Firms must reflect cost of living crisis in pay, says FCA

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Firms must reflect cost of living crisis in pay, says FCA
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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. 

“In line with the government’s expectations, we will have regard to the government's commitment to achieve net zero by 2050 when carrying out our duties. As firms respond to evolving regulatory, societal and customer expectations in this area, firms may wish to review whether incentives for their senior leadership and other material risk takers are aligned to these wider ESG risk factors.”

The regulator said financial markets have a critical role to play in helping to achieve a transition to a greener and more sustainable economy and many firms have set net zero targets and joined associated industry alliances. 

It explained that firms may wish to use remuneration and incentive programmes as a lever to align incentives with these commitments. 

“We believe that linking progress against these commitments to a measurable proportion of pay could be effective in encouraging individuals to take accountability for change,” it said. 

Considering diversity and inclusion, the FCA said while there are a number of positive industry initiatives underway, progress to increase diversity of representation remains relatively slow across the financial sector. 

The FCA argued that remuneration and incentives have a part to play in supporting diversity in the firm. 

“Better data is important in understanding representation and underlying issues. We understand that many firms face challenges in achieving sufficiently high declaration rates when trying to improve and broaden their diversity data, especially for some characteristics,” the regulator said.

“We believe that, to increase declaration rates, it is important to build understanding and trust with employees about how their data will be used.”

In the letter, it said: “In your role as chair, your oversight of the link between the performance management framework and incentives is critical and you may wish to review how remuneration policy takes into account some of the risks that an employee’s working preferences negatively influence their remuneration.”

sonia.rach@ft.com