The Financial Services Authority is to introduce a new code that requires large banks and building societies to link employee bonuses to effective risk management, so discouraging short term risk taking. The code which comes into force in January, will only affect 26 of the original 47 banks proposed, and has two main objectives. Firstly to ensure that boards focus more closely on making sure that "the total pay and bonuses distributed by a firm is consistent with good risk management and sustainability", and secondly to ensure that overall pay, including bonuses, "provides the right incentives". This watered down version of the original proposal has already been widely criticised for not going far enough. Both the EU and US are yet to introduce similar legislation, so there is speculation that city concerns over banking being driven abroad to “softer” climates, has lead to the FSA diluting their original proposal. The Financial Services Consumer Panel said the fundamental problem of not linking bonuses to long-term performance remained, and the code fails to effectively address the issue of senior managers' incentives being linked to the performance of the business. Even the FSA themselves admitted that the code "is not going to change the bonus culture overnight”. With criticism mounting, the FSA’s chief executive Hector Sants said the code would put an end to the “imprudent, reckless policies” that had endangered financial institutions. However he conceded that the guidelines would have to be changed if they damaged the UK’s competitiveness. He also said that the debate over pay 'was for government', and politicians were 'passing the buck to the FSA' and 'ducking the issue' about introducing pay caps. Firms that do not comply with the code "could face enforcement action", or be forced to hold more cash in reserve should they want to pursue risky strategies.
FSA (fails to) Put the Cuffs on Banker Bonuses.