FSA confirms remuneration code of practice

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LONDON - A remuneration code of practice has been confirmed for the UK financial services industry today, as the Financial Services Authority (FSA) added its financial pay guidelines into its regulatory handbook.

The FSA said it was including the code of conduct into its handbook now so that the large banks, building societies and broker dealers could put into place the recommendations in time for their planning for 2010.

The code is designed to ensure firms establish, implement and maintain remuneration policies that are consistent with effective risk management, in response to criticisms that many firms operated incentivisation far out of kilter with risk-based metrics.

Firms are now required to provide the regulator with a remuneration policy statement before November, signed off by a remuneration committee checking compliance with the code. A press release from the regulator stated: "Non-compliant firms could face enforcement action or ultimately, be forced to hold additional capital should they pursue risky processes."

The standards are, the FSA says, concentrated on two objectives: firstly, to compel boards to pay enough attention to whether their pay policies are risk-based and sustainable; and secondly, that individual pay packages incentivise correctly.

The FSA says its code makes clear that firms must not enter into employee contracts offering guaranteed bonuses for over one year, and also that two thirds of bonuses for senior employees will be spread over three years.

The regulator reassures firms that the code is designed to limit damage to their competitiveness in global markets and is similar to proposals being discussed by EU and Swiss regulators, and in line with high-level principles agreed at the G-20 and published by the Financial Stability Forum, now the Financial Stability Board (FSB).

"While there is general international agreement on the need for supervisory action on remuneration policies and practices, we will be the first major financial regulator to take this step," said Hector Sants, chief executive of the FSA.

The UK rules come shortly after the US House of Representatives passed an executive compensation bill on July 31 that will provide far greater regulatory oversight of top-level pay at US financial institutions, as well as increase shareholder voting powers on remuneration decisions.

The FSA has published a policy statement "Reforming remuneration practices in financial services" as feedback on CP09/10, which can be read here.

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