13 December 2019 - Article
Last week, when the press was more concerned about the publication of Lord Turner's Review of the regulatory response to the global banking crisis, the FSA quietly published a Consultation Paper on whether to incorporate its Code of Practice on Remuneration (“the Code”) into the FSA's Handbook.
The general principle of the Code – that a firm must implement and maintain effective remuneration policies, procedures and practices that are consistent with effective risk management – is proposed as being made into a FSA rule with its 10 specific principles working as evidential provisions as to whether a firm is breaching or complying with this general rule.
A firm in breach of a FSA rule risks FSA enforcement proceedings which could result in a fine and/or its authorisation being altered. Its senior management could also be the subject of FSA enforcement proceedings under the FSA's new enforcement policy of credible deterrence.
At present it is proposed that the Code and its new FSA rule will only apply to about 45 of the largest banks and broker dealers. However the Consultation Paper is also inviting discussion as to whether the Code should be applied to all other FSA authorised firms, regardless of their size.
In doing so, it is acknowledged that there is little evidence that inappropriate remuneration practices in firms outside the largest institutions played a significant role in the present financial crisis.
However, some remuneration practices are highlighted as a legitimate cause for concern for all firms and their regulators such as:
(a) designing incentives so that there is an increased risk of material financial loss to firms (even if such losses do not contribute to wider market instability or disruption);
(b) providing incentives to employees to promote one product over another to the potential detriment of a customer, eg where a fund manager is running both a low commission long only fund and a higher commission hedge fund; and
© providing incentives to maximise the quantity of output rather than its quality – a risk in most commission based incentive structures
The period for discussion and feedback on the idea of extending the Code to all firms regulated by the FSA will run until 18 June.
If you would like to discuss how the implementation of this Code might affect your existing remuneration practices and/or how to feed back on the questions raised in this Discussion Paper, please contact us.
We are also pleased to announce that Harvey Knight who worked for 6 years in the FSA's General Counsel Division has joined us to lead our financial services regulatory practice.