The Financial Stability Board (FSB) has published its fifth progress report on the implementation of the FSB Principles for Sound Compensation Practices and their Implementation Standards (P&S) which aim to reduce incentives for excessive risk-taking that may arise from the structure of compensation schemes in significant financial institutions. The report also examines links between compensation and misconduct and provides insights into compensation practices in the securities sector, which were issues of particular focus since the publication of the last report in November 2015.
Among other things, key findings in the report include:
- almost all FSB member jurisdictions have substantively implemented the P&S for banking organisations. However, there are some significant differences between the approaches taken to the oversight of compensation practices in banking organisations;
- in-year adjustments to compensation remains the compensation tool of choice in banking organisations. Application of malus is still rare in many jurisdictions and clawback is subject to more significant legal obstacles or enforcement issues;
- there are significant differences between banking organisations’ approaches and supervisory frameworks for the identification of material risk takers;
- progress on implementing the P&S in the insurance sector is significantly behind that of banking organisations;
- in the securities sector, there is a great variety of approaches to compensation, with the variations reflecting the diversity of firms in the sector; and
- securities industry participants believe that sound compensation practices may be a useful tool in managing misconduct risk.
In terms of future developments, the FSB:
- will continue to focus on the extent to which compensation, together with a range of other measures, can be used to address misconduct risk in financial institutions. The FSB will finalise by end-2017 its supplementary guidance to the P&S on the use of compensation tools to address misconduct;
- will explore ways to assess the effectiveness of aligning compensation policies and approaches with risk. This might include, for example, the extent to which compensation disclosure requirements are an effective mechanism for providing investors with meaningful information on the alignment of compensation with the long-term interests of the firm.
The next progress report will be published in 2019.
View Fifth FSB progress report on compensation practices, 4 July 207
