A employee arranges produce inside a Sainsbury’s supermarket in Richmond, west London
A employee arranges produce inside a Sainsbury’s supermarket in Richmond, west London, Britain, June 27, 2022. Picture taken June 27, 2022.

Britain's financial watchdog said on Tuesday that the cost of living crisis, meeting climate targets and improving diversity should be reflected in how banks determine pay and bonuses.

"Your role is key in ensuring that your firm's remuneration policies support the purpose, long-term strategy and values of your firm, while reflecting the current economic environment," the Financial Conduct Authority (FCA) said in a letter to chairs of remuneration committees at banks.

Fuel bills, food prices and borrowing costs are all rising in Britain, putting a squeeze on household incomes, and firms have until Aug. 31 to respond to the watchdog.

"This includes how your firm will take into account the impact of the current economic environment on bonus pools and individual outcomes," the FCA said.

Some UK banks have already started to reward staff with cost-of-living linked payments. HSBC for instance said on Monday it would give some of its workforce a one-off 1,500 pounds ($1,830) to help them deal with inflation pressures.

The FCA also asked banks to provide details of how their environmental, social and governance (ESG) commitments are linked to remuneration policy, including any targets.

"We believe that linking progress against these commitments to a measurable proportion of pay could be effective in encouraging individuals to take accountability for change," the FCA letter said.

Pay also has a role to play in improving diversity and inclusion at banks, the watchdog said.

"In your role as Chair, your oversight of the link between the performance management framework and incentives is critical and you may wish to review how remuneration policy takes into account some of the risks that an employee's working preferences negatively influence their remuneration."

FCA signage is seen at their head offices in London
Signage for the FCA (Financial Conduct Authority), the Britain's financial regulatory body, is seen at their head offices in London, Britain March 10, 2022.