Dear Chair of the Remuneration Committee | Release Date: 2nd August 2022
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
This letter from the Financial Conduct Authority (FCA) is directed towards Chairs of Remuneration Committees at financial institutions. It outlines the expectations for aligning remuneration policies with the firm’s strategic goals, ethical standards, and the broader economic context. The letter underscores the significant role of remuneration in fostering a culture that enhances operational performance, manages risks effectively, and ensures accountability within firms. The FCA’s strategic goals from 2022 to 2025, including the integration of Environmental, Social, and Governance (ESG) considerations and Diversity and Inclusion (D&I) in corporate practices, are highlighted as areas of focus.
Detailed Expectations from the FCA
Culture and Accountability
A strong corporate culture that promotes risk awareness and ethical behaviour is critical to achieving business objectives and enhancing customer and shareholder value. The FCA expects remuneration policies to reflect a firm’s cultural goals and drive positive behavioural changes across all levels of the organisation. The implementation of the Senior Managers and Certification Regime (SM&CR) is a particular area of focus, ensuring that there is a robust linkage between performance, remuneration, and compliance. The committee is tasked with the responsibility to ensure that failures in regulatory compliance are reflected in remuneration adjustments and are transparently documented.
Strategic Framework and Regulatory Expectations
The FCA’s strategy for the next few years involves setting clear expectations through regulatory frameworks that encourage firms to deliver favourable outcomes in the financial services industry. This includes the promotion of sustainability through ESG integration and enhancing D&I within financial institutions. Upcoming regulatory changes will likely redefine the scope of responsibilities for Remuneration Committees, emphasising their role in cultivating a conducive culture for strategic and ethical business operations.
New Consumer Duty
The introduction of the New Consumer Duty (NCD) marks a significant shift towards higher standards of consumer care. This duty compels firms to consider consumer interests proactively through all stages of product and service life cycles. Remuneration policies should be structured to encourage and reward behaviours that align with these higher standards, ensuring that consumer well-being is at the forefront of business decisions.
Economic Impact and Remuneration Considerations
The current economic climate, characterised by rising inflation and interest rates, poses significant challenges for consumers and businesses alike. The FCA stresses the importance of remuneration committees being mindful of these conditions when setting remuneration policies, particularly in terms of supporting employees facing economic hardships. Additionally, remuneration structures should be reviewed to ensure they do not incentivize behaviours that could exacerbate customer vulnerabilities or lead to poor consumer outcomes.
Operational Resilience
Operational resilience is increasingly crucial in maintaining system stability and consumer confidence. The FCA expects that remuneration policies should support efforts to minimise disruptions and enhance the firm’s ability to respond, recover, and learn from operational incidents. This includes making necessary adjustments to remuneration following significant disruptions to underline the importance of resilience.
Environmental, Social, Governance (ESG) Integration
As the financial sector increasingly focuses on sustainability, the FCA encourages firms to align their remuneration policies with ESG objectives. This alignment should support the firm’s strategic goals related to sustainability, such as reducing carbon footprints, improving governance practices, and fostering social responsibility. Remuneration Committees are urged to consider how incentives can be structured to drive meaningful progress towards these goals.
Diversity and Inclusion
Progress on D&I within the financial sector has been slower than expected. The FCA plans to introduce new measures to accelerate this progress and expects Remuneration Committees to play a crucial role in this area. This includes using remuneration and incentives to promote a diverse and inclusive workplace, thereby enhancing the representation and retention of diverse talent within firms.
Conclusion and Forward-Looking Guidance
The FCA concludes the letter by reiterating the critical role of Remuneration Committees in aligning remuneration policies with the regulatory expectations and strategic objectives of firms. The Committees are expected to proactively adapt their strategies to support the evolving landscape of financial regulations, particularly in relation to consumer protection, operational resilience, and sustainability.
Key Takeaways and Action Points
Align Remuneration with Regulatory and Strategic Goals: Ensure that remuneration structures support the firm’s long-term objectives and comply with new regulatory standards.
Promote a Risk-Aware and Ethical Culture: Link remuneration to the promotion of a healthy corporate culture and the effective management of risks.
Support Economic Resilience: Consider the broader economic challenges when designing remuneration policies, especially in supporting vulnerable employees.
Enhance Operational Resilience: Integrate operational resilience into remuneration considerations, emphasising the importance of robust response mechanisms.
Drive ESG Commitments: Use remuneration tools to promote and achieve ESG objectives, aligning incentives with sustainable business practices.
Foster Diversity and Inclusion: Leverage remuneration and incentives to support D&I initiatives within the firm, aiming for a more inclusive corporate environment.
The Remuneration Committee is urged to review and refine its policies continually to ensure they are in line with the expectations set out by the FCA and are capable of achieving the desired outcomes in a rapidly changing financial landscape.