What is the FSA playing at by including deference to discrimination and equal pay provision in its code on remuneration in the financial sector? Elaine McIlroy, senior associate at lawyers Dundas & Wilson, checks it out.

Few people could have been surprised by the final code of practice on financial sector bonuses published recently by the Financial Services Authority (FSA). As a response to the banking crisis, the Code on Reforming Remuneration Practices in financial services, which will be incorporated into the FSA Handbook from 1 January 2010, contained few shocks, other than perhaps being less stringent than might have been preferred by some.

But one section of the code stood out. In guidance that describes to firms how to achieve its aims, it states: "In considering the risks arising from its remuneration policies, a firm will also need to take into account its statutory duties in relation to equal pay and non-discrimination".

The overall purpose of the code is to crack down on remuneration policies and procedures that have rewarded inappropriate risk taking, viewed as a contributory factor to the banking crisis. It is ultimately intended to promote financial stability, and thereby, to protect consumers.

The code provides guidance for firms on how these aims are to be achieved, which as expected emphasises the financial risks. It contains an underlying "general requirement" that firms affected by it – 26 so far – must "establish, implement and maintain remuneration policies, procedures and practices that are consistent with and promote effective risk management". The code then sets out evidential requirements and additional guidance for firms on how to meet the general requirement.

Some of these measures were expected – for example, the requirement for firms to have in place experienced remuneration committees that can exercise independent judgement. These measures are clearly related to effective risk management and are properly matters for a regulator. But the guidance on equal pay and non-discrimination appeared to come out of left field. It is unusual that a regulatory regime designed to tackle the sort of risk that has given rise to the market crisis is concerned with the risks arising from matters such as equal pay and discrimination.

Risks associated with equality and diversity are not matters that one normally associates as being a cause of the market crisis or linked to "inappropriate risk taking". Although it may be commendable to draw matters such as compliance with equal pay and other discrimination legislation into the regulatory regime in this way (albeit that the references are in the form of 'guidance'), it is questionable whether such matters have been viewed as a factor that has driven the "inappropriate risk taking" which is at the heart of this regulatory response.

It is also unclear which risks affected firms should consider. For example, is the potential for equal pay litigation to be taken into account and, if so, how are firms to assess and manage this risk?

Businesses that will be bound by the code would be well advised to audit their remuneration processes to assess equal pay and other discrimination risks. Statistical evidence may be required to assist in this process and many of the larger banks may already have processes in place to conduct such a review. It will remain to be seen what standard of compliance the FSA may expect to see in this area.
Written by Elaine McIlroy, www.dundas-wilson.com

FSA confirms introduction of remuneration code of practice: Banks given new rules on bonuses
Bankers' pay deals are to be linked more closely with the long-term profitability of banks under new rules from the FSA who say that bonuses should not be guaranteed for more than a year, and that senior employees should have their bonuses spread over three years.

The new code, announced by the FSA on 12 August 2009, 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:

• First, 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.

Eight principles have also been added to the FSA's handbook to ensure firms understand how the FSA will assess compliance.

The code makes clear that it is not expected that firms will enter into contracts with individuals which provide guaranteed bonuses for more than one year. It is also expected that for senior employees two-thirds of bonuses will be spread over three years.

Firms are expected to provide the FSA with a remuneration policy statement by the end of October. This will have to be signed off by remuneration committees and will enable the FSA to check compliance with the code. Non-compliant firms could face enforcement action or ultimately, be forced to hold additional capital should they pursue risky processes.

Source: www.fsa.gov.uk/pages/Library/Communication/PR/2009/108.shtml

The policy statement: 'Reforming Remuneration Practices in Financial Services' can be downloaded from: www.fsa.gov.uk/pubs/policy/ps09_15.pdf        
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July 2009: Business Climate Indicator continues to recover
The Business Climate Indicator (BCI) for the euro area increased again in July. However, the level is still very low, even when compared to the previous historical lows of 1993. This suggests that year-on-year industrial production growth will have been negative in June and will remain subdued in July.

The rise in the BCI reflects an overall easing. In particular, both order books and export order books finally showed some signs of improving. Managers' production expectations and their perception of the production trend observed in recent months picked up for the fourth month in a row. Their opinion of stocks of finished goods improved as well, even though the level of stocks was still considered excessive.

The BCI is based on a factor analysis of the euro area aggregate balances (seasonally adjusted) of five of the monthly questions in the industry survey (only employment and selling-price expectations are excluded).

Full details of the Business Climate Indicator are available on the Europa website at:
http://ec.europa.eu/economy_finance/db_indicators/db_indicators8650_en.htm
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