FCA warns wholesale brokers of certain remuneration practices
The UK Financial Conduct Authority (FCA) has warned wholesale brokers that issues around weak incentive and reward structures remain.
In particular, the FCA continues to see brokers receiving lower salaries with large cash bonuses based on the value and volume of trades they conclude for clients, which may lead them to focus on achieving short-term financial targets at the expense of client interests. Such structures can incentivise brokers to push trades through by whatever means possible and reduce firms’ ability to penalise brokers for misconduct if it is identified after bonuses have been paid.
In January 2022, the FCA introduced the MIFIDPRU Remuneration Code (SYSC19G) under IFPR, which supports prudential soundness and risk management, by promoting accountability, discouraging poor conduct, and prioritising positive outcomes by helping to instil a healthy firm culture. As part of the regime, fixed and variable remuneration must be appropriately balanced, with fixed salaries making up a sufficiently high proportion of total remuneration.
Individual performance must take account of both financial and non-financial criteria of which a substantial part of the non-financial criteria may include metrics on conduct. Firms will need to ensure that their remuneration structures match the risks associated with their business model and higher risk firms (i.e., those categorised as non-SNI)2 must identify ‘Material Risk Takers’ (MRTs) whose professional activities have a material impact on the risk profile of the firm or the assets it manages.
These individuals are subject to more stringent remuneration requirements where appropriate, such as deferral, malus and clawback, which help to mitigate against short-termism and excessive risk taking.
The FCA expects wholesale broker Boards and CEOs to ensure that their remuneration structures comply with the new IFPR remuneration requirements.
In 2023, the regulator will focus on ensuring that firms are appropriately applying deferrals, malus and clawback when remunerating relevant staff. This will include looking at how practices have changed since the FCA gathered data on industry wide practices in 2019, and what boards have done to assess the risks.
Where firms have failed to evidence that they have taken appropriate steps to implement the required IFPR remuneration requirements, the FCA will consider using its range of regulatory tools, including routinely imposing additional capital requirements to account for the increased risk that weak incentives can drive.