On 2 August 2022, the Financial Conduct Authority (FCA) published a letter it has sent to the Chair of the Remuneration Committee (the Chair) of proportionality level one banks, building societies and PRA designated investment firms.

The letter sets out the FCA’s expectations for the Chair, as they determine their firm’s remuneration outcomes for the year. Furthermore, it highlights a number of key focus areas the FCA expects the Chair to take into account, and which may focus on in any firm-specific engagement with the Chair through the course of the year.

The letter addresses the following topics:

  • Culture and accountability: The FCA outlines how remuneration policies should be risk-focused, helping to identify and manage risks and promoting a strong risk culture in the firm. Through the Senior Managers and Certification Regime (SM&CR), individuals should be held accountable for their conduct and competence with a clear, strong, and evidenced link between behaviours and remuneration outcomes. Where there is evidence of regulatory failings, the FCA expect the Chair to oversee and challenge the process to ensure appropriate, timely and transparent adjustments to remuneration are made, where relevant, this should include individuals and Senior Managers. Where appropriate, the FCA may follow up with the Chair to see evidence of this.
  • The new Consumer Duty: The FCA recently published the final rules and guidance for a new Consumer Duty (NCD), which set higher and clearer expectations for the standard of care and customer service that firms give consumers at each stage of the product lifecycle. A healthy, consumer-centric culture will be essential to delivering outcomes. The FCA established that the Chair should align their approach to supporting consumers in the current economic environment with their firm’s business strategy. The firm’s remuneration policies should be designed to support the expectations set by the NCD when it comes into effect.
  • The rising cost of living: The FCA highlights that lenders need to make sure that their approach to taking on new borrowers takes account of the financial pressure they may be facing and its impact on their income and expenditure. The FCA is aware that many firms are working to ensure that colleagues on lower pay are supported through this period. In line with the Corporate Governance Code, the FCA expects that the Chair “should review workforce remuneration and related policies and the alignment of incentives and rewards with culture.”
  • Operational Resilience: Continuing to strengthen firms’ operational resilience and minimise the impact of operational disruptions is one of the FCA’s key priorities. In the event of service disruptions, data breaches or other interruptions, the FCA expects firms to respond appropriately, such as making remuneration adjustments where appropriate, and to recover and learn from the experience.
  •  Environmental, Social, Governance: As firms respond to evolving regulatory, societal and customer expectations in this area, firms may wish to review whether incentives for their senior leadership and other material risk takers are aligned to these wider ESG risk factors. Firms may wish to use remuneration and incentive programmes as a lever to align incentives with commitments to setting net zero targets. The FCA believes that linking progress against these commitments to a measurable proportion of pay could be effective in encouraging individuals to take accountability for change.
  • Diversity and inclusion: While there are a number of positive industry initiatives underway, progress to increase diversity of representation remains relatively slow across the financial sector. The FCA set forth that the Chair’s oversight of the link between the performance management framework and incentives is critical and they may wish to review how remuneration policy takes into account some of the risks that an employee’s working preferences negatively influence their remuneration.