On-site visits form part of FSA strategy

STUNG by criticism that it is being soft on City banks, the Financial Services Authority said yesterday it would shortly be starting on-site visits to look at individual contracts of City bankers.<br /><br />The visits are designed to ensure banks are not taking excessive risks when they draw up their bonuses policy. <br /><br />&ldquo;We&rsquo;ve got the toughest set of regulations on remuneration in the world, where that applies to risk in firms that have a systemic importance,&rdquo; an FSA spokesman said last night.<br /><br />Earlier in the day attention focused on the softening of some of the principles proposed by the FSA in a March consultation after the regulator received 47 responses warning the rules may damage competition.<br /><br />FSA chief executive Hector Sants said the principles force firms to make sure overall payouts reflect good risk management and sustainability. <br /><br />&ldquo;The FSA is determined that banks&rsquo; remuneration policies should be consistent with, and promote, effective risk management,&rdquo; said Sants. <br /><br />He said firms will from the start of next year be obliged to ensure pay reflects &ldquo;the right incentives&rdquo; to ensure risks are controlled.<br /><br />The FSA will ultimately decide if the principles and guidance are being heeded. <br /><br />It has told firms to submit remuneration statements by the end of October, warning those who do not appear to have complied will face &ldquo;enforcement action&rdquo; or &ldquo;be forced to hold additional capital should they pursue risky processes&rdquo;. <br /><br />Only 26 firms, rather than the 47 originally envisaged, will be required to comply with these rules after non-UK firms were excused unless they are part of a group that contains UK banks with capital over &pound;1bn. <br /><br />A rule forcing the majority of bonuses to be deferred was downgraded to guidance, leading to claims from some that the FSA was too soft.<br /><br />Another rule that may have forced bonuses to be cut completely if a company made a loss has been downgraded after the regulator listened to concerns of the industry.<br /><br /><strong>HIGHLIGHTS: FSA REMUNERATION PRINCIPLES</strong><br /><br /><strong>Principle 1: Role of remuneration bodies</strong><br />&bull; Remuneration committees must be able to show decisions are consistent with a firm&rsquo;s financial situation.<br />&bull; Must evaluate the risks posed by pay policies. <br />&bull; They must have the skills and experience to reach an independent judgment.<br />&bull; They have to issue regular statements to the FSA for perusal. <br /><br /><strong>Principle 2: Risk and compliance </strong><br />&bull; Remuneration procedures should be clear and documented.<br />&bull; Firms must be aware of potential conflicts of interest in pay setting. <br /><br /><strong>Principle 3: Risk &amp; compliance staff pay</strong><br />&bull; Risk and compliance staff should have their pay set independently.<br />&bull; Risk and compliance functions should have performance metrics based on the achievement of those functions.<br /><br /><strong>Principle 4: Profit- and risk-based pay</strong><br />&bull; Profits should form the basis of assessments of financial performance<br />&bull; Bonus calculations should include current and future risks.<br /><br /><strong>Principle 5: Long-term performance</strong><br />&bull; Firms should ensure pay levels are based on longer-term performance.<br /><br /><strong>Principle 6: Other metrics</strong><br />&bull; Non-financial performance metrics should be used. <br />&bull; Non-financial performance metrics should include adherence to effective risk&nbsp; management and compliance<br /><br /><strong>Principle 7: Incentive plans</strong><br />&bull; Schemes, like those based on shares, should take account of future risks. <br /><br /><strong>Principle 8: Remuneration Structures</strong><br />&bull; It is good practice for salary to form a large part of total pay, so firms are able to cut bonuses if they makes a loss. <br />&bull; Minimum vesting periods for bonuses are good practice.<br />&bull; It is good practice to link pay to the future performance of a whole firm, not just a division or employee. <br />&bull; Multi-year guaranteed bonuses are likely to represent a rules breach.