Hello, everybody. Welcome to another edition of C&F Talks. Today, it's my pleasure to be interviewing Kate Pumfrey, who's a Partner at A&O Shearman. Kate's going to be speaking, and in fact, chairing the morning at our forthcoming conference, the City Remuneration Summit, which is being held in London on the 1st of May. Welcome, Kate.

Hi, Maurice. Great to be here today.

Very nice to have you with us.

Now, you're moderating the panel discussion on non-financial misconduct at the conference. The FCA recently sent a Dear CEO letter in which they stated that they would be paying attention to whether remuneration is used as an effective disciplinary tool by firms to address broken misconduct, including non-financial misconduct (NFM). It warned against NFM being overlooked because the perpetrators were ‘star performers’ who were rewarded financially despite incidences of bullying and harassment. What's your experience of this practice?

Well, I think there is still work that firms need to do in this area, Maurice, and the FCA has really wrapped its arms around this issue and is continuing to place considerable emphasis on it. There's some really interesting statistics in the FCA survey on non-financial misconduct, which I think are worth noting. For example, 33% of firms confirmed that they have no formal governance to decide regulatory consequences of non-financial misconduct incidents. As an employment lawyer, that is quite alarming-

Shocking.

And I think it is something which I think we see firms continue to need to work on and that really is the interplay and the cooperation between the regulatory functions in organisations and the HR functions and only when those two work together can you actually effectively put in place governance systems that catch and capture and effectively deal with remuneration consequences of non-financial misconduct.

One thing that I think firms are getting better at now and I see in my practice is increased use of malice and remuneration adjustments in cases of non-financial misconduct but that really does rely on there being a good dialogue between HR functions, remuneration risk and compliance functions and often legal functions as well, in order to deliver the result that the regulators expect and require from firms.

Now, the other thing that I would say which I think is important to note is there has been quite significant development in the employment law space in terms of there being a requirement for employers, UK employers, to take reasonable steps to prevent sexual harassment of employees in the workplace and I expect therefore that where there may have been instances of bullying and harassment that have gone unchecked where those perpetrators have been high performers for instance, that that will become an increasingly untenable position to maintain certainly in financial services but also beyond, and so I think we see the coming together of the regulatory environment and the employment law environment in a way that really is moving in a single direction now and that there must be remuneration consequences as well as often employment and regulatory consequences to these types of non-financial misconduct issues.

How well do you think that sort of coordination is currently happening between the various functions that are needed to tackle this issue between HR on the compliance side remuneration side and so on?

I think it varies, I think it varies hugely between different organisations but I think it is something which firms are aware of and increasingly where we see this working as it should for at least in the regulators views, it is you know usually where those functions are cooperating and talking to each other and communicating really well, and so that certainly is the kind of best practice model for navigating these kinds of multifaceted challenges in financial services firms.

Maurice

Turning to the FCA/PRA's joint consultation on remuneration, it addresses a number of issues particularly around reducing the length of time for the vesting of deferred compensation. Is this something which firms should welcome or is a more long-term approach incentivising senior executives to stay in post preferable?

I think it is something that firms will welcome, you may know that the UK financial services industry, certainly the banking industry was out on a bit of a limb globally in terms of the length of the deferral that was required under the under the remuneration code prior to these changes. And I think given that we have such a global workforce, a global economy these days, most of our clients were happy to see that they will no longer, there will be a better alignment now across various jurisdictions, particularly for firms who are navigating for instance, a US environment and an Asian environment and a European and a UK environment.

And let's not forget that there's nothing in the rules that prevents a firm from having a longer deferral period should they wish, this is just a change to the minimum requirements and so I think on balance it will be welcomed along with the bonus cap change which of course we saw the year prior. Essentially, this lightening of regulation around remuneration is generally I think in terms of my client's reaction has been well received particularly for any clients who've got a large exposure say to the US or to less regulated financial services environments outside of Europe.

Okay.

And since last year's summit the IA, the Investment Association has also published their revised principles of remuneration, what changes have you seen in investors or asset managers approach to executive remuneration?

Well it's still quite early on in the AGM season, and so we're very much kind of watching and waiting and seeing and there'll be more I'm sure to observe and to comment on when we come to the summit in May. But right now, I'd say there are two significant points to note.

The first is that generally speaking shareholder dissent has been less than has maybe historically been the case, there seems to be a general trend towards a greater understanding from shareholders of companies remuneration policies and so less revolt on pay. And that may well be because the IA as you may know has slightly changed and relaxed its approach and has placed a huge amount of emphasis less on, kind of, you know, strict compliance and more on consultation with shareholders and that, where companies are doing that well they will reap the benefits of that in terms of a less hostile shareholder audience when it comes to pay voting.

The second trend that we're starting to see, which is very much a hot topic at the moment, is the evolution of diversity, equity and inclusion targets in pay and that is obviously a very fast-moving area at the moment driven in the main by the Trump administration but we are seeing a number of both US headquartered but also outside of the US headquartered organisations moving away or altering ESG and other DE&I targets for both executives and for middle managers and pivoting away from something that has been an area of real focus in the last three, four, five years so that is continuing to evolve and will be something we'll watch and look at quite carefully in the coming weeks and months.

Yeah, very much as you say the influence of the Trump administration. I think we've probably run out of time Kate, so for our viewers we'd love for you to come along to the conference and to hear more about the issues discussed today and a whole range of other related issues.

So, the event again is the City Remuneration Summit being held in London on the 1st of May. Further information on our website www.cityandfinancial.com. Kate, thanks very much for joining us, look forward to seeing you on the 1st of May.

Thanks very much.