The UK’s Financial Services Authority introduced a new code of conduct governing financial industry compensation practices, but consumer advocates warn that it doesn’t go far enough.

The FSA said that its new code will require large banks, building societies and broker dealers in the UK to “establish, implement and maintain remuneration policies consistent with effective risk management”. Among other things, the code discourages firms from guaranteeing bonuses for more than one year, and encourages them to spread two thirds of senior employees’ bonuses over three years.

The new code is designed to achieve two objectives, the FSA says: to push boards to focus more closely on ensuring that the total amount distributed by a firm is consistent with good risk management and sustainability; and, that individual compensation practices provide the right incentives.

In response to the new code, the advocate for industry clients in the UK, the Financial Services Consumer Panel, said it welcomed the FSA’s clear statement about the need for managers’ bonuses to be awarded in a way that promotes effective risk management.

However, the panel added that it does not think it goes far enough. The panel indicated that it is concerned that the code does not require any evidence that bonus policies will reflect long term value being added to the business by managers. It said that the code does not tackle the problem of banks awarding bonuses for apparent performance that is later discovered to be illusory. And, it argued that shareholders don’t have access to the information needed to reach an informed view about whether the bonus levels for senior management are appropriate.

“The FSA’s introduction of the Remuneration Code is a big step towards reining in the excesses of the past, but it fails to effectively address the issue of senior managers’ incentives being linked to the performance of the business. Huge bonuses are being paid at the expense of real long term value being added to the business, a problem which Lord Turner clearly identified in his report on the banking crisis and as ever, it will be consumers that have to foot the bill,” said Adam Phillips, chairman of the Financial Services Consumer Panel.

Firms are expected to provide the FSA with a remuneration policy statement by the end of October, which will have to be signed off by remuneration committees. Additionally, eight principles have also been added to the FSA’s handbook to ensure firms understand how the FSA will assess compliance.

“The FSA is determined that banks’ remuneration policies should be consistent with, and promote, effective risk management. The new rules and code of practice, which will take effect from January, next year, are aimed at achieving this,” said FSA chief, Hector Sants.

The regulator noted that it is the first among the world’s maor regulators to address industry compensation practices, and it added that international negotiations on common guidelines should be concluded in the first half of 2010. “Whilst there is general international agreement on the need for supervisory action on remuneration policies and practices we will be the first major financial regulator to take this step. We think that it is important to have rules in place for 2010,” Sants said.

IE