The implementation of the actual framework was left to each individual country's regulator. The UK's regulator, the FSA, had already published its Remuneration Code in August 2009, which is intended to ensure the remuneration policies of affected banks are consistent with effective risk management. Following the announcement at the G20 meeting, the FSA confirmed it will review the code further prior to its implementation on 1 January 2010.
Following the G20 summit, the UK Government has also announced that it intends to introduce new legislation in this Parliament any session (that is, before June 2010) incorporating some of the recommendations made at the G20 summit.
Initially, the FSA intends that the code will apply to 26 UK-based banks and other financial institutions. Some of the larger of these affected UK-based banks are under foreign ownership, and it is reported that these banks are considering a legal challenge to the FSA's and the UK Government's plans to curb City bonuses. Indeed, executives from leading foreign banks have met with the Treasury in the last week to clarify the situation.
One of the main reasons for this is the fact that the large international banks operate in many different (G20) jurisdictions. If each country operates similar, but ultimately different, rules regarding executive remuneration, which they have to abide with, then it will be a huge task to administer this effectively, and will make it practically difficult to transfer employees globally or incentivise ex-pats to relocate. Also, depending on the nature of the changes that are introduced, there may be a requirement to change existing contracts of employment, bonus and other incentivisation schemes, which may be unpalatable to employees or even unlawful for employers to make the changes in the respective jurisdiction.
If the UK Government introduces new legislation, it will be the subject of consultation and debate prior to implementation, then the terms of that legislation will set out the scope of its application - for example, whether it only applies to banks with a certain number of employees, or over a certain size, measured by turnover or revenue. In theory, the UK Government could decide to restrict the scope of any new legislation so that foreign-owned banks are not caught within its ambit. If it decides to cast the net wider, though, then any institution that is covered by the UK rules in the UK will have to abide by the legislation, regardless of where the parent company is based.
The enforceability of the FSA's code is slightly different, however. The FSA has said that if banks do not comply with the new code, then it could act against them to force them to hold more capital where it feels that they have risky bonus structures. However, the code is incorporated into the FSA's Handbook, which is made up of principles and guidance. The FSA has stated it will not force firms to follow its guidance. That said, the FSA has a lot of weapons in its armoury and so a failure to follow its principles could lead to enforcement action including disciplinary sanctions, fines and cancellation of authorised firm's permission.
There is still scope for the code to be amended prior to its implementation in the beginning of next year. Any actual legislation to address executive remuneration and bonus structures in the financial services industry is also at a formative stage. Therefore, for institutions that may be caught by the new rules as currently envisaged, their best chance to ensure they will not be impacted is to lobby the FSA and the UK Government to introduce narrower rules or laws that are not designed to affect them.
Christopher Hitchins is a partner in the labour and employment team at law firm Morgan Lewis
