Financial Services Authority code: can it cut financial sector risk?

Some experts think the FSA code of practice for employee remuneration is unlikely to reduce risk-taking in the financial sector.

Employers affected by the Financial Services Authority’s (FSA) code of practice for employee remuneration in the financial sector face a flurry of activity over the next few months if they are to meet its guidelines – with more to come if politicians’ threats to clamp down on bankers and brokers come to pass. Surprisingly, the code also calls for affected employers to “take into account statutory duties in relation to equal pay and non-discrimination”.

The FSA has told 26 large banks, building societies and stock-broking and dealing firms to take measures to help ensure that their remuneration policies are consistent with effective risk management. In particular, they have been told to submit details of their remuneration policies to the FSA for approval by the end of Oct­ober. Those that don’t could face enforcement measures or be compelled to hold more cash in reserve.


The code’s main aim is to link the deferral of bonuses to financial institutions’ underlying business models and to take into account long- and short-term risks, following last year’s financial sector meltdown to which the banking sector’s bonus culture was deemed to be a major contributory factor. To this end, the FSA code stipulates that bonuses should only be guaranteed for 12 months and that two-thirds of bonuses for senior employees will be paid out over three years.

The code is not as rigorous as might have been expected, given the harsh sentiments towards senior bankers expressed in recent times. Jocelyn Mitchell, employment, pensions and benefits partner at law firm Freshfields Bruckhaus Deringer, said: “[The FSA] has recognised that its original proposals were too rigid, particularly as to the proportion of pay to be deferred and the length of the deferral period.

“Instead of providing specific evidential provisions on these aspects, the FSA has now expressed them as guidance as to what is good practice, which should give financial institutions more freedom for implementation and allow them to tailor arrangements to fit their own specific circumstances.”


Certainly the FSA has steered clear of insisting on claw-back arrangements where an employer would try to recover bonuses after they had been paid, should post-bonus performance prove poor – something that Karen Cooper, head of the employee benefits practice at Osborne Clarke, said is “noteworthy”.

Also, the code’s inclusion of strictures on equal pay and non-discrimination in remuneration are baffling. What do they have to do with minimising risk?

Elaine McIlroy, senior associate at law firm Dundas & Wilson, said: “It may be commendable to draw matters such as compliance with equal pay and other discrimination legislation into the regulatory regime. It is questionable whether such matters have been viewed as a factor that has driven the inappropriate risk-taking that is at the heart of this regulatory response.

“It is also unclear which risks firms should consider. For example, is the potential for equal pay litigation to be taken into account and, if so, how are firms to assess and manage this risk?”


Although it’s nigh on impossible to pre-judge the efficacy of the FSA code of practice, it is not as prescriptive as critics of the banking bonus culture would wish. Vince Cable, Liberal Democrat Treasury spokesman, said: “These watered-down plans send out entirely the wrong message to an industry which is already forgetting that, just a matter of months ago, it had to come with its begging bowl to the taxpayer.”

Also, chancellor Alistair Darling has promised more measures to curb City bonuses, as has his Conservative counterpart George Osbourne, making it likely that the FSA code will be overtaken by events.

The anti-banker mood among the public and the media is likely to be exacerbated in the next few months when many financial institutions will pay out big bonuses – think of the furore that greeted recent Goldman Sachs bonus announcements.

Indeed, it’s likely that many of the employers affected by the FSA code will pay bonuses before 1 January 2010, when the new regime becomes effective.


Even though the code may not assuage the public’s anger about the way financial institutions are managed, it will still worry those large banks and businesses affected that will fear losing key personnel to smaller rivals that are not bound by it.

One City employment lawyer said litigation against teams of key employees defecting to smaller rivals that are likely to pay bigger bonuses has risen significantly this year.

Jon Terry, partner and head of reward at PwC, said: “There is a danger that a two-tier system of regulation will evolve, putting those that the code applies to at a competitive disadvantage.”

Nevertheless, it’s unlikely that this spells the end of remuneration regulation for high-earning bankers and City employees. If massive bonuses are paid out in the coming months, pubic pressure will again mount, and politicians – especially with a general election looming – will call for more measures to curb bankers’ pay and reward. As Nicholas Stretch, partner at law firm CMS Cameron McKenna, said: “This is not the end of the rules for rewards for bank employees.”

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