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British financial watchdog gets tough on bonuses


Latest update : 2009-08-13

Britain's Financial Services Authority has unveiled a new code of practice for banking bonuses designed to prevent the kind of risk-taking that helped spark the current financial crisis, though critics accuse it of watering down previous proposals.

AFP - Britain's financial watchdog on Wednesday outlined new rules on bonuses for banking executives to prevent excessive risk-taking that helped spark the global financial crisis.
The Financial Services Authority unveiled a new code of practice for banking bonuses that will come into effect from 2010, in the wake of the multi-billion pound taxpayer bailout of the British banking sector.
The FSA said "non-compliant firms could face enforcement action or ultimately, be forced to hold additional capital should they pursue risky processes."
It added in a statement: "The FSA has today introduced a new code that will require large banks, building societies and broker dealers in the UK to establish, implement and maintain remuneration policies consistent with effective risk management.
"The new code is 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."
Analysts argue that large bonuses -- particularly in Europe and the United States -- damaged the ability of leading bank executives to take well-judged business risks in the run-up to the crisis.
Under the new FSA code, banks will be forced to spread two-thirds of bonuses for senior employees over a three-year period.
Firms will not be expected to enter into contracts which provide guaranteed bonuses beyond one year.
The FSA said that all financial firms were expected to provide the watchdog with a remuneration policy statement by the end of October.
"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," said FSA chief executive Hector Sants.
However, the FSA was accused of watering down previous proposals on deferred bonuses, and the linking of payouts to a bank's overall performance.
"The banks seem to think it's business as usual and today it looks as though the FSA thinks this too," said Vince Cable, finance spokesman for the Liberal Democrats, Britain's third biggest party.
"These watered-down plans send out entirely the wrong message to an industry which is already forgetting that just a matter of months ago it had to come with its begging bowl to the taxpayer."

Date created : 2009-08-13