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FCA changes remuneration rules in response to EU

Chris Hamblin, Editor, London, 13 June 2017

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The UK's Financial Conduct Authority has published new rules about remuneration at "Capital Requirements Directive IV (CRD IV) firms."

It has done so, in line with current common practice, in a so-called policy statement entitled PS17-10. The new rules  will affect all financial firms that have to obey the European Union's CRD IV, plus other firms that are required to comply with the FCA's remuneration codes, which in turn are to be found in its systems-and-controls rules in SYSC 19A, 19C and 19D. The idea is to make firms align risk with reward when remunerating their staff.

The SYSC rules have already conformed to CRD IV; these latest rules are there to fit in with the latest dictates of the European Banking Authority, which is going to have to move its offices out of London when the UK leaves the EU.

The EBA guidelines came into force on 1 January 2017 and are addressed to firms directly. In applying them in a form that the regulator calls 'frequently asked questions' (although its preceding consultative process attracted only three responses, so there seems to be nothing frequent about them at all), the FCA says that firms should follow the steps below (in the order presented) when identifying their "material risk-takers."

  • Use qualitative criteria. They must consider all types of risk including prudential, operational, market, credit, conduct and reputational risks.
  • Use quantitative criteria. For this they must refer to an EU 'regulatory technical standard' known as Regulation (EU) 604/2014 of 4 March 2014.
  • Consider whether any exclusions are appropriate, "subject to prior FCA notification or our approval under Article 4(4) of the RTS."
  • Apply a "proporionality framework" in line with the FCA's "proportionality guidance," a set of rules that seem to be housed in a document called FG17/7.

Remuneration committees

Should a firm that is part of a group that has a remuneration committee at the "UK consolidation group level" also establish a local remuneration committee? Here the FCA sticks to its rules in SYSC 19A.3.1R and SYSC 19D.3.1R that say that any firm that is ‘significant’ in terms of its size must do so. The EBA guidelines say that ‘significance’ must be assessed "on a standalone entity basis," so this is what the FCA says also. If a subsidiary is not ‘significant,’ it can rely on the group remuneration committee.  
 
Firms that are in the same "UK consolidation group" as a CRD IV firm, but are not themselves subject to the CRD, will have to obey the FCA’s Remuneration Code to which the consolidating entity is subject to members of staff who either (i) have a material effect on the risk profile of the UK consolidation group or (ii) have a material effect on the risk profile of a CRD firm that resides in the UK consolidation group.

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