FCA to crack down on non-financial misconduct remuneration adjustments

It follows the recently published results of the FCA culture and non-financial misconduct survey. The FCA highlighted various issues within the financial sector, particularly concerning the infrequent use of remuneration adjustments as a consequence for non-financial misconduct. The survey found that, in the limited circumstances when remuneration was adjusted on account of non-financial misconduct, it was mostly against unvested variable pay. Respondents reported little or no use of clawback or other tools to recover remuneration that has already been paid as a response to non-financial misconduct.

The fact that remuneration adjustments were more commonly found to be applied by way of reducing unpaid cash bonuses or other unvested performance-based rewards (known as malus) rather than by way of clawback is “not particularly surprising”, said James Sullivan-Tailyour, share incentives expert at Pinsent Masons. Reducing any unpaid remuneration is significantly easier, both practically and legally, than applying clawback against remuneration that has already been paid. The former can be done unilaterally by the company with the onus to challenge being on the affected employees. However, the latter requires the company to claim against the affected employee, potentially by bringing legal proceedings.

“However, it is interesting that the FCA has chosen to highlight this area in particular,” said Chris Evans, employment law expert at Pinsent Masons.

Evans said: “We anticipate that the FCA will take a more muscular approach to policing instances of non-financial misconduct. Financial services companies may want to consider their malus and clawback policies to ensure that they appropriately cover, and can be enforced in, instances of non-financial misconduct as that appears to be the direction of travel and expectation of the regulator.”

The survey highlighted the lack of clear policies and guidelines on how to implement remuneration adjustments effectively, with other relevant policies such as whistleblowing and disciplinary policies not in place at all firms surveyed.

In the financial services sector, investigation and application of malus and clawback typically requires a more formal process.

Sullivan-Tailyour said: “Establishing a malus and clawback policy has the practical benefit of ensuring that a process for investigating circumstances that might lead to malus and clawback, and applying any remuneration adjustment, does not have to be designed ‘in the moment’ when the time pressure to conclude the matter may not allow for full consultation and reflection. It is also helpful legally to establish a fair and clear process to avoid the risk of challenge from an affected individual.”

Evans said: “The hidden risk with applying malus is that it can be reportable to the Regulator. Reduction in remuneration is considered by the Regulator as disciplinary action and, if a reason for applying the reduction in remuneration is because of a conduct rule breach, then there is a requirement to notify the Regulator of that disciplinary action. Formal malus and clawback policies are a useful tool for navigating through these overlapping requirements.”

The FCA’s survey also coincides with the publication of new principles of remuneration by the Investment Association. The principles emphasise the importance for listed companies – both within and outside the FS sector – of establishing clear and enforceable processes for applying malus and clawback. This is consistent with the requirements of the UK Corporate Governance Code which applies to main market listed companies.