Bank pay: can UK become the Jones’ to keep up with?

The FSA this week introduced a new code for remuneration practices at large banks, building societies and broker dealers in the UK.  Not surprisingly, the FSA’s main objectives are to ensure that boards keep a tighter rein on the link between company pay and risk management and sustainability, and that incentives provided to individuals are appropriate.

The code is the result of consultation earlier in the year, the results of which clearly showed the need for action in governance, the measurement of performance and the composition of remuneration. Some concern had been expressed by respondents about the inflexibility of provisions relating to remuneration structure, as well as the tight timescale initially intended for implementation.  

The FSA has responded to both these concerns. In the case of the former, by replacing remuneration structure provisions with one single principle, but with the previous proposed principles retained as ‘guidance’. It will be interesting to see whether companies under the code will treat provisions any differently now they are simply guidance. In the case of the latter, implementation is now to be the 1st January 2010.

The code outlines some specific practices which are to be considered inappropriate, such as contracts which guarantee bonuses for more than one year and senior employee bonuses being paid out across timescales shorter than three years.

Monitoring of compliance with the code will be through specific reports signed off and submitted to the FSA by the remuneration committees of firms concerned. These reports are expected by the end of October, with specific guidance being sent to remuneration committee Chairmen during August. Non-compliance could mean enforcement action or the imposition of more stringent capital requirements.

Criticism has been levelled at the FSA by those who are concerned the watered down code does not go far enough (prominent amongst whom are government ministers – ‘Mandelson considers legal action to curb City bonuses’, The Guardian, 14thAugust), with the FSA Chief Executive, Hector Sants, hitting back with the argument it is the job of the government, not the regulator, to take social action in the form of limiting the quantum of pay. This is a sensitive question with, on the one hand, popular uproar at the sums received by bankers whose excessive risk-taking we are still paying for, whilst on the other hand genuine concerns that we do not regulate away the delicate financial ecology which has enabled London to establish and maintain its status as a world financial centre.

The FSA is the first regulatory body in Europe to adopt such a set of measures. Whilst undoubtedly others will follow, not least because international negotiations on common guidelines are scheduled to finish by this time next year, this step certainly enables the UK market to steal a march on other financial centres around Europe from whom a response is expected.

In this way, it is hoped that where London has led, others will follow. Critics claim that London should lead with a more radical regime. This debate has not yet run its course.

Links

Reforming Remuneration Practices in Financial Services >>

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