FSA crackdown on excessive risk-taking for bonuses

The City regulator has attempted to clamp down on short term, risky gains made at the expense of prudence by staff hungry for big payouts.

The FSA's code of practice on remuneration policies - released after the furore surrounding semi-nationalised banks still paying out bonuses to staff - aims to crack down on staff at companies taking undue risk in order to maximise bonuses.

The regulator has created ten detailed principles designed to cut down on undue risk taking for short term gains, although it stopped short of trying to restrict the size of actual payouts, which it said was a matter for firms' boards.

A spokesperson for the FSA said that although the code was only a draft so far, requiring consultation, it would take a ‘dim view’ of firms that did not comply. A final code is expected in the Autumn.

The principls in the code cover areas such as the governance of remuneration committees, which the FSA said should exercise 'independent judgement and demonstrate that their decisions are consistent with the firm's financial situation and future prospects.'

It said committees should consist of at least one or more of a company's non-executive directors who have practical skills and experience of risk management.

The FSA also wants firms to prepare an annual statement on their remuneration policies, which is available not only to the FSA but also shareholders. It said: 'It would be good practice for a statement on remuneration policies to be available also to shareholders, ahead of the annual vote on directors' remuneration.'

The authorities also said the procedure for setting compensation should be clear and documented, with risk and compliance functions having significant input when remuneration is set.

In a move to combat fears that remuneration committees will be compromised by their own desire for payouts, the FSA also said compensation for staff in the risk and compliance sections of a business should be determined independently of business areas, with different criteria dictating their level of rewards.

Much has also been made of paying out bonuses over a longer period to counter short-termism, and the FSA stressed that 'the assessment process should include measures to ensure that employees are assessed on their longer term performance'.