The FSB (Financial Stability Board) is consulting on a standard set of data that could be reported by companies around the globe to national supervisory authorities (i.e. APRA and ASIC here in Australia).
The aim of the dataset is to address the issue of whether governance and compensation structures are having sufficient effect on reducing misconduct risk in significant financial institutions,
To this end, on 7 May 2018 it released a consultative document with a recommended dataset titled “Recommendation for consistent national reporting of data on the use of compensation to address misconduct risk” (See HERE). The document was the result of a workplan that began in 2015 to address misconduct risk.
If regulators request the data suggested, significant financial institutions would need to disclose specific compensation data, not just for material risk takers (MRTs), but even for junior employees, or employees not strictly in financial business units (although just to the regulator, not publicly).
The data would enable regulators and companies to review whether performance measures are appropriately designed, and how effective a company’s compensation tools are in promoting good conduct and addressing misconduct risk.
The FSB believes the reporting process would also enable organisations to establish, implement and monitor risk prevention and mitigation strategies, and use compensation more effectively within the organisation’s risk and governance frameworks.
Data would cover the organisation’s policy frameworks as well as actual implementation, thus giving the ability to analyse the effectiveness of compensation frameworks in addressing misconduct risk.
Organisations would specify how misconduct or a failure incident is identified, and when it is identified:
- the governance and decision-making process used to assess individual and collective responsibility
- what the impact on compensation will be
- whether other compensation tools would have been more appropriate
- how they will learn from this and prevent similar failures in other areas of operation
The requested data is not prescriptive, or a ‘one size fits all’. The regulator could decide exactly how the data is structured and gathered, as well as the frequency of collection, but a suggested set of ‘core data’ is specified in the paper, along with ‘nice to have’ additional data. Data would be both quantitative and qualitative and would be required to be updated at least annually.
The suggested core data would define:
- The population in scope (not limited to MRTs)
- The criteria used to identify MRTs in relation to misconduct risk
- The process and policies for determining and reviewing the use of remuneration in supporting effective risk management, including misconduct
- Information on how the remuneration framework is designed, i.e. key financial and non-financial metrics used for compensation including incentives
- The extent to which misconduct can impact remuneration
- Data on misconduct incidents that have occurred (severity, number of staff involved, root cause etc)
- How remuneration is adjusted (incentive adjustments or clawback)
‘Nice to have’ or additional data suggested would dig deeper into the remuneration frameworks as well as give information on near misses, e.g.:
- Data regarding vesting criteria, deferral and retention policy, balance between cash and non-cash instruments
- Details of any near misses (misconduct) and their potential impact
- Data regarding misconduct incidents for which no remuneration adjustment occurred and why no adjustment was made
There are many aspects associated with this reporting that are worthy of review and comment. However, for the life of us we cannot see any Australian banks having the resources to respond given everything else going on. Moreover, if something like this is fully implemented (as it probably will be), we are not sure the regulators will have sufficient resource funding for regular monitoring and analysis.
The FSB is seeking any comments on their consultative document before 6th July 2018.© Guerdon Associates 2021 Back to all articles