We recently reported that they were concerned that more work was necessary to overcome constraints to full implementation by individual national authorities and to address concerns by companies of an uneven playing field (see HERE).
To assist resolve this the FSB launched the Bilateral Complaint Handling Process (BCHP) in early 2012 and a Compensation Monitoring Contact Group (CMCG).
Last month they published a progress report on implementing the P&S.
When the FSB first reviewed countries’ implementation of the P&S our reading of it inferred Australia got an A (see HERE). Based on this most recent report, Australia may have slipped a bit (albeit on its own self assessment), perhaps to an A-, with Australia’s APRA believing it needs to focus on disclosure standards for material risk takers (MRTs), on-site regulatory review and supervision, and more specific performance measurement for incentives incorporating risk management.
Read on for a comparative analysis.
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). The FSB considers that 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.
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 EU’s Capital Requirements Directive (CRD) III. In two jurisdictions, the new disclosure guidance is being finalised (United States) or is still under development (Australia). In Australia, the supervisory authority (APRA) has been consulting with banks on the form of remuneration disclosures and, while standards and guidelines have not yet been issued, locally incorporated companies are encouraged to report on remuneration practices in a manner consistent with the Basel Committee’s document.
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.
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, companies 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).
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 companies’ remuneration committees, senior management as well as the heads of remuneration or control functions. Several supervisors have just completed, or are currently conducting, in-depth offsite (Australia, France, United Kingdom) or on-site remuneration inspections (Germany, Hong Kong, Mexico, Saudi Arabia, Spain, United States), usually of their largest institutions. The FSB considers on-site inspections as particularly effective for exerting pressure for reform on institutions, so Australia seems to be not quite at the ideal level yet, and Australian banks and insurers should brace for more on-site inspections. Specifically, future plans will see APRA’s supervisory activity focus on the effectiveness of the processes for risk alignment; the role of the firms’ board remuneration committee; and the process adopted by that committee to make recommendations on the individual remuneration of Responsible Persons.
Most authorities report that companies in their jurisdiction have made good progress and that those companies – especially the ones deemed significant for the purposes of the P&S – do not show major implementation gaps. Companies 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 companies to look for better solutions.
While some member countries note improvements in companies’ 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. APRA has identified appropriate risk adjustment as a challenging area, as currently adjustments are mainly qualitative or subjective in nature (Australia shares this perspective with Spain, Singapore, and the United Kingdom). APRA focuses on performance measures since it is concerned that some companies place too much reliance on generic measures (such as earnings-per-share) that are too high-level to provide a reliable measure of individual performance and risk-taking.
The FSB report can be found HERE.© Guerdon Associates 2022 Back to all articles