The FSA has warned banks about a new code of practice concerning guaranteed bonuses in employment contacts.

The Financial Services Authority (FSA) has warned banks that offer employment contracts with more than one year guaranteed bonus could be in breach of new rules.

Banks that continue to offer guaranteed bonuses for more than one year could be in breach of new FSA regulations and could invoke heavy penalties.

Hector Sants, FSA Chief Executive, issued this warning in a letter titled ‘Remuneration Code of practice’ to 45 chief executives within the financial services industry.

He warns that any guarantees made after 18 March, when the FSA published a consultation paper on pay deals, may have to be revoked in order to comply with new regulations when they are likely to come into force on 1 January 2010.

In the letter, Mr Sants states: “I would draw your attention to the fact that guaranteed bonuses which run for a period of more than one year may be inconsistent with effective risk management.

“It is essential that the market should not revert to remuneration practices that would be incompatible with our intended outcomes if the rule and code become effective next year.”

Banks will be given to the end of October this year to show how they intend to comply with the new code of practice.