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FCA's Proposed New Remuneration Code Rules

The Financial Conduct Authority has opened a consultation on how consumer credit firms should manage risks related to how they pay or incentivise their staff. The published package of proposed handbook rules and non-handbook guidance aims to help consumer credit firms identify potential risks and effectively manage any potential harm to consumers.

FCA New Remuneration Code Rules

The consultation follows a thematic review of 98 consumer credit firms. The FCA found that some of the firms in the sample did not have adequate systems and controls in place to manage staff incentives, which have the potential to influence the way they behave with customers. A significant proportion of firms were also found to have high risk financial incentives and/or performance management practices which it deemed likely to encourage high-pressure sales or collections. In addition, some firms from the sample had not recognised the potential harm to customers that their incentive schemes could pose.

As a result, the FCA consultation proposes a new rule and guidance to be added to the Consumer Credit sourcebook (CONC), aimed at helping firms to be able to detect and manage the risks arising from their financial incentive and performance management schemes.

The FCA's current remuneration code rules apply to over 3,000 firms including banks, building societies, large full-scope UK alternative investment fund managers and Capital Requirements Directive investment firms. Whilst the FCA's proposal for consumer credit firms does not include a prescribed set of calculations similar to those in the current remuneration rules, the proposals would bring incentives and performance management culture in consumer credit firms more in line.

The proposals have been published and are open for comments until 4 October 2017, with the aim that the Policy Statement and Finalised Guidance should be published in the first quarter of 2018.

The thematic review considered the risks and controls that applied to customer-facing staff in both sales and collections roles. Although many firms had taken positive steps in the way they financially reward staff, the FCA found that 'too many' of the firms in the sample had high-risk elements in the incentive schemes, primarily arising where staff earned bonus or commission payments based on the volume or value of sales or collections. In particular, where commission comprised most or all of customer-facing staff's pay, or different rates of commission were earned for different products, or the rate of commission varied depending on reaching certain targets were highlighted as being examples of high-risk practices. Overall, 88% of firms in the sample were found to pay staff some form of variable remuneration.

Where high-risk elements formed part of a firm's remuneration practices, the FCA found that in many cases, sufficient controls were not in place to address the risks. The draft handbook amendments propose guidance that firms should 'identify and effectively manage the risks to customers that may arise out of firms' policies, procedures and practices for the remuneration or performance management of their employees (...)', and a rule that firms must 'establish, implement and maintain adequate policies and procedures designed to detect risk' arising from its remuneration or performance management policies, and must 'put in place adequate measures and procedures designed to manage this risk.' The rule also states that firms must take account of the nature, scale and complexity of its business in deciding how to comply. Handbook guidance also offers some examples of measures and procedures to manage risks.

The FCA's cost benefit analysis suggests that whilst there may be some one-off costs to firms in considering if and how the firm is to be affected, and from implementing any necessary measures, almost three quarters of the sample investigated indicated that the proposals would result in no incremental costs. For smaller companies of between 1 and 15 members of staff, ongoing costs were estimated to be, at most, £1,800 per annum. For companies with more than 15 members of staff, ongoing costs were estimated to be no more than £4,840. The FCA envisage benefits to firms, staff and consumers, with the key benefit expected to be improved matching of credit products to customer needs, which may lead to increased customer satisfaction, loyalty and retention, increased sales and fewer complaints.

To comment on the proposals, go to and submit comments before 4th October 2017.

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