The French Banking Federation (FBF) has endorsed the conclusions of the working group on the compensation of financial market professionals. Set up to establish compensation guidelines at the initiative of Christine Lagarde, the French minister of the Economy, Industry and Employment, the working group is chaired by Georges Pauget, the FBF Chairman and includes representatives from professional bodies*, the Autorité des marches financiers (AMF), the Commission bancaire and the Treasury and Economic Policy General Directorate (DGTPE). The working group's conclusions will be submitted to Christine Lagarde ahead of the next meeting of the Paris Financial Services High Level Committee (Haut Comité de Place).
In the service of the general economic interest, the guidelines for the compensation of financial market professionals are designed to increase consistency between the behaviour of professionals - most notably in the area of risk management - and the long-term objectives of the enterprises that employ them. The regulatory authorities (Commission bancaire, the Autorité de contrôle des assurances et des mutuelles (ACAM) and the AMF will use these guidelines to scrutinise the compensation systems for financial market professionals and to evaluate any associated risks.
The guidelines apply to professionals (front office, support functions, control functions) in areas such as trading, investment and corporate banking divisions, regardless of the legal form of their employer (e.g. bank, insurance company, investment firm, management company, etc.). They shall enter into force as from 2009 and shall apply to variable compensation to be paid in 2010.
An international approach is essential.
To maintain the competitive position of companies based in France, the adoption of these guidelines must be relayed by European and global approaches, notably in tandem with the initiative being led by the G20 nations.
Guidelines on the variable compensation of financial market professionals:
In accordance with the Markets in Financial Instruments Directive, the variable component, which is not linked to base pay, should be based on profits actually earned by the company and should take account of clients' interests.
Assessment basis for variable compensation should be based on net profits from operations and not on gross revenue. They should be on a net basis, taking into account all costs (market, liquidity, cost of risk, capital allocated, etc), and should be based on the actual performance and profits of operations.
Variable compensation should comprise:
> A variable portion which is paid in respect of the year just ended. The basis for calculation for the variable portion should take account of effectively realised profits and not anticipated profits.
> A significant portion of deferred compensation in order to take account of the definitive results of operations which may only emerge several years later.
Compensation may be paid in cash. Shares, options on company shares or similar instruments may also be awarded in order to achieve a lasting alignment between corporate performance, and shareholders' interest. Hedging of the corresponding risk associated with such assets must not be authorised, under any circumstances, until options are exercised or shares are acquired definitively.
The Board of Directors should endorse the principles of the compensation policy and must be informed of any incidences of the application of the policy where individual compensation exceeds an upper limit. Senior management should implement rules governing compensation while decisions relating to compensation (including assessment basis) must be arrived at independently without any influence from the staff to whom they apply. Variable compensation for support and control functions should be based on specific objectives that are not linked to front office financial results.
* AFG (Association Française de la Gestion Financière), AFIC (L'Association Française des Investisseurs en Capital), AMAFI (Association Française des marchés financiers), FBF (Fédération Bancaire Française), FFSA (Fédération Française des Sociétés d'Assurances)
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