The FSA is consulting on whether to extend its code of remuneration practices, designed to clamp-down on bank excesses, to retail investment intermediaries.
The code has a general requirement that a "firm must establish, implement and maintain remuneration policies, procedures and practices that are consistent with and promote effective risk management". This could be implemented by a remuneration committee for each firm.
Its consultation paper will also propose that the Code's remaining 10 principles are put into the Handbook to help guide firms on the evidence the FSA will focus on when assessing compliance.
Aside from banks and broker dealers, the regulator admits it does not think there is a strong case to suggest inappropriate remuneration practices by financial services firms played a significant role in the present crisis.
However, it argues there are other ways in which these practices are a legitimate cause for concern to firms and regulators.
It highlights the risk that an employee has a financial incentive to promote one product over another to the potential detriment of a customer. It cites the example of 'where a fund manager is running both a low commission long only fund and a higher commission hedge fund'.
Furthermore, it says there is a risk an employee has an incentive to maximise the quantity of output, rather than its quality.
"This is a risk in most commission based incentive structures, and has been the focus of much of the work in our retail distribution review," it says.
Firms to which the code might apply, aside from retail investment intermediaries, include: other investment firms such as asset managers (including hedge fund managers); insurers, managing agents and Lloyd's; mortgage and other home finance providers; credit unions; general insurance and home finance intermediaries.
It says whether and how the code should be applied to intermediary firms will be discussed further alongside the work of the RDR.
"We will therefore ask for views on this particular area in the RDR Consultation Paper to be published in June 2009."
It said if the remit of the code was extended it would be important to apply flexibility in some areas.
"For example, smaller firms often do not have remuneration committees, and decisions about remuneration policies can be made effectively by the directors or partners of the firm within their existing management structure."
The consulting period on implementation of the Code for larger banks and broker dealers will run for two months, until 18 May. Discussion and feedback on the idea of extending the Code to other firms regulated by the FSA will run until 18 June.
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