August 2019: UK FCA: Level 1 Firms - update on supervisory approach

The UK Financial Conduct Authority (‘FCA’) has published a ‘Dear Chair of the Remuneration Committee letter’ (dated 19 August 2019) on 28 August 2019 which outlines the FCA’s 2019/20 approach for supervising remuneration policies and practices for level 1 firms (e.g. deposit takers and investment firms with total assets exceeding £50bn). The letter also contains findings and observations from supervision during 2018/19.

Approach to supervision for 2019/20:

  • Accountability - the FCA highlights that the remuneration committee chair is ultimately responsible for remuneration policies and practices. The FCA expects the chair to consider how remuneration will contribute to a healthy culture and promote the right behaviour.
  • Ex-post risk adjustments - the FCA will continue to focus on adjustments made where an employee’s conduct falls below the standards expected. Firms must make appropriate, justifiable and consistent adjustments to variable remuneration. The chair must have oversight to ensure any adjustments are made in a timely manner.
  • Diversity and inclusion - the FCA sees this as a key consideration and will continue to engage with firms on how remuneration policies can influence their approach to diversity and inclusion.
  • Remuneration policy statement - for the FCA’s annual review with the PRA, in addition to submitting a Remuneration Policy Statement (‘RPS’), firms should submit a short summary of the key points in the RPS, including key changes. Firms should also submit an explanation of how the remuneration policies drive appropriate behaviour and lead to good consumer outcomes.
  • Transforming culture in financial services - the FCA will continue to focus on transforming culture in financial services firms. They are now exploring what, other than remuneration, motivates individuals in the financial services sector (including non-financial incentives and recognition), the role of incentives in creating a successful business model and the interaction between interests of different stakeholders. The FCA will continue to engage with the financial services community on this and welcomes your views.

Tapestry Comment

The FCA approach to remuneration supervision for 2019/20 focuses on culture and governance. The FCA has highlighted the significance of the chair of the remuneration committee in being accountable for making the right policies to drive positive behaviour and culture. The FCA are continuing in their efforts to transform the culture of financial services firms - and are now also considering including non financial drivers - we expect to see more on this. Diversity in its broadest form (i.e. not just gender) is being taken even more seriously this year and we expect that this trend will continue.

This summer, we undertook research which showed that many financial services firms in the FTSE 100 had linked diversity / gender targets to their incentive plans. If you would like to see the key findings from our FTSE 100 Diversity Report, please let Gabby know. Firms should review the themes presented in this letter for 2019/20 and consider if their current policies and practices remain fit for purpose.

If you have any questions about this, or any other financial services update, please do contact us.

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