18 November 2020
The Financial Stability Board (FSB) has published its annual report on the implementation and effects of the G20 financial regulatory reforms that followed the 2008 financial crisis. The report considers the impact that the COVID-19 pandemic has had on the implementation of reforms and how effective the reforms have been. The FSB concludes that the reforms have “served the financial system well during the pandemic” but that there has been limited additional progress in implementing the reforms this year due to the pandemic. The report includes some comments on the FSB’s remuneration reforms, which we have summarised below.
Background
Following the 2008 financial crisis, the FSB was called upon to develop and co-ordinate a comprehensive framework for global financial services regulation, as well as to provide oversight of the global financial system and increase international financial stability. The reforms included the regulation of remuneration within ‘significant’ financial institutions and resulted in the publication of the FSB’s ‘Principles for Sound Compensation Practices’ and the related ‘Implementation Standards’ (the ‘Principles and Standards’), which were intended to align compensation with prudent risk-taking and develop good compensation practices. The Principles and Standards form the basis of many of the remuneration rules that regulate financial services firms around the world, including, for example, the remuneration rules set out under the EU’s Capital Requirements Directive.
As part of their oversight role, the FSB produces an annual report reviewing the implementation and effects of the financial regulatory reforms. In this alert, we have summarised the key remuneration-related points noted in the 2020 annual report. The implementation of the remuneration reforms is judged by how far the Principles and Standards have been implemented for all banks considered to be ‘significant’ in this context.
Key remuneration-related points:
- In line with the 2019 report, as of October 2020, the Principles and Standards had been implemented in full for significant banks by 18 FSB jurisdictions, with 6 FSB jurisdictions (Argentina, Brazil, China, Russia, South Africa and the US) having implemented all except a few (three or less) of the Principles and Standards. There were no jurisdictions that had not implemented the Principles and Standards at all.
- Fewer jurisdictions have implemented the Principles and Standards for the insurance and asset management sectors but the FSB did not provide further detail on this in the report.
- Authorities in some jurisdictions have introduced new prohibitions or set supervisory expectations on remuneration to address COVID-related risks, including to ensure that banks preserve the capital needed to support lending. In line with the Principles and Standards which expect remuneration actions to be risk-aligned, some jurisdictions have asked banks to consider prudential risks when taking remuneration actions.
- The FSB intends to conduct a country peer review of the UK’s compensation practices and expects to publish this in Q1 2021.
- More generally, the FSB will undertake further work to identify potential lessons learned from the COVID-19 pandemic in relation to international standards.
Tapestry comment
It is not surprising that the COVID-19 pandemic is a topic that the FSB has focussed on in this year’s annual report. The FSB’s financial regulatory reforms, including those relating to remuneration, were intended to ensure that the financial system would remain sufficiently robust during periods of market instability and shock. The COVID-19 pandemic is probably the first time that the effectiveness of the reforms has been tested globally in this way and the FSB will be keen to identify what has worked well, what did not work well, and where further international standards will be required, which could include further remuneration reforms.
This year’s report did not identify any major changes in how the Principles and Standards have been applied globally, which appears to have remained largely unchanged against last year with the exception of the general comments on the approach to remuneration in consideration of the COVID-19 pandemic. That said, the report only gives a high-level overview of whether the Principles and Standards have been applied and not necessarily how they have been applied or whether a jurisdiction has implemented more stringent requirements than those expected under the Principles and Standards.
Firms should look out for the FSB’s country peer review on the UK’s compensation practices when this is published in Q1 2021. The UK has implemented stringent remuneration rules for significant banks, going much further than the Principles and Standards in some places, and so it will be interesting to see the comments and any recommendations coming from the review.
If you have any questions about this alert, or if you would like to discuss your remuneration structures, please do let us know.
Matthew Hunter