The FCA has published a letter which it has sent to firms in which the regulator shares its findings and observations from the 2016/17 remuneration round and provides information on its approach to the supervision of remuneration for 2017/18.
Generally in the 2016/17 remuneration round, the FCA observed improvements in the remuneration policies and practices of firms. The FCA further discusses its findings in relation to:
- material risk takers (MRTs);
- bonus pools and individual performance assessment; and
- ex-post risk adjustment.
In terms of MRTs the FCA observed that firms subject to the annual remuneration round were addressing the European Banking Authority guidelines on sound remuneration policies’ requirement to treat European Commission Delegated Regulation 604/2014 as a minimum standard for identification of individuals. The FCA also noticed an upward trend in the number of additional roles identified as posing a material risk. Further examples of identified roles from those shared last year included sales traders, heads of desk, senior advisors, individuals previously identified under the quantitative criteria now identified under the qualitative, and heads of geographical or strategically important functions or business areas not otherwise deemed material. As well as additional roles being identified as MRTs the FCA also reported that it had received an increase in the number of applications to exclude individuals from the MRT list for FCA solo-regulated firms.
The FCA also observed a greater degree of transparency in the bonus pool setting process. Most firms were able to articulate their pool setting process through a waterfall diagram or other step by step process.
The FCA reminds firms that in relation to demonstrating consideration of conduct risk in bonus pools it has shared examples of good practice in an earlier policy statement (PS10/17). However, the FCA reports that those firms that did not adequately capture non-financial and conduct factors relied heavily on the exercise of discretion in setting their awards. This approach made it more difficult to demonstrate the empirical factors underlying awards and therefore made it harder for the firm to justify why awards had been set either higher or lower than expected.
The FCA noted that, in some cases responsibility for systems and processes for ex-post adjustment had not been clearly allocated and consequently those firms found it difficult to identify and adjust awards of appropriate individuals. The FCA also found that some firms appeared to be over-relying on the outcomes of FCA enforcement investigations to inform their own decision on the application of ex-post risk adjustment.
The FCA reports that a new area of focus for 2016/17 was to assess how the introduction of the Senior Managers Regime had changed approaches to remuneration. As expected, the new regime was not a significant step change for those firms with a pre-established UK remuneration committee and remuneration committee chair (SMF12).
The FCA also looked at previously submitted statements of responsibilities (SoRs) related to the prescribed responsibility for remuneration. The FCA found that firms took a range of approaches including submitting additional information on SoRs that was either not relevant to the individual’s responsibilities or which focused on how the individual discharged their responsibilities, rather than what they were actually responsible for.
The FCA therefore reiterates the Handbook requirements (SUP 10C.11) that where a firm expands on the SMF12 role or the prescribed responsibility, including additional details of responsibilities and information, firms should remain clear and concise so as not to dilute, qualify or caveat the responsibility. Where describing the responsibilities of the SMF 12, firms should describe the responsibilities of the individual only (and not the remuneration committee). Also, firms should not reference text that is external to the SOR, unless the text is submitted as supplementary information to the SOR itself.
View FCA letter to proportionality level 1 firms on 2017/18 remuneration round, 24 November 2017