The Financial Stability Board(FSB) published today the second progress report on the implementation of the FSB Principles for Sound Compensation Practices and their Implementation Standards (P&S) by FSB jurisdictions.
The report finds that, while good progress continues to be made, more work needs to be done by national authorities and firms to ensure that implementation of the P&S is effectively leading to more prudent risk-taking behaviour. This will take time, and there is still some way to go before the improvements in compensation practices can be deemed effective and sustainable.The report describes some of the key challenges and evolving practices in the areas of ex ante risk adjustment, alignment of compensation with performance (including maluses and claw-back mechanisms), and the identification of material risk-takers.
All FSB member jurisdictions except two have now completed the implementation of the P&S in national regulation or supervisory guidance; the focus of national authorities is now on effective supervision and oversight of implementation by relevant firms.
Reported trends suggest that most compensation structures are being revised in the direction indicated by the P&S. Further work is needed on the identification criteria for material risk-takers given the existing differences in approach and points of view by FSB jurisdictions.
The disclosure of compensation practices has also improved, although it is still generally difficult for policymakers and the public to reliably access easy to understand and consistent data on compensation structures for significant firms across jurisdictions.
The report notes that certain regulatory initiatives currently being implemented could materially change compensation structures in some FSB member jurisdictions.
Some level playing field concerns continue to be expressed by firms, however national authorities have yet to see any real evidence that the implementation of the P&S has impeded or diminished the ability of supervised institutions to recruit and retain talent. The Bilateral Complaint Handling Process, which the FSB initiated for the purposes of addressing such concerns, has not been activated so far by firms.
The FSB will continue to monitor actions taken and identify remaining gaps and impediments to full and effective implementation of the P&S. As part of this effort, the FSB will continue to engage with the industry to discuss trends and remaining challenges, including by organising another workshop to share experiences and views. The FSB will also survey and compare the range of practices on material risk-takers across its membership, with a view to identifying good practices while recognising firms’ differences and the need for proportionality.