UK financial watchdog urges banks to link bonuses with duty to clients

By Huw Jones

LONDON (Reuters) – Banks should cut bonuses of staff failing to properly apply a new regulatory duty to put customers first as a cap on payouts comes to an end, Britain’s Financial Conduct Authority said on Tuesday.

The FCA said in a letter to chairs of banks’ remuneration committees they should prioritise embedding the new Consumer Duty introduced in July, to ensure customers get fair value and appropriate products and services.

“Senior managers and boards, especially those whose role is most relevant to the duty, are accountable for complying with the duty,” the FCA said in the letter made public.

“We encourage you to consider how you can use relevant risk metrics and performance criteria to help inform both individual and firm-wide remuneration decisions, including making remuneration adjustments if progress in embedding the duty falls short.”

Banks are currently deciding how to divide up the annual bonus pool as a cap limiting the size of bonuses, inherited from the European Union, expires.

“We aim to make the remuneration regime more effective by increasing the proportion of compensation at risk and subject to the incentive-setting tools in the remuneration framework,” the FCA said.

“This should also give firms greater flexibility to adjust variable remuneration to absorb losses in a downturn, or to respond to any material poor performance or misconduct that subsequently comes to light.”

The watchdog said banks should ensure that there is a “clear, strong and evidenced link” between behaviours and overall pay, with “timely and transparent” adjustments when appropriate.

Alasdair Steele, partner at law firm CMS, said the FCA was underscoring its expectation that banks should use tools such as risk metrics and performance criteria, including behavioural standards, to adjust remuneration appropriately.

(Reporting by Huw Jones; Editing by Jan Harvey)