In late 2008, the UK Government stepped up its attempts to address the bonus culture within the financial services industry. British Prime Minister Gordon Brown declared in October 2008 that “the days of big bonuses are over,” while the UK’s regulating body in this sector, the Financial Services Authority (FSA), started working on a draft remuneration code to address what it saw as a short-term bonus culture.

In October 2008, Lord Turner, Chairman of the FSA, stated that he was also seeking to create a global framework on bankers’ remuneration, rather than simply addressing the issues in the context of the UK. To this end, he would be working with the Federal Reserve in the United States, the Organisation for Economic Cooperation and Development, and other European regulators.

In February 2009, the FSA published its draft code on remuneration practices (the Code) with the intention that it would publish the Code in final form in July 2009, with a view to its coming into force in November 2009. The FSA also stated that it would press for a wider review of unadjusted share performance measures in the corporate sector—i.e., outside of its remit.

The Code currently contains a “general requirement” and 10 specific principles, broken down into categories of governance, measurement of performance for the calculation of bonuses, measurement of performance for long-term incentive plans, and the composition of remuneration. The general requirement states that firms that will be regulated by the Code “must establish, implement and maintain remuneration policies, procedures and practices that are consistent with and promote effective risk management.” The principles broadly address the fact that bonuses should be less short term, less cash based and subject to subsequent revision or clawback.

The FSA has suggested that the general requirement be incorporated into its handbook as a new rule, thus giving it power to discipline firms that breach this rule.

Consistent with the FSA’s intention that the principle of good risk management should be applied by financial services businesses outside of the UK, the European Commission passed a Recommendation on April 29, 2009 on remuneration in the financial services sector. The Commission recommends that European Union (EU) member states should ensure that financial institutions have remuneration policies applicable to risk-taking staff that promote and are consistent with the principles of sound and effective risk management. The Recommendation sets out guidelines on the structure of pay, on the process of design and implementation of remuneration policies, and on the role of supervisory authorities in the review of remuneration policies of financial institutions.

The Commission has also adopted a Recommendation on company directors’ pay. It is the intention of the EU authorities that the European Commission’s Recommendation will be followed in due course by legislative proposals, which may ultimately lead to EU member states being compelled to introduce legislation to regulate this complex area in the coming years.