FG23/6: General guidance on the application of ex-post risk adjustment to variable remuneration [pdf]

The Financial Conduct Authority, FCA, has published a revised general guidance on the application of ex-post risk adjustment to variable remuneration (FG23/6) for CRR regulated firms, including investment firms, banks, and building societies. The guidance presents an updated version of FG21/5 and aims to assist firms in their compliance with FCA rules as regards such adjustments, thereby covering the following key topics:
– the expectations of the FCA as regards the application of ex-post risk adjustment (when should it be applied, which factors should be considered in the application of the ex-post risk adjustments such as the impact of the poor performance, violation, etc. on the firm or its customers);
– the timing of considering whether or not such adjustments shall be made (e.g. following the conclusion of the performance period);
– the expectations of the FCA as regards the policies and procedures to be developed and maintained by firms to lay out the criteria or triggers that may cause an ex-post risk adjustment; and
– the expectations of the FCA concerning cooperation with the regulator in relation to such policies or any risk adjustments that have been made.
Besides introducing some technical modifications (renumbering of certain sections), the new version primarily clarifies that „while level 3 Dual-regulated firms (as defined in FG23/5 General Guidance on Proportionality) are no longer subject to the rules relating to malus and clawback (including SYSC 19D.3.62R – SYSC 19D3.64R), they remain subject to the other rules on ex-post risk adjustment (SYSC 19D3.29)“. This clarification comes in response to the joint Policy Statement (FCA PS23/17 – PRA PS16/23) (EventID 24252), which removes the malus and clawback provisions for such firms – that is the mandatory inclusion of provisions in an executive compensation plan that allows a company to reclaim or reduce the compensation or benefits paid to an employee, if certain conditions or performance metrics are not met and the actual recovery of such funds, respectively.