FSB published, for public consultation, the draft supplementary guidance to the FSB Principles and Standards on sound compensation practices. Once finalized, the guidance will provide firms and supervisors with a framework to consider how compensation practices and tools, such as in-year bonus adjustments, malus, and clawback, can be used to reduce misconduct risk and address misconduct incidents.
The guidance, like the FSB Principles and Standards, will apply to financial institutions that competent authorities consider significant for the purpose of the Principles and Standards. The guidance does not establish additional principles or standards beyond those already set out in the FSB Principles and Standards on sound compensation practices and it has been developed in the form of recommendations on better practices. It highlights eight considerations that are relevant for firms and supervisors in terms of governance of compensation and misconduct risk, effective alignment of compensation and misconduct risk, and supervision of compensation and misconduct risk. This consultation is part of FSB’s broader misconduct workplan, which was launched in May 2015. FSB also plans to publish a progress report on the overall implementation of its Principles and Standards on compensation, in advance of the G20 Leaders’ Summit in Hamburg in July.
The proposed guidance was developed in collaboration with the standard-setting bodies and supplements the FSB Principles and Standards on sound compensation practices, which were published in 2009, in the aftermath of the global financial crisis. These Principles and Standards have been implemented across FSB member jurisdictions. Compensation tools, along with other measures, can play an important role in addressing misconduct risk by providing both ex ante incentives for good conduct and ex post adjustment mechanisms that ensure appropriate accountability. To ensure such accountability, firms should have tools available to consider using when misconduct occurs. Therefore, in 2016, FSB agreed to develop guidance on better practices regarding the application of the Principles & Standards to misconduct risk.
Keywords: International, FSB, Banking, Insurance, Compensation Practices, Misconduct Risks
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