration and risk and compliance function input.
3. Remuneration of employees in risk and compliance functions.
4. Profit-based measurement and risk-adjustment.
5. Long-term performance measurement.
6. Non-financial performance metrics.
7. Measurement of performance for long-term incentive plans.
8. Remuneration structures.
   

Whether the Code should apply to all FSA authorised firms will be the subject of a consultation paper in the autumn. As it currently stands, the Code will apply to 26 firms. 

The Code will be included in the FSA Handbook and the relevant amendments are being made by the Senior Management Arrangements, Systems and Controls (Remuneration Code) Instrument 2009.

For further information see: FSA policy statement (including the Code) | FSA press release | FSA newsletter | March 2009 consultation paper | Article by the FSA chief executive in today's Financial Times newspaper | 

Update (13 August 2009): the FSA Handbook has now been updated to include the Code: click here (if the Code is not displayed, try changing the date at the top of the page to 1 January 2010).