First progress report on compensation practices
The 2011 FSB peer review on compensation indicated that good progress had been made in implementing the FSB PrinciplesandStandardson Sound Compensation Practices ("Principles and Standards", P&S), but that more work was necessary to overcome constraints to full implementation by individual national authorities and to address concerns by firms of an uneven playing field. The review set out several recommendations to address these issues and to support the effective implementation of the P&S by both national authorities and firms. The need for additional work was also echoed by the Cannes Summit Declaration, in which G20 Leaders called on the FSB to "undertake an ongoing monitoring and public reporting on compensation practices focused on remaining gaps and impediments to full implementation of these standards and carry out an ongoing bilateral complaint handling process to address level playing field concerns of individual firms."
The FSB launched the Bilateral Complaint Handling Process(BCHP) in early 2012. The BCHP establishes a mechanism for national supervisors from FSB member jurisdictions to bilaterally report, verify and, if necessary, address specific compensation-related complaints by financial institutions based on level playing field concerns. All FSB members have informed the relevant financial institutions operating in their jurisdiction of the main features of the BCHP.
To undertake the ongoing monitoring, the FSB has also established a Compensation Monitoring Contact Group (CMCG) comprising national experts from member jurisdictions with regulatory or supervisory responsibility on compensation practices. The CMCG is responsible for monitoring and reporting to the FSB on national implementation of the P&S. The ongoing monitoring exercise, which is not as in-depth as a peer review, is based on the input provided in a survey by CMCG members.
This first progress report describes the developments in implementing the P&S over the relatively short time period since the October 2011 thematic peer review. The main findings of the report are as follows:
First, almost all FSB member jurisdictions have now completed the implementation of the P&S in their national regulation or supervisory guidance. Those jurisdictions that, at the time of the 2011 peer review, still showed significant gaps (Argentina, India, Indonesia, Russia, and South Africa) have progressed in their implementation efforts. However, in the case of Indonesia and Russia, the relevant regulation is currently under review and it has not yet been issued. Moreover, some other jurisdictions (Argentina, Brazil, China, India, and Turkey) have elected not to implement one or more Standards related to the alignment of compensation with risk taking, either because they are not deemed applicable or because of domestic constraints (e.g. labour laws). These jurisdictions will need to continue their efforts to overcome impediments to full implementation in order to ensure an outcome that is fully consistent with the objectives of the P&S. The reasons for not implementing specific Principles or Standards, as well as the nature of the actions taken to address identified impediments, will be reported to the FSB by the relevant jurisdictions and will be described in the next progress report. Several other jurisdictions that had already implemented the P&S have issued additional regulation or supervisory guidance. For example, some European Union (EU) member states have issued regulation in relation to the implementation of the Capital Requirements Directive (CRD) III. A few jurisdictions (Italy, Spain, Netherlands) have also issued specific provisions for institutions applying for government support, with restrictions on compensation policies that in some cases go beyond the P&S.
Second, notable progress has been made in implementing the Basel Committee's Pillar 3 disclosure requirements issued in July 2011, but more needs to be done. Several jurisdictions have issued regulation or supervisory guidance to implement those requirements (Canada Germany, Hong Kong, Italy, Japan Saudi Arabia, Singapore, Spain, Switzerland, Turkey). In the case of EU members, consistency with the Pillar 3 requirements is required by the CRD III. In two jurisdictions, the new disclosure guidance is being finalised (United States) or is still under development (Australia). Other members indicated that the disclosure requirements are already included in existing regulation, although in some cases more work is necessary to confirm that their regulation is fully consistent with the Pillar 3 requirements.
Third, there remain important differences in terms of applying the P&S. In particular, implementation choices vary with respect to the application of the principle of proportionality and to the identification of employees as material risk takers (MRTs). Some jurisdictions have given detailed guidance on the application of the principle of proportionality (Brazil, Germany, Italy, Spain, United Kingdom), while others have made reference to general criteria supporting the principle or have not defined such criteria at all. As regards the identification of MRTs, several jurisdictions have provided detailed guidance (Australia, Brazil, France, Germany, Hong Kong, India, Italy, Japan, Netherlands, Spain, Switzerland, United Kingdom). Even without explicit criteria, firms in some other jurisdictions are required by supervisory guidance to have adequate processes in place to identify MRTs (e.g. Singapore, Saudi Arabia, United States).
Fourth, supervisory attention on compensation issues at the domestic level continues to increase. A number of supervisory actions have been taken since the 2011 peer review. These actions often include direct engagement with firms' remuneration committees, senior management as well as the heads of remuneration or control functions. Future supervisory plans continue to focus on compensation practices and indicate that supervisory attention is not fading - indeed, a high level of supervisory engagement is reported to contribute to greater attention to compensation issues by firms. Most authorities report that firms in their jurisdiction have made good progress and that those firms - especially the ones deemed significant for the purposes of the P&S - do not show major implementation gaps. Firms are still experimenting with different approaches in their compensation practices on a number of issues covered by the P&S and so it is still difficult to identify best practices, although supervisory pressure and dialogue are encouraging firms to look for better solutions. While some member countries note improvements in firms' compensation practices (e.g. use of longer periods when evaluating employees' performance), others highlight practical implementation problems. In addition, there remain some challenging areas where more progress is needed, the most critical of which are the alignment of compensation with ex-ante risk taking and ex-post performance, and the identification of material risk takers. These are also the areas identified by members where more supervisory cooperation would be beneficial.
Finally, cross-border supervisory cooperation on compensation issues is improving, but more progress can be made. Almost all respondents confirm their engagement in supervisory cooperation, both in networks and in supervisory colleges. Some host authorities note, however, that compensation issues have not yet been included in the agenda of some supervisory colleges. A few authorities note that bilateral exchanges among their national supervisors are proving effective to address compensation issues for cross-border groups (Mexico, United States). The findings in this report confirm the 2011 peer review's conclusion that achieving lasting change in behaviour and culture within firms is a long-term challenge requiring a sustained commitment and that additional time is needed for a common supervisory understanding to evolve and for effective and consistent implementation of the P&S to take place. The FSB will continue to monitor and report on progress so as to generate substantive and relevant information that provides further impetus to aligning compensation practices to prudent risk taking behaviour.
In terms of next steps, and in order to promote the sharing of experiences across its membership, the FSB will organise a workshop of the CMCG and external, independent parties with expertise in firms' compensation practices. The workshop will focus on initial findings from the BCHP and on those areas where particular progress is still needed in light of the findings of this progress report, such as better risk alignment. The discussions from such a workshop will provide useful information for FSB members and will be included in the next progress report, which will continue to follow up on remaining gaps and impediments to full implementation as well as the actions taken by relevant parties. Continue reading