Regulator adopts a measured Code for bonuses

NEWS that the Financial Services Authority (FSA) wants to influence but not emasculate the bank bonus culture is welcome, but was the only sensible option. The City watchdog has clearly listened to industry concerns, particularly the worry that an excessive clampdown on remuneration would spark an exodus of workers overseas. <br /><br />Jocelyn Mitchell, employment partner at Freshfields, hit the nail on the head yesterday when she said there were aspects of the draft FSA code that would potentially have put UK firms at a disadvantage to other countries not constrained by such rules. The Square Mile would be uncompetitive and unable to attract the best talent so long as foreign financial centres offer a more accommodating approach.<br /><br />Being first-mover on remuneration policy also means the FSA is leading the way on the regulatory supervision of pay and bonuses. It could rightly claim to have outlined the toughest set of rules on banking remuneration in the world. It therefore does the regulator a disservice to suggest the FSA has gone soft. The FSA&rsquo;s role is to monitor the structure of the City and minimise excessive risk-taking. It should rightly leave comparison of the relative merits of bankers&rsquo; pay against nurses or teachers to the politicians.<br /><br />Therefore labelling the code as a total climb-down or relaxation from the curbs first proposed in March is unfair, despite the FSA&rsquo;s plan stopping short of forcing at least two-thirds of bonuses to be deferred. <br /><br />It seeks to prevent banks putting the interests of their employees ahead of shareholders in setting pay. Institutions have only until 1 January next year to have compliant remuneration policies in place. And, the FSA has pledged to start on-site visits to institutions to examine individual contracts. Together this can hardly be regarded as a softly-softly approach. <br /><br />Besides, there has already been a general acceptance in the City of the need for revamped remuneration policies. Unjustified bonuses are not best practice in today&rsquo;s climate and rewards will remain under scrutiny as we await Sir David Walker&rsquo;s final report on corporate governance. But bonuses, as FSA chief Hector Sants acknowledged yesterday, can be useful when used properly. He said pay &ldquo;should be seen as a contributory factor but not as the principal cause&rdquo; of the global financial meltdown. Bob Diamond is among those who would agree, after confirming a handful of guaranteed bonuses have been used to entice key bankers to Barclays Capital.<br /><br />Blaming the kind of risk-taking that brought down some of the world&rsquo;s biggest banks solely on remuneration is wrong. The City of London&rsquo;s Stuart Fraser is right when he says that identifying what types of activities can create systemic risk and how to deal with them &ndash; whether with restrictions and capital requirements &ndash; is more important.