FSA speaks out on remuneration and risk

by Gill Montia

Story link: FSA speaks out on remuneration and risk

The Financial Services Authority (FSA) has issued a statement setting out its position on remuneration in the banking sector.

The authority says it is responding to widespread concern that inappropriate remuneration schemes, particularly but not exclusively in the areas of investment banking and trading, may have contributed to the present market crisis.

The statement refers to a number of private sector bodies, including the Counterparty Risk Management Group and the International Institute of Finance, which have focused on this area and concluded that remuneration structures may have led staff to pursue risky policies to the detriment of shareholders, depositors, creditors and ultimately taxpayers.

The FSA says it agrees with this view but has no wish to become involved in setting remuneration levels.

However, it does want to ensure that firms follow remuneration policies which are aligned with sound risk management systems and controls, and with the stated risk appetite of the business.

The regulator is urging all firms to consider carefully their remuneration policies, especially in light of recent market developments and warns that if policies are not aligned with sound risk management, immediate action is required.

Benchmark criteria for this exercise are now available from the FSA.

The Authority adds that the scope of its statement does not extend to the remuneration of Board non-executive directors, which has been covered in the 2003 Higgs Review and earlier reviews.