Banks given new rules on bonuses

Banks given new rules on bonuses
New rules on how financial institutions should determine pay and bonuses for staff have been set out by the Financial Services Authority (FSA).

It wants to see bankers' pay deals linked far more closely with the long-term profitability of the banks.

The FSA says that bonuses should not be guaranteed for more than a year, and that senior employees should have their bonuses spread over three years.

Many believe that big bonuses led to excessive risk-taking at banks.

The new code is designed specifically to discourage short-term risk-taking, which many argue was an important factor in triggering the financial crisis.

The FSA is determined that banks' remuneration policies should be consistent with, and promote, effective risk management Hector Sants, FSA chief executive

"The fundamental objective [of the rules] is to sustain market confidence and promote financial stability through removing the incentives for inappropriate risk taking by firms," the FSA said.

But it said that "inappropriate remuneration policies" were a "contributory, rather than a dominant factor" in the crisis.

'Right incentives'

Hector Sants, head of the FSA, said the regulator was "determined that banks' remuneration policies should be consistent with, and promote, effective risk management".

The FSA said there were two main objectives behind the code of practice.

First, to ensure that boards focus more closely on making sure that "the total amount [of pay and bonuses] distributed by a firm is consistent with good risk management and sustainability".

And second, to ensure that overall pay, including bonuses, "provides the right incentives".

To this end, a number of new principles have been added to the FSA's financial regulation handbook.

In particular, these make clear that bonuses should only be guaranteed for 12 months, and that senior employees will see two-thirds of their bonuses paid out over three years.

Mr Sants said the new rules would take effect from January 2010.

The FSA wants banks to submit their remuneration policies to it by the end of October. Firms that do not comply with the code "could face enforcement action", or be forced to hold more cash in reserve should they want to pursue risky strategies.

However, it conceded that the code "is not going to change the bonus culture overnight".

The FSA also reduced the number of banks affected by the code to 26, down from the 47 originally covered.

The Association of British Insurers described the new rules as "an important step forward."

"The new version [of the handbook] is much more likely to deliver the desired outcome without excessive compliance burdens," it added.

Nicholas Stretch at City law firm CMS Cameron McKenna said: "This is not the end of the rules for rewards for bank employees.

"There is still substantial political pressure for capping awards, greater public disclosure and naming and shaming in this sector, both in the UK and internationally, which is likely to continue for some time."

Relocation concerns

The FSA launched a consultation in February looking at measures to discourage excessive risk-taking, and published a draft version of the code in March.

Bankers expressed concerns that the proposed measures on bonuses, some of which have been included in the final code, would encourage institutions to relocate employees outside of the UK, to get round the new rules.

This could have serious implications for the City's position as the world's leading financial centre, and for the UK's tax take, bankers argue.

However, recently there have been concerns that large bonuses are returning amid a boom in profits from investment banking.

And there have been calls for stricter rules on pay from those who criticise what they see as excessive bonuses.

sourced from THE BBC