On-site visits form part of FSA strategy
STUNG by criticism that it is being soft on City banks, the Financial Services Authority said yesterday it would shortly be starting on-site visits to look at individual contracts of City bankers.
The visits are designed to ensure banks are not taking excessive risks when they draw up their bonuses policy.
“We’ve got the toughest set of regulations on remuneration in the world, where that applies to risk in firms that have a systemic importance,” an FSA spokesman said last night.
Earlier in the day attention focused on the softening of some of the principles proposed by the FSA in a March consultation after the regulator received 47 responses warning the rules may damage competition.
FSA chief executive Hector Sants said the principles force firms to make sure overall payouts reflect good risk management and sustainability.
“The FSA is determined that banks’ remuneration policies should be consistent with, and promote, effective risk management,” said Sants.
He said firms will from the start of next year be obliged to ensure pay reflects “the right incentives” to ensure risks are controlled.
The FSA will ultimately decide if the principles and guidance are being heeded.
It has told firms to submit remuneration statements by the end of October, warning those who do not appear to have complied will face “enforcement action” or “be forced to hold additional capital should they pursue risky processes”.
Only 26 firms, rather than the 47 originally envisaged, will be required to comply with these rules after non-UK firms were excused unless they are part of a group that contains UK banks with capital over £1bn.
A rule forcing the majority of bonuses to be deferred was downgraded to guidance, leading to claims from some that the FSA was too soft.
Another rule that may have forced bonuses to be cut completely if a company made a loss has been downgraded after the regulator listened to concerns of the industry.
HIGHLIGHTS: FSA REMUNERATION PRINCIPLES
Principle 1: Role of remuneration bodies
• Remuneration committees must be able to show decisions are consistent with a firm’s financial situation.
• Must evaluate the risks posed by pay policies.
• They must have the skills and experience to reach an independent judgment.
• They have to issue regular statements to the FSA for perusal.
Principle 2: Risk and compliance
• Remuneration procedures should be clear and documented.
• Firms must be aware of potential conflicts of interest in pay setting.
Principle 3: Risk & compliance staff pay
• Risk and compliance staff should have their pay set independently.
• Risk and compliance functions should have performance metrics based on the achievement of those functions.
Principle 4: Profit- and risk-based pay
• Profits should form the basis of assessments of financial performance
• Bonus calculations should include current and future risks.
Principle 5: Long-term performance
• Firms should ensure pay levels are based on longer-term performance.
Principle 6: Other metrics
• Non-financial performance metrics should be used.
• Non-financial performance metrics should include adherence to effective risk management and compliance
Principle 7: Incentive plans
• Schemes, like those based on shares, should take account of future risks.
Principle 8: Remuneration Structures
• It is good practice for salary to form a large part of total pay, so firms are able to cut bonuses if they makes a loss.
• Minimum vesting periods for bonuses are good practice.
• It is good practice to link pay to the future performance of a whole firm, not just a division or employee.
• Multi-year guaranteed bonuses are likely to represent a rules breach.