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FSA launches new bank code

Wednesday, 12 August 2009 11:51 AM

The Financial Services Authority (FSA) has launched its new banking code aimed at curbing the excesses of City bonuses.

The new code comes in response to public outcry at the financial services' bonus culture. The regulator was severely criticised last year for not taking a firmer stance on the practice of paying excessive City bonuses, which many blame for the recession.

City trades in mortgage backed securities were one of the main causes of the collapse of a number of City banking institutions both in the US and UK last year.

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

This means making bank boards more responsible for their investment decisions and that bonuses cannot be guaranteed for more than one year.

Senior employees meanwhile will see their bonuses spread over three years in an effort to ensure they are keeping a closer eye on investment decisions in effect linking the performance of trades to bonuses over a longer period of time. The theory behind this is that this will discourage excessive risk-taking in the City.

Firms are expected to provide the FSA with a remuneration policy statement by the end of October. Firms that do not comply with the new code could find themselves falling foul of the regulator and could be forced to hold more capital reserves.

Hector Sants, chief executive at the FSA, said the new code will come into force in 2010.

"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," he added.

But Angela Knight, chief executive of the British Bankers' Association, said the new code would only apply to 26 banks and financial firms operating in the UK.

She said it was essential that regulators in other countries not only followed the example set by the FSA but also followed the timetable for implementation of their own banking codes.

She added: "Our concerns are that other countries have talked about similar changes but have not made them. For this code to succeed, our European partners and the G20 countries must also step up to the plate and do what the UK has done. The principal cause of the global financial problems was not bankers' pay. It was however a contributory factor globally - as such it needs to be addressed globally."

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