Industry regulator FSA has written an open letter to all chief executives in the insurance and banking world.
Roughly translated, it is warning them all not to continue with some of the obscene practices which have rewarded people with more money than any normal person needs, whether or not they make a success of the job.
If you make a mess of your job, you get sacked. The FSA wants that to apply to the fat cats in the City too.
The main points:
There is widespread concern that inappropriate remuneration schemes, may have contributed to the present market crisis.
In the private sector, bodies such as the Counterparty Risk Management Policy Group (CRMPG) have identified remuneration structures as one of the possible driving forces behind current problems. The International Institute of Finance (IIF) reached a similar conclusion and has issued Principles of Conduct that they think should be adopted by firms. The FSA shares these concerns.
It would appear that in many cases the remuneration structures of firms may have been inconsistent with sound risk management. It is possible that they frequently gave incentives to staff to pursue risky policies, undermining the impact of systems designed to control risk, to the detriment of shareholders and customers.
Hector Sants, chief executive of the FSA has written to CEOs, telling them that: “The FSA has no wish to become involved in setting remuneration levels: that is a matter for directors who should ensure that they have effective structures in place to set remuneration policies and monitor remuneration levels throughout the firm. We want to ensure that firms follow remuneration policies that are aligned with sound risk management systems and controls, and with the firm's stated risk appetite.
“It is possible to set out some high level criteria against which policies can be assessed.
“I urge all firms to consider carefully their remuneration policies, especially in light of recent market developments. If the policies are not aligned with sound risk management, that is unacceptable. Immediate action will be required to change the policies.
“Between now and the end of the year we will arrange a further round of visits to all recipients of this letter. Our aim will be to gather more specific information about remuneration practices to assure that bad practices are not present and to seek further input on what would constitute good practice.
“Given the events of the past year firms recognise the need to review their remuneration policies and to take steps to change them if necessary.”