Dear Chair of the Remuneration Committee letter 2023 [pdf]

Following the issuance of a recent joint policy statement (23/15) issued by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) in which the regulators eliminate the cap on variable pay for material risk takers of all supervised firms (EventID 23576), the FCA has now published an open letter addressed at Chairmans of the remuneration committee of supervised firms. In this letter, the FCA outlines several aspects remuneration committees should take into consideration when evaluating, reviewing, or drawing up (new) compensation policies in supervised firms. These factors include, but are not limited to the following:
– The recent elimination of the cap is intended to support firms in their design of remuneration policies so as to increase their flexibility to adjust to changing market conditions. This should also help firms to „absorb losses in a downturn“ and to respond to deficiencies in performance.
– In view of the recent enactment of the Consumer duty which requires all firms to put the interest of customers first, remuneration committees should consider how to embed this duty in their remuneration policies. In fact, the FCA encourages supervised firms to consider how they can use relevant risk metrics and performance criteria to help set up adequate remuneration policies to reflect the new duty.
– Furthermore, the FCA reminds firms that they have an obligation to foster a healthy corporate culture and set up an accountability framework to ensure that decision makers are held liable for their doing. This accountability should be reflected in remuneration policies for decision takers. Likewise, the FCA considers transparency on remuneration as an important step in fostering a good corporate culture.
– In view of persisting gender-based remuneration gaps, the FCA expects firms to maintain their efforts to address this issue. At the same time, firms are expected to ensure that any variable remuneration does not discriminate based on gender, race, and other protected characteristics.
– Finally, due to the increasing importance to fight climate change and the government’s efforts to become carbon neutral, firms are recommended to review their remuneration policies to ensure that any ESG-related goals of their companies are reflected in their remuneration policies.
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To conclude, the FCA notes that it expects Chairmans of remuneration committees to take this letter into account in their work and to align their practices in view of the issues discussed.