UK Authorities (FCA and PRA) welcomed the findings of FSB peer review on the implementation of financial sector remuneration reforms in the UK. The review finds that the UK Authorities have implemented reforms that are consistent with the FSB Principles and Implementation Standards for sound compensation practices. While the initial focus was on the banking sector, over time, the UK Authorities have increasingly implemented the Principles and Implementation Standards in the insurance and asset management sectors.
The FSB report highlights that the UK Authorities are increasingly focused on evaluating the effectiveness of the regime and require firms to periodically review the design and implementation of their remuneration policies. Some of the approaches of the UK Authorities can serve as examples of good practice for other jurisdictions to consider. These include adopting a risk-based and proportional regulatory and supervisory approach, setting expectations through public communication to Remuneration Committee Chairs of firms, a supervisory approach that focuses on close interaction between prudential and conduct rules and reinforces accountability with links to compensation outcomes, and evaluation of the effectiveness of remuneration regime. In combination with the Senior Managers and Certification Regime (SM&CR), the remuneration regime has helped firms become more disciplined in mapping responsibilities and has resulted in greater consistency and transparency on acceptable remuneration practices. Notwithstanding this progress, the review concludes that steps can be taken to further strengthen the financial sector compensation framework in a few areas:
- Review interaction between SM&CR and compensation. UK Authorities should review the interaction between the SM&CR and remuneration framework, including how the interplay between the SM&CR and remuneration rules/codes reward diligent and proactive risk management.
- Improve efficiency of data collection. UK Authorities should consider streamlining and automating the data collection and analysis for level one banks and investment firms. They could also consider collecting remuneration data from a broader range of firms while having regard to the cost and complexity for all stakeholders, including minimizing the burden on firms where possible.
- Assess effectiveness of remuneration regime. As part of the initiative of UK Authorities to assess the effectiveness of remuneration rules, they should consider complementing business as usual supervision practices and the data analytics performed on the Remuneration Policy Statement submissions (for level one banks and investment firms) with additional thematic reviews and onsite visits. Results of such reviews could be published to guide implementation by the industry.
- Provide additional guidance on remuneration for the insurance sector. UK Authorities should consider supplementing the Solvency II remuneration requirements with more detailed guidance for the insurance sector, to ensure effective risk alignment and avoid potential inconsistent interpretation by firms.
The peer review process and report preparation took place prior to the UK implementation of the fifth EU Capital Requirements Directive (CRD5), which came into force on December 29, 2020. The report does not examine these changes in depth. FCA also plans to consult on a new remuneration regime for investment firms shortly as part of the new Investment Firms Prudential Regime. The UK is the first FSB member jurisdiction to undergo this kind of peer assessment of the effectiveness of remuneration reforms in the financial sector.
Keywords: Europe, UK, Banking, Remuneration Form, SM&CR, Peer Review, Data Collection, FSB, FCA, PRA
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