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Dear Chair of the Remuneration Committee | Release Date: 28th August 2019

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 alignment with its ongoing focus on enhancing the culture and governance within financial services, the Financial Conduct Authority (FCA) has released findings from its 2018/19 remuneration review and set forth expectations for the 2019/20 period. This communication aims to provide senior management, specifically Chairs of Remuneration Committees at financial firms, with detailed insights and directives to ensure that remuneration strategies foster a culture of compliance and positive behaviours.

Findings from the 2018/19 Remuneration Round

The FCA, in collaboration with the Prudential Regulation Authority (PRA), undertook a thorough review of remuneration practices among Level 1 firms. This review scrutinised the alignment of remuneration policies with the dual-regulated firms Remuneration Code (SYSC 19D) and relevant EU regulations. A notable positive outcome from this review is the ongoing effort by firms to incorporate conduct-related metrics into their remuneration practices. However, the review also highlighted areas needing significant improvement, especially in accountability measures, the rationale behind remuneration adjustments (ex-post risk adjustments), and the overall effectiveness of these practices in driving desirable behaviours.

Expectations for Accountability in Remuneration

As an individual holding a Senior Manager Function (SMF12), tasked with overseeing remuneration policies, you bear a crucial responsibility. The FCA expects that you ensure these policies are not only regulatory compliant but also promotive of a healthy corporate culture and conducive to driving correct behaviours across all levels of the firm. In the 2019/20 supervisory cycle, the FCA will intensify discussions on how senior managers ensure their remuneration policies uphold the firm’s ethical standards and encourage positive behavioural outcomes.

Focus on Ex-post Risk Adjustments

The practice of adjusting remuneration to reflect poor performance or misconduct is well noted. However, inconsistencies in the application and justification of these adjustments remain a concern. The FCA has provided detailed guidance on applying ex-post risk adjustments to variable remuneration and expects firms to demonstrate a well-grounded approach to determining the scale of adjustments. Firms must ensure that these adjustments are timely and reflective of the individual’s and the firm’s overall performance and conduct.

Enhancing Diversity and Inclusion Through Remuneration Policies

Recognising the integral role of diversity and inclusion in fostering a healthy workplace culture, the FCA continues to press firms to broaden their diversity initiatives. Beyond gender diversity, there is an emphasis on embracing a wider spectrum of diversity dimensions, including ethnicity, disability, and socio-economic background. This year, the FCA will closely monitor how firms’ remuneration policies aid in promoting diversity and inclusion, expecting firms to make substantial progress in this area.

Requirements for the Remuneration Policy Statement (RPS)

For the upcoming review period, besides the standard RPS submission, firms are required to include a succinct summary of the key elements of the RPS and any significant changes from the previous year. This summary should articulate how the remuneration policies align with and support positive consumer outcomes and reduce potential harm. Accurate and reflective reporting in the RPS is crucial for the FCA’s assessment.

Ongoing Cultural Transformation in Financial Services

The FCA is committed to driving cultural change within the financial services industry. Through initiatives like the Transforming Culture in Financial Services project, the authority seeks to explore and understand the dynamics of workplace culture and the impact of various types of incentives. Upcoming events and workshops are planned to delve deeper into these topics, providing platforms for industry leaders to share insights and adopt best practices.

Key Actions and Takeaways

Strengthen Accountability Frameworks: Review and enhance mechanisms within your remuneration policies that ensure accountability and alignment with the firm’s values.

Clarify and Justify Remuneration Adjustments: Develop a more structured approach to justifying how remuneration adjustments are calculated and applied.

Expand and Integrate Diversity Efforts: Actively work on broadening the scope of diversity within your firm, ensuring that remuneration policies support these broader goals.

Enhance Reporting in RPS: Ensure that the Remuneration Policy Statement accurately reflects your firm’s policies and their efficacy in promoting desirable behaviours and outcomes.

Participate in Cultural Transformation Discussions: Engage with the FCA’s initiatives on cultural transformation to stay at the forefront of discussions on creating positive and sustainable workplace environments in financial services.

This comprehensive summary and the subsequent guidelines are designed to help you align your firm’s practices with the FCA’s regulatory expectations and cultural objectives effectively.

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