Global Regulation Tomorrow

The FCA has issued a large number of deregulatory papers in the last few months. Many of these might be viewed as making incremental or technical changes. However, I think it is fair to say that the FCA’s consultation on remuneration for solo regulated firms represents real change and liberalisation of the remuneration regime. I have set out below a summary of the key differences between the current and future regimes. There is no question that these proposed changes are real and amount to a lot more than tinkering around at the edges. Most of them will be welcomed by the industry.

As always, there are a few points worth questioning, and these are the ones I want to focus on.

The first point concerns the removal of prescription in many areas, including deferral and malus and clawback. Firms are moving into a world in which they must decide for themselves whether malus and clawback are appropriate and retention periods will now be considered on a firm-by-firm basis. In addition, the requirement to pay in instruments of the firm will be removed and a principles-based approach adopted, where firms need to support appropriate incentives.

All of this is welcome as far as it goes. However, I think there remain some real questions about how the FCA will supervise and what non-guidance it may give, formally or informally. For boards and executives facing policy decisions about how far to move away from the existing approach, this is going to pose a real challenge in terms of decision audit trails and how to judge that you are in the “pack” and not an outlier.

The second point which will concern many HR and compliance heads is the extent to which the move to a principles-based approach will actually create even greater pressure on them from the front office to revert to more old-style bonus based structures. Principles-based flexibility is attractive in theory, but it only works if first and second line management retain the ability to hold back excessive emphasis on variable bonuses. This pressure will be a real concern to management who may liberalise their approach only to find that the FCA, as it sometimes does, turns around and basically says that you do not comply with the regime, you have gone too far and have not properly considered the governance requirements in our rules.

So, while most of the changes will be welcomed by the industry, a word of caution is warranted, as always, the approach that senior management and second line functions should take, and in terms of outcomes. This leads to afurther point, an old theme that is going to be absolutely crucial in this area, which is the strength of the firm’s governance at the executive level, the relationship of first and second line and in relation to board oversight. I think it is important not be fooled, for example, the removal of the requirement for a remuneration committee, into thinking there is no need for proper governance. On the contrary, the FCA’s language throughout suggests that all firms, and in particular, more systemic firms, may need to spend more, not less, management time on remuneration issues.

I think this taps into the long-running debate about the balance between certainty of rules and a principles-based approach to regulation. The industry often calls for a principles-based approach, and this can sometimes make for an easier life, but not always. There are occasions when having an element of hard coded rules is valuable, precisely because it provides some bright lines and certainty in the regime.

These are the main points I wanted to raise but there are two broader macro themes also worth noting. First, it is unclear to what extent this type of deregulatory approach is a harbinger of what is to come in other areas. Second, this consultation marks a significant shift away from the more prescriptive EU approach to remuneration as it has developed over recent years. There may be differing views on the merits of the different approaches to remuneration regulation as a matter of policy but it is interesting to note the relationship between the deregulatory pressure placed on the regulators by the previous Chancellor and the fact that after two years this has actually resulted in real change real change in areas such as remuneration. It remains to be seen whether the new leadership of HM Treasury is as committed to the deregulatory agenda and what impact this may have on the approach of the PRA and FCA going forward.

Comparison of current position/proposals: