HKMA Guideline on Sound Remuneration System

HKMA has recently developed this Guideline on the basis of the recommendations issued by the Financial Stability Board (FSB), which have been endorsed by the G20 as an international standard on sound remuneration practices. This Guideline serves to provide broad guidance on the governance and control arrangements for, and operations of, banks' remuneration systems. It is intended to apply to both locally incorporated banks and local branches of foreign banks.

The Guideline covers the following areas:

1. Governance – formulation of remuneration policy; board oversight (including the establishment of a remuneration committee); and the role of risk control functions (including, but not limited to, risk management, financial control, compliance, and internal audit) in respect of an bank's remuneration system.
2. Structure of remuneration – proportionate balance of fixed and variable remuneration; use of instruments for variable remuneration; and exceptional use of guaranteed minimum bonuses.
3. Measurement of performance for variable remuneration – pre-determined criteria for performance measurement; adjustments to performance assessment in respect of current and potential risks and the overall performance of a bank and relevant business units; and the exercise of judgement in the process of determining variable remuneration.
4. Alignment of remuneration payouts to the time horizon of risks – deferment of variable remuneration (including minimum vesting period and pre-defined performance conditions); claw-back provision and restriction on hedging exposures in respect of the unvested portion of deferred remuneration.
5. Adequate disclosure on remuneration – disclosure in respect of the design and implementation of remuneration systems; and aggregate quantitative information on remuneration broken down by senior management and by other employees whose activities could have a material impact on the risk exposure of a bank.

HKMA intends to finalize the Guideline by the end of 2009 and expects all banks to fully implement it within 2010.

It appears that even last year's financial tsunami has not caused a disaster affecting the stability of Hong Kong's banking industry, HKMA is more proactively intervening in the banking industry by following the international recommendations. If banks' remuneration system has to be regulated, how about insurance companies and the securities industry?

As a compliance practitioner, I am also interested to know how the remuneration policy would be formulated for the compliance function.