U.K. Compensation Reform Could Hurt Insurers, Trade Group Warns

NU Online News Service, Aug. 14, 10:10 a.m. EDT

A government proposal in the United Kingdom to reform the type of employee compensation that led to the current economic meltdown could be detrimental to insurers if regulators are not careful about how the new rules are applied, a London-based industry association warned.

While there is still work to be done on the code, "great care needs to be taken to avoid reading across from banks to insurers and asset managers, whose businesses are substantially different in nature and pose much less risk to overall financial stability," said Peter Montagnon, director of investment affairs at the Association of British Insurers.

However, despite such concerns, Mr. Montagnon called the U.K. Financial Services Authority proposal to reform remuneration practices "an important step forward."

"The FSA has stuck to its principle of linking remuneration to risk, while making the [proposal] less prescriptive and narrowing the scope of the organizations covered," said Mr. Montagnon. "The new version is much more likely to deliver the desired outcome without excessive compliance burdens."

In addition, he said that "we agree with the FSA that the focus should be on the structure of remuneration, not the size of the package, which companies must be able to determine based on their need to compete. And as shareholders, we support the proposal that bonus pools should be formed only after taking into account the cost of capital, adjusted for risk."

The FSA said its Code Proposal focuses on making sure the total amount of money distributed is "consistent with good risk management and sustainability," and that the compensation practices "provide the right incentives."

The new regulations would apply to the financial services industry, but may be extended to other services including insurers, the FSA said.

While not dictating terms of remuneration, the FSA said it would not expect firms to enter into individual contracts that provide guaranteed bonuses for more than one year. It also expects that for senior employees, two-thirds of bonuses will be spread over three years.

Statements of remuneration policy would have to be provided to the FSA, the regulator said.

FSA Chief Executive Hector Sants said the aim is to make sure remuneration policies are consistent with and "promote effective risk management."

The rules, which would take effect in January, are consistent with what is being considered in Switzerland and the European Union, the FSA noted.

"Whilst there is general international agreement on the need for supervisory action on remuneration policies and practices, we will be the first major financial regulator to take this step," he said. "We think that it is important to have rules in place for 2010."