FCA consults on staff incentives, remuneration and performance management in consumer credit

21st July 2017

The Financial Conduct Authority (FCA) has published the findings from its thematic review of staff incentives, remuneration and performance management in the consumer credit sector.  It is consulting on a proposed new rule and guidance (Handbook and non-Handbook) to help ensure that firms take appropriate steps to identify and mitigate the risks arising from the way their staff are paid and managed.  The aim is to reduce the risk of poor sales or collections-related behaviour.  The consultation affects all firms engaged in consumer credit activity that have customer-facing staff.

Key findings

The FCA concludes that some firms need to do more and have a better appreciation of the risks their incentives pose and the controls needed to address them. It reviewed the incentives and performance management policies and practices for sales and collections staff at 98 consumer credit firms, finding that a significant proportion had:

• high risk financial incentives and/or performance management practices likely to encourage high-pressure sales or collections
• inadequate or ineffective controls and/or
• a lack of appreciation of the risks their incentives posed and the controls needed to address them.

The review covered a broad range of business types and sizes, where consumer credit or other financial services was the primary purpose of the business or consumer credit activity was secondary/ancillary (including, for example, retailers selling goods on finance). The FCA took into account the risks and controls relating to the incentive schemes of line managers of customer-facing staff.

Although the review identified some examples of good practice, too many firms had high-risk elements in their incentive schemes and had either not recognised the risks or had taken insufficient steps to manage them. Many firms where consumer credit activities were ancillary to their main business, in addition to a number of lenders, had not properly assessed the risks associated with such activities, or the impact that staff incentives could have on them.

Risks arising from incentive schemes arose primarily where staff earned bonus or commission payments based on the volume or value of sales or collections. High-risk elements included schemes where:

• commission accounted for the majority (or all) of customer-facing staff’s pay
• different rates of commission were earned for different products or products sold on different terms or
• the rate of commission varied depending on reaching certain targets.

Notably, eight firms indicated that their monitoring arrangements were solely carried out by line managers whose pay was dependent on the performance of the staff they were monitoring. Some firms’ performance management approaches focused on the achievement of sales or collections targets instead of on customer outcomes.

The combination of incentives, performance management and related controls posed a high, or very high, risk of customer detriment in 40% of firms, rising to 64% among those whose primary business was not financial services.

The firms assessed as presenting the highest risk were typically those where:

• incentive and performance management schemes included multiple high-risk elements
• control arrangements had material weaknesses and did not adequately address the specific risks posed
• senior management showed a lack of recognition about the risks their schemes could pose.

Proposed changes

The FCA proposes to insert the following into section 2.11 of the Consumer Credit sourcebook (CONC):

• a high-level rule requiring firms to put in place adequate arrangements to detect and manage any risk of non-compliance with their regulatory obligations arising from their remuneration or performance management practices
• a proportionality provision requiring the firm to take into account the nature, scale and complexity of its business, and the nature and range of financial services and activities undertaken in the course of that business, when deciding how to comply
• guidance on the purpose of the proposed new provisions
• guidance setting out examples of measures and procedures to manage risks
• a cross-reference to the non-Handbook guidance which the FCA is also consulting on.

The draft text is set out in Appendix 1 of the consultation paper.

More detailed, non-Handbook, guidance will include examples of good and poor practice coming out of the thematic review. The draft text for this separate guidance is set out in Appendix 2.

Next steps

Comments are requested by 4 October 2017, after which the FCA will publish a policy statement with the final rules and guidance.

How Walker Morris can help

If you would like to find out more about how the proposals could impact your business, or you require any assistance in responding to the consultation or carrying out a review of your own policies and practices, please contact Jeanette Burgess or any member of Walker Morris’ Regulatory and Compliance team, who will be very happy to help.