FSA firm on pay and bonuses

Employers affected by the Financial Services Authority’s (FSA) Code of Practice for Employee Remuneration face a flurry of activity over the coming 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.

The FSA has told 26 large banks, building societies and stock broking and dealing firms to take measures to ensure their remuneration policies are consistent with effective risk management. In particular, they have been told to submit details of their 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 FSA’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. This follows 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 senior employees will get two-thirds of their bonuses paid out over three years.

The code is not as rigorous as might have been expected given the harsh sentiments expressed about senior bankers in recent times.

Jocelyn Mitchell, employment, pensions and benefits partner at law firm Freshfields Bruckhaus Deringer, said: “It [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, 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 circumstances.”

Certainly, the FSA has steered clear of insisting on claw-back arrangements, whereby 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”.

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 to the taxpayer with its begging bowl.”

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 coming 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 towards financial institutions, it will still worry those large banks and businesses affected, which will fear losing key personnel to smaller rivals not bound by it. One City employment lawyer told Employers’ Law that litigation against teams of key employees defecting to smaller rivals that are likely to pay bigger bonuses has risen significantly this year.

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