UK to regulate City bonuses

Regulator initiates process of discussion to address remuneration issues

LONDON – The UK Financial Services Authority (FSA) has released a ‘Dear CEO’ missive explaining its new requirements regarding bonuses at investment banks and financial firms. Although the letter says it is difficult to regulate without being overly prescriptive, the regulator expects firms to develop structures to effectively monitor their remuneration policy – and wed it to risk management.

The FSA says it is addressing “widespread concern” over the link between remuneration cultures and the global financial crisis. It says its recommendations are in line with the April 2008 recommendations from the Financial Stability Forum, the International Institute of Finance and the Counterparty Risk Management Group.

The FSA’s letter says: “During September, the FSA held a number of high-level discussions with London-based firms about remuneration policies. Between now and the end of the year we will arrange a further round of visits to all recipients of this letter. Our aim will be to gather more specific information about remuneration practices in your firm to assure bad practices are not present and to seek further input on what would constitute good practice.”

Examples of bad practice include bonuses calculated on the basis of revenues without any counterbalancing risk controls, performance assessed entirely on the results for the current financial year, and remuneration paid solely in cash.

The FSA says its letter does not constitute formal regulation, but an ongoing process of discussion. The results of this work are due in early 2009.

To read the letter and its recommendations for good practice click the link below.

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