The Financial Conduct Authority has written to the chairpeople of remuneration committees at financial services firms, urging them to review pay and incentives, in light of the cost of living crisis.
In a letter last week (August 2), the FCA said in line with the corporate governance code, firms “should review workforce remuneration and related policies and the alignment of incentives and rewards with culture”.
The FCA said: “You will be aware of the pressure on the UK and global economies with rising interest rates and inflation. The latest Bank of England forecast expects inflation in the UK to rise to around 11 per cent this year.
“The current economic environment is both a current and future risk that we expect you to take into consideration when designing and reviewing the remuneration policies and practices and the incentives created.”
Other areas listed in the letter to review included culture and accountability where it urged chairpeople to use the Senior Managers and Certification Regime as a tool to ensure high standards of conduct and culture within the firm are met and there is a clear link between behaviours and remuneration outcomes.
The regulator reiterated that a healthy culture is “at the heart of driving operational performance” which will meet the needs of customers and drive shareholder or owner value.
“We expect firms to continue to focus on driving positive cultural change. Remuneration policies should be risk-focused, helping to identify and manage risks and promoting a strong risk culture in the firm.”
Through the SMCR, individuals should be held accountable for their conduct and competence between behaviours and remuneration outcomes.
“Where there is evidence of regulatory failings, we expect you 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, we may follow up with you to see evidence of this.”
The FCA also said firms should align their approach to supporting consumers in the current economic environment with the firm’s business strategy.
“Your firm’s remuneration policies should be designed to support the expectations set by the new consumer duty when it comes into effect,” it said.
The FCA said firms with a fiscal year-end of December 31 should submit their remuneration policy statement and relevant tables by August 31 2022.
Along with their RPS, firms are expected to provide a short summary of the key points in the RPS, including any key changes made in the last year, an explanation of how the firm has assured that the overall remuneration policies support the firm’s purpose, business strategy and values and incentivise the right behaviours, and how the firm’s approach to paying variable remuneration will be considered in the continuing context of the pandemic.
ESG & diversity push
The City watchdog said financial services firms are increasingly embedding wider environmental, social and governance considerations into their strategies and activities.
“We are committed to consulting on a new regulatory framework for ESG,” it said. “We want to embed positive change through our ESG priorities.