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FSA sets out code of practice for pay policies

The FSA has today published a draft code of practice on remuneration policies which attempts to ensure firms’ policies do not encourage excessive risk-taking.

All FSA-regulated firms will have to implement remuneration policies that are consistent with sound risk management and do not expose them to excessive risk.

The FSA says it is a matter for the boards of companies and shareholders to set levels of remuneration, but adds that they must be able to demonstrate that their decisions are “consistent with the firm’s financial situation and future prospects”.

The code also states that assessments of financial performance to calculate bonus pools should be principally based on profits. The bonus pool calculation should include an adjustment for current and future risk, and take into account the cost of capital employed and liquidity required.

FSA chief executive Hector Sants says: “We have already outlined the work we have been doing on remuneration during the last 12 months. The code of practice we have published today is the next stage in that work and clearly lays out the framework we expect firms to adopt.”

The FSA will consult on the code and further proposals for remuneration policy in March.

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