24 July 2020
Earlier this week, the Financial Conduct Authority (FCA) published a letter (also sent to firms' remuneration committee chairs) setting out its finding from the 2019/20 remuneration year and how it plans to assess firms' remuneration policies and practices for the 2020/21 remuneration year.
In the letter the FCA confirmed that culture in financial services remains a key area of focus. They commented on the risk that firms may deprioritise their focus on culture as they redirect resources in response to immediate risks presented by Covid-19. The FCA stated that a continued focus on maintaining a healthy culture and driving the right behaviours during this time of uncertainty is needed. They believe it can help to reduce the potential for harm and make firms more resilient.
In addition to the importance of culture, firms' remuneration and recognition practices remain a key focus for the FCA. They will continue to assess the extent to which firms' approaches to rewarding and incentivising staff promote healthy cultures and minimise harm.
Findings for 2019/20 and future approach
- Accountability: the FCA expect firms to ensure remuneration policies and practices remain aligned with long-term business plans and continue to support and reinforce healthy cultures at the firm. Supervisors will continue to assess how policies may have evolved in response to Covid-19 including the impact on bonus pools and individual remuneration outcomes. The FCA expect firms to consider how their remuneration policies promote equality of opportunity and ensure that diversity and inclusion is embedded within firms' approaches to rewarding individuals, avoiding unconscious bias.
- Ex-post risk adjustments: during the 2019/20 review, supervisors focused on how firms had responded to major risk and performance issues, including adjustments made to bonus pools and individual remuneration outcomes. The review found that some firms were slow in concluding investigations and failed to demonstrate how they aligned levels of adjustment with what they knew about individuals' conduct. The FCA expects Remuneration Committee Chairs to oversee how their firm makes consistent and timely judgements on the level of adjustments made.
- Diversity and inclusion: a firm's approach to diversity and inclusion is an important part of a healthy culture. Firms should assess the extent to which a remuneration policy positively promotes diversity and inclusion across all protected characteristics and take appropriate steps to address areas of weakness or concern. Firms should be aware of the risks that may have a negative impact on diverse and inclusive cultures. They should proactively recognise particular issues that some people may face and take action. The review showed that gender and BAME pay gaps provide a quantitative window into inequalities and the FCA expect firms to consider the analysis from those reports and use them to address inequalities.
The letter also confirms, in line with last year, which supporting information should be provided alongside the Remuneration Policy Statement.
It is not surprising that the FCA's review of the latest remuneration year primarily focuses on risk and firms' abilities to be accountable for that risk. Whilst Covid-19 was unexpected and unprecedented, recent notable case law has shown firms that they should be adaptive and quick to respond to risk and performance issues. This letter demonstrates that firms may still have a way to go to ensure they are prepared for any event which may impact performance and pose a risk.
A focus on diversity and inclusion fits in with many trends we have seen, and we expect this will be a focus for some time. As demonstrated in our FTSE review last year (and being updated this year), diversity is being embedded within remuneration practices. Financial services companies are taking the lead for pushing the Gender Agenda forwards. With firms getting prepared for the updated CRD V / CRR II and IFD / IFR legislative packages, we expect to see a bigger push on diversity and inclusion to comply with gender and diversity requirements under the legislation. As a result, we may see the 2020/21 review find the progression on diversity and inclusion to be impressive.
FCA supervisors will continue to assess firms' remuneration policies and the outcomes they drive, and we will of course keep you appraised of any changes and how they may impact your current policies and practices.
If you have any questions about this alert, or if you would like to discuss your remuneration structures, please do let us know.