This revised guidance consultation is intended to share the latest good practice observed in the 2014 remuneration round and clarify the FCA’s expectations on how relevant firms meet the Remuneration Code requirements on ex-post risk adjustment.
This guidance is relevant for all firms that form part of a dual-regulated group in scope of CRD IV for which SYSC 19D is proposed to apply (as set out in CP14/14).
Background to this consultation
In July 2014, the FCA, jointly with the PRA, published CP14/14 Strengthening the alignment of risk and reward: new remuneration rules.
CP14/14 set out proposed changes to the FCA remuneration regime by creating the Dual-regulated firms Remuneration Code in SYSC 19D (among other amendments). This was intended to address weaknesses in the alignment between risk and reward that were highlighted in the final report of the Parliamentary Commission on Banking Standards (PCBS), Changing Banking For Good (June 2013).
CP14/14 also included FCA-only General guidance on the application of malus to variable remuneration and ex-ante risk adjustments in Appendix 6. The consultation period closed on 31 October 2014. We did not receive any formal responses specific to Appendix 6.
Following our annual review of the remuneration policies and practices of the proportionality Level 1 firms, we are consulting on revised general guidance on the application of ex-post risk adjustment to variable remuneration. This is intended to amend and replace the guidance consulted on in Appendix 6 of CP14/14.
This revised guidance consultation proposes to set out more clearly our expectations on how firms should implement the requirements of the Dual-regulated firms Remuneration Code on ex-post risk adjustment and to share good practice observed in the 2014 remuneration round.
We recognise the importance of the regulation of remuneration to firms and this guidance consultation provides a further opportunity for respondents to provide feedback to us.
Who should read this?
- All firms that form part of a dual-regulated group in scope of CRD IV for which SYSC 19D is proposed to apply (as set out in CP14/14).
- Trade associations.
Cost benefit analysis
As part of CP14/14, we commissioned Europe Economics (EE), an economics consultancy, to assess the likely impacts of the package of accountability and remuneration measures, including on the application of malus.
The baseline for the cost benefit analysis (CBA) is what firms do to meet the current Remuneration Code in SYSC 19A. However, EE also took into account any activities that have been undertaken in anticipation of the new regime being introduced. In the CBA, we focused on the incremental impact of the remuneration proposals. We asked EE to judge the additional impact of the remuneration proposals within its overall analysis.
The EE report indicated the direct compliance costs for firms to be relatively modest (and particularly so regarding deferral and clawback rather than the new guidance). The EE report also found the proposals were likely to have indirect costs, potentially on the balance of fixed and variable pay within remuneration structures and on the flexibility of the labour market for individuals within the scope of the regulatory remuneration regime.
For firms within scope of the proposed SYSC 19D, we do not believe the costs of the proposals of this guidance consultation materially change the CBA previously undertaken.
Views are welcomed on all areas of the guidance consultation, including in response to the specific questions posed:
- Do you agree with the proposals in each of the five areas set out in this guidance consultation?
- Do you agree with the proposal to revise the scope of application?
Please respond by 7 May 2015.
Please email your responses to: [email protected] or send your responses in writing to:
Financial Conduct Authority
25 The North Colonnade
London E14 5HS
Telephone: 020 7066 2516