Dear Chair of the Remuneration Committee | Release Date: 31st October 2023
To read a shorter summary of this Dear Chair of the Remuneration Committee letter, click here.
To access the original FCA document, click here.
Long Summary
In a comprehensive directive addressed to the Chairs of Remuneration Committees, the Financial Conduct Authority (FCA) sets forth expectations under the persistently challenging economic backdrop and ongoing cost of living pressures. This letter is crucial as it guides the strategies that align remuneration policies with consumer-centric outcomes and broader economic realities.
Economic Context and Strategic Considerations for Remuneration
Addressing Economic and Consumer Pressures
The FCA underscores the importance of remuneration policies in responding to economic instability and inflationary pressures. Committees are urged to tailor their strategies not only to incentivise a consumer-focused approach but also to support lower-paid staff amidst the cost of living crisis.
Supporting Lower-Paid Employees
Acknowledging the efforts of many firms to assist lower-paid employees, the FCA highlights the necessity of continuing these supports, which are vital in maintaining workforce stability and morale during challenging times.
Structural Expectations for Remuneration Policies
Variable vs. Fixed Remuneration Ratios
Following the publication of PS23/15 by the FCA and the Prudential Regulation Authority, there is a strategic shift toward increasing the proportion of at-risk compensation. This change is intended to enhance the responsiveness of remuneration policies to downturns, poor performance, or misconduct by increasing the variable component linked to performance metrics.
Implementation of Consumer Duty
With the Consumer Duty effective from July 31, 2023, for new and renewing customers, and extending to closed book products by July 31, 2024, firms are expected to fully integrate these duties into their operations. This includes adjusting services to meet changing technology and customer behaviours, always with a focus on consumer impact, particularly protecting vulnerable customers.
Corporate Culture and Accountability
Importance of a Healthy Corporate Culture
Recent market turbulence has reinforced the importance of nurturing a robust corporate culture. The FCA calls for firms to develop cultures that support their corporate purpose, governance, risk management, operational resilience, and inclusive leadership practices. Such cultures are not just goals in themselves but are fundamental to achieving business and ethical success.
Promoting Transparency and Accountability
Firms are encouraged to promote environments where transparency and accountability are paramount. This involves clear delineation of roles and responsibilities, ensuring that staff feel empowered to raise concerns that could impact consumer outcomes or the firm’s risk profile. The alignment between individual behaviors and remuneration outcomes should be evident, and adjustments to remuneration must be made transparently and promptly when standards are not met.
Focus on Diversity and Inclusion
Enhancing Sector Diversity
In conjunction with the Prudential Regulation Authority, the FCA has released a consultation paper, CP23/20, aimed at bolstering diversity and inclusion within the financial sector. Firms are encouraged to actively engage with these proposals and continue their initiatives aimed at narrowing pay gaps. Additionally, firms must maintain gender-neutral pay policies and ensure that variable remuneration awards do not discriminate based on any protected characteristic.
Sustainability and Environmental Commitments
Integrating Sustainability into Remuneration
Reflecting the growing corporate commitment to sustainability, particularly net-zero objectives, the FCA expects firms to align their remuneration structures with their strategic and governance frameworks related to these goals. The Transition Plan Taskforce (TPT) is finalising a Disclosure Framework for credible climate transition plans, which includes recommendations on aligning remuneration and incentive structures with strategic sustainability ambitions.
Conclusion and Next Steps
The FCA expects the Chairs of Remuneration Committees to carefully integrate the guidance provided in this letter into their remuneration frameworks. The authority is looking for detailed responses on how these principles will be implemented and anticipates continued engagement through the standard supervisory cycle. This correspondence sets a clear path for remuneration strategies to align with not only financial and economic objectives but also with societal and environmental responsibilities. The next communication on this topic is scheduled for no sooner than two years from now, underscoring the importance of the current directives.