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U.K. Regulator Issues Rules on Bank PaySubmitted by: Subodh Mishra, Governance Institute

Britain?s Financial Services Authority this week published new rules to strengthen links between pay and risk taking at U.K. banks, though opted against mandatory deferrals on bonuses as provided for under earlier draft rules.

In another departure from the draft rules, the FSA code now applies to just 27, rather than 47, institutions, exempting many smaller banks and international groups with London-based branches.

The reversal has sparked concern in some quarters, with critics charging the government with watering-down the rules and thus failing to adequately address concerns over poor pay practices. Supporters of the reversal, however, say the changes will help ensure London?s continued place as a premier financial center.

According to the FSA, the code, released Aug. 12, is designed to force boards to focus more closely on ensuring that pay is consistent with good risk management and sustainability, and that individual compensation practices provide the right incentives.

?The FSA is determined that banks? remuneration policies should be consistent with, and promote, effective risk management,? FSA head Hector Sants said in an Aug. 12 statement. ?The new rules and code of practice ? are aimed at achieving this.?

The code will take effect Jan. 1, 2010, and represents the first set of major market rules to reform pay in the wake of the global financial crisis. The code may also help U.S. lawmakers and others address ways and means to reform and measure links between compensation and risk at companies receiving aid under the Troubled Asset Relief Program.

Eight principles, including one to address deferrals on bonus pay, were added to the FSA code to provide institutions with a better understanding of the yardstick the agency will use when measuring compliance.

The principles include: remuneration committees should have a majority of non-executives; risk managers and compliance officers should be involved in setting bankers? pay; bonuses available to risk managers and compliance officers should be proportionally lower than for bankers; the calculation of bonus pools should be based principally on profits; when performance related pay accounts for a large share of overall remuneration, there should be a bias towards longer-term performance; non-financial criteria should be part of bonus calculations; long-term bonuses should take account of future risks; and at least two-thirds of bonuses should be deferred for at least three years and they should reflect group-wide and divisional, as well as personal, performance.

According to the FSA, affected financial services companies will be expected to provide a remuneration policy statement by the end of October. The statement must be sanctioned by the remuneration committee and will be used by the FSA to check compliance with the code. Non-compliance could mean enforcement action or a mandate to hold additional capital, should, agency officials warn, companies pursue risky processes.

Meanwhile, the Swiss Financial Market Supervisory Authority?s deadline for feedback on its own proposed new compensation guidelines for financial services companies is Aug. 14. Like the FSA?s code, the draft guidelines aim to align pay policies better with long-term profitability and take into account risks, according to Bloomberg News. Final guidelines are expected next month.

Also this week, Swiss lawmakers on Aug. 11 rejected proposed caps on executive pay at banking giant UBS. The Swiss government owns just under 10 percent of the company.

Full post as published by Institutional Shareholder Services -- Corporate Governance Blog on August 13, 2009 (boomark / email).