UK Authorities Welcome FSB Review of their Remuneration Regime
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.
Related Links
Keywords: Europe, UK, Banking, Remuneration Form, SM&CR, Peer Review, Data Collection, FSB, FCA, PRA
Related Articles
APRA Issues Interim Update to Policy Priorities for 2021 and Beyond
In a letter addressed to the industry, the Australian Prudential Regulation Authority (APRA) set out an updated schedule of policy priorities for the banking, insurance, and superannuation industries.
EC Adopts Solvency II and Resolution Rules Package for Insurers
The European Commission (EC) adopted a comprehensive review package of Solvency II rules in the European Union.
OCC Issues Booklets on Regulatory Reporting and Earnings
The Office of the Comptroller of the Currency (OCC) issued Versions 1.0 of the "Earnings" and "Regulatory Reporting" booklets of the Comptroller's Handbook.
ECB Sets Out Results of Economy-Wide Climate Stress Tests
The European Central Bank (ECB) published results of its economy-wide climate stress test, which aimed to assess the resilience of non-financial corporates and euro area banks to climate risks.
EBA Examines Implications of Increasing Use of Digital Platforms in EU
The European Banking Authority (EBA) published a report on the use of digital platforms in the banking and payments sector in European Union.
HKMA Issues Updates on Policy Measures Intended to Ease COVID Impact
The Hong Kong Monetary Authority (HKMA) published updates on the policy measures that were announced in context of the ongoing pandemic.
ISDA Responds to BCBS Proposal on Treatment of Cryptoasset Exposures
The International Swaps and Derivatives Association (ISDA), along with several other associations, submitted a joint response to the Basel Committee on Banking Supervision (BCBS) consultation on preliminary proposals for the prudential treatment of cryptoasset exposures.
BIS Quarterly Review Discusses Developments in Fintech and ESG Space
BIS published the September issue of the Quarterly Review, which contains special features that analyze the rapid rise in equity funding for financial technology firms, the effectiveness of policy measures in response to pandemic, and the evolution of international banking.
BCBS to Consult on Supervisory Practices for Climate Risks by Year-End
The Basel Committee for Banking Supervision (BCBS) met in September 2021 and reviewed climate-related financial risks, discussed impact of digitalization, and welcomed efforts by the International Financial Reporting Standards (IFRS) Foundation to develop a common set of sustainability reporting standards
OCC Identifies Operational Risk Deficiencies in MUFG Union Bank
The Office of the Comptroller of the Currency (OCC) issued a Cease and Desist Order against MUFG Union Bank for deficiencies in technology and operational risk governance.
