Bonuses in the financial sector
The Government is taking action to tackle unacceptable bonuses as part of wider reform of the financial sector. It is essential that remuneration – while remaining flexible – does not encourage excessive risk-taking or threaten financial and economic stability.
In taking these steps, the Government continues to work closely with international counterparts, helping to shape and influence a truly international agenda. This work also involves wider, indirect measures to tackle excessive risk and improve corporate governance – in particular by introducing strict requirements on the capital banks must hold, and to increase competition in the sector.
The steps being taken in this area can be broadly summarised as follows:
- The introduction of the Financial Service Authority's (FSA) new Remuneration Code, effective from 1 January 2011.
- The Code ensures that significant portions of bonuses are deferred for at least three years, and will be linked to the performance of the employee and their firm.
- In addition, the Code requires a large portion of bonuses to be paid in shares or other securities, rather than in cash.
- Banks and other financial services firms must also disclose qualitative and quantitative information relating to pay. This will increase transparency and facilitate better oversight of risk-taking and remuneration.
- Separately, the Government is working on tackling the wider issue of risk inherent in the banking sector, and exploring whether lack of competition is a problem. This is being examined by the Independent Commission on Banking (which reports in September 2011).
- The Government has also introduced a levy on bank balance sheets, which is designed to incentivise less risky banking activities.
More broadly, further measures are being assessed relating to corporate governance practices, including with international counterparts. Future reform may potentially focus on the structure of company boards, ensuring they have the right resource and ability to oversee issues relating to risk and pay. The issue of shareholders, and their responsibility for companies in which they invest, is also being explored as part of this work.
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