Britain’s Financial Services Authority has announced plans to toughen its code governing financial industry compensation practices, in anticipation of planned compensation rules in the European Union. British bankers are calling for similar restrictions in the rest of the world.

The FSA already has a code regulating compensation, which applies to the largest banks, building societies and broker dealers. But changes to bring that code in compliance with the rest of Europe will bring over 2,500 firms within the scope of the code, the FSA said. This includes all banks and building societies, asset managers, hedge fund managers, investment firms, as well as some firms that engage in corporate finance, venture capital, the provision of financial advice and stockbrokers.

In addition to extending the code’s reach, the FSA is consulting on precisely which employees it will apply to, including senior management and anyone whose professional activities could have a material impact on a firm’s risk profile.

For these employees, at least 40% of their bonuses must be deferred over a period of at least three years, and at least 60% must be deferred when the bonus is more than £500,000. Also, at least 50% of any variable remuneration must be made in shares, share-linked instruments or other equivalent non-cash instruments of the firm, which will need to be subject to a minimum retention policy. Firms must not offer guaranteed bonuses of more than one year, and guarantees can only be given in exceptional circumstances to new hires for the first year of service.

Additionally, firms must ensure that their total variable remuneration does not limit the ability to strengthen their capital base. Total variable remuneration must be significantly reduced in circumstances where the firm produces a subdued or negative financial performance. And, a new rule will be introduced which defines instances where breaches of the code may render a contract void and/or require recovery of payments made.

Finally, severance payments should reflect performance over time, and failure must not be rewarded. And, enhanced discretionary pension benefits should be held for five years in the form of shares or share-like instruments.

The consultation period for these latest changes closes on October 8. The FSA intends to issue a policy statement in November setting out rules that will take effect from January 1, 2011.

In response to the planned changes, the British Bankers’ Association said, “The UK has moved further and faster on reform of pay and bonuses than any other country. Today’s proposals from the FSA represent the UKs contribution to levelling the playing field for all EU financial institutions, as they will implement the EU-wide rule changes which will come into force next January.”

“The BBA maintains that reform of the bonus system in financial services must be globally coordinated. A global industry needs to conform to global standards, as any country which takes a lighter approach will prove to be a magnet for business. We now need other countries to coordinate their reforms with the UK and EU rules. We will work with the FSA to ensure rule changes do not damage the banks ability to recruit and retain staff in the UK,” it added.

The FSA says that, while it will take time to assess the full impact of the existing code in contributing to effective risk management, all firms that are subject it and have paid bonuses this year, have adhered to it.

“Successful implementation has resulted in more demanding standards in a number of areas and has shifted the composition of remuneration structures to forms more consistent with effective risk management,” it says. “More generally, the FSA has seen stronger and more independent remuneration committees and greater recognition of the need to consider risk when setting remuneration policies and signing off bonus policies.”

IE