June 17, 2019

FSB published the sixth progress report on the implementation of its principles and standards for sound compensation practices in financial institutions. The report assesses how compensation practices have evolved since 2009. The progress report finds that FSB jurisdictions implemented the principles and standards for sound compensation for all banks that are considered significant for the purpose of the principles and standards. While most banks have put in place practices and procedures that reduce the potential for inappropriate risk-taking, their effectiveness is still being tested. FSB also published a document that provides links to information on the FSB member jurisdictions’ national regulation and supervisory guidance on compensation.

The report finds that, at most banks, further work is required to validate that practices and procedures operate effectively and cover all compensation-related risks. International supervisory dialog facilitated increased attention to compensation design and implementation, contributing to better practices. Authorities remain focused on compensation practices, with many of them incorporating assessment of compensation practices as part of the ongoing supervisory review processes. The report highlights that for significant banks a number of changes have taken place. Boards appear more active and engaged and compensation processes are now conducted with greater oversight. Compensation arrangements now have longer time horizons, include mechanisms that better align them with effective risk management practices and include a wider range of financial and non-financial risk assessment criteria. Moreover, in recent years, there has been an increased focus on compensation as a tool to address conduct risk, along with a greater emphasis on how results are achieved.

The report assesses several jurisdictions, including Argentina, Australia, Brazil, Canada, China, France, Germany, Hong Kong, India, Indonesia, Italy, Japan, Korea, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Switzerland, Turkey, United Kingdom, and the United States. The FSB principles and implementation standards are intended to apply to financial institutions that are significant for the purposes of compensation standards including banks, insurers, and asset managers. In most jurisdictions, the identified institutions are mainly in the banking sector. Fewer jurisdictions have implemented the requirements for the insurance and asset management sectors. The challenge now is to develop frameworks for assessing the effectiveness of compensation policies and practices in balancing risk and reward. As supervisors continue to monitor compensation practices, they will need to ensure that compensation remains aligned with prudent risk-taking and fully reflects the evolving risks and the new areas of vulnerabilities as they emerge. 

 

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Keywords: International, Banking, Insurance, Securities, Compensation Practices, Progress Report, Operational Risk, Conduct Risk, FSB

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