3 August 2022
The UK Financial Conduct Authority (FCA) has published a letter addressed to the Chair of the Remuneration Committee of proportionality level one banks, building societies and PRA designated investment firms. The letter sets out the FCA’s expectations for the Chair as they determine their firm’s remuneration outcomes for the year and highlights a number of focus areas that they expect the Chair to take into account, and which the FCA may focus on in any firm-specific engagement during the year.
Culture and accountability – firms are expected to continue to focus on driving positive cultural change. Remuneration policies should be risk-focused, helping to identify and manage risks and promoting a strong risk culture in the firm. Through the Senior Managers and Certification Regime, individuals should be held accountable for their conduct and competence with a clear, strong, and evidenced link between behaviours and remuneration outcomes. Where there is evidence of regulatory failings, the Chair is expected to oversee and challenge the process to ensure appropriate, timely and transparent adjustments to remuneration are made, including for individuals and Senior Managers, and the FCA may ask to see evidence of this. The FCA aims to embed Environmental, Social and Governance, and Diversity and Inclusion considerations into firms’ functions and will, later this year, consult on measures to promote diversity and inclusion in the financial services sector, including proposals to change the responsibilities of the Remuneration Committee.
Consumer duty – the FCA recently published the final rules and guidance for a new Consumer Duty which sets higher and clearer expectations for the standard of care and customer service that firms give consumers at each stage of the product lifecycle. The firm’s approach to supporting consumers in the current economic environment should be aligned with the firm’s business strategy. The firm’s remuneration policies should be designed to support the expectations set by the Consumer Duty when it comes into effect.
Rising cost of living – the current economic environment is both a current and future risk that the FCA expects the Chair to take into consideration when designing and reviewing the remuneration policies and practices and the incentives created.
Operational resilience – operational resilience is the ability of firms, financial market infrastructures and the financial sector as a whole to prevent, adapt and respond to, recover and learn from operational disruption. Continuing to strengthen firms’ operational resilience and minimise the impact of operational disruptions is one of the FCA’s key priorities. In the event of service disruptions, data breaches or other interruptions, the FCA would expect firms to respond appropriately, such as making remuneration adjustments where appropriate.
Environmental, Social, Governance (ESG) – the FCA is committed to consulting on a new regulatory framework for ESG. As firms respond to evolving regulatory, societal and customer expectations in this area, firms may wish to review whether incentives for their senior leadership and other material risk takers are aligned to these wider ESG risk factors. Firms may wish to use remuneration and incentive programmes as a lever to align incentives with ESG commitments. The FCA believes that linking progress against these commitments to a measurable proportion of pay could be effective in encouraging individuals to take accountability for change. Firms may want to consider the short and long-term milestones towards achieving these goals. If asked, the Chair should be able to explain the approach that the firm has taken to assess the outcomes of these measures to the usual FCA supervisory contact.
Diversity and Inclusion – the FCA published a discussion paper on diversity and inclusion in 2021 and are looking to consult on a new package of measures later this year. Pending that consultation and its outcomes, the FCA believes that remuneration and incentives have a part to play in supporting diversity within firms. As Chair, oversight of the link between the performance management framework and incentives is critical and the Chair may wish to review how remuneration policy takes into account some of the risks that an employee’s working preferences negatively influence their remuneration.
Remuneration approach for 2022/23 – in line with previous years, firms with an accounting reference date of 31 December should submit their Remuneration Policy Statement (RPS), Annex 1: malus and RPS tables 1a, 2 and 8 by 31 August 2022. Firms with an accounting reference date later than 31 December should submit their RPS no later than 8 months after the end of the preceding financial year. Firms are asked to also send:
(a) a short summary of the key points in the RPS with cross-references to the full RPS, including any key changes made in the last year;
(b) an explanation of how the Chair remains assured that the firm’s remuneration policies motivate and drive the purpose, long-term strategy and values of the firm, and how the Chair will hold employees to account if these are not met. This includes how the firm will take into account the impact of the current economic environment on bonus pools and individual outcomes; and
(c) where these exist, details of how the firm's ESG commitments are linked to remuneration policy, including any metrics and targets.
This letter will be helpful for the relevant firms to understand some of the regulatory priorities impacting remuneration. This letter does not appear to contain any expectations that should come as a surprise for a relevant firm. The majority of the topics covered, and the interaction with a firm’s remuneration, have been areas of focus for the UK regulators for a number of years, particularly culture and accountability, operational resilience and diversity and inclusion. The other topics, being the new Consumer Duty, rising cost of living and ESG, are not surprising and align with areas of regulatory focus outside of the remuneration context. Firms should ensure that they have taken note of these expectations and take steps to address any possible improvements to the firm’s approach. Firms should also note the references to possible future changes to remuneration expectations, particularly in relation to ESG and diversity and inclusion.
Matthew Hunter and Lewis Dulley