Staff Incentives and Remuneration for Consumer Credit Firms: A Quick Guide to the FCA's consulta
Keeping abreast of regulatory changes is vital for consumer credit firms, and can be particularly helpful for firms wishing to gain FCA authorisation. With the closure of the Financial Conduct Authority’s Staff Incentives, Remuneration and Performance Management in Consumer Credit consultation in early October and the Policy Statement and Finalised Guidance due to be produced in Q1 of 2018, we’ve produced this handy guide to get straight to the FCA’s findings and highlight practices that are likely to be considered high-risk in the near future.
The FCA has highlighted certain practices it considers to be high risk in relation to incentives:
100% variable pay – where salary is made up purely of, for example, commission payments
Disproportionate reward from marginal sales / collection – where bonus targets may encourage staff to mis-sell to gain a sale
Accelerators or stepped payments
Incentives linked to the terms of finance
Incentives for sale of finance
Variable salaries that change based on volume measures – where salary is linked directly to sales
Volume based measures to determine whether incentives are paid – where salaries are only paid if targets are met
Competitions or promotions
Incentive schemes for managers linked to team performance
Incentives for sales of non-financial products – common among secondary brokers
Following a thematic review of 98 consumer credit firms, the FCA concluded that some firms did not have adequate systems and controls in place to manage their remuneration and incentive packages and that this had the potential to influence the way staff behave with customers. Crucially, the FCA found that ‘a significant proportion’ of firms had high-risk financial incentives and/or performance management practices which carried an increased risk of mis-selling. The consultation and proposed rules rests on the idea that the way staff are paid may influence the way they behave with customers. The FCA recognise that firms may want to incentivise their staff to achieve more, but in these cases, firms should take steps to manage the risk of non-compliance as a result of these incentives, including identifying and managing risks.
The FCA are keen to point out that firms using such schemes aim to motivate staff to succeed, and that the consultation and resulting changes to rules and guidance is not aimed at making firms remove bonus schemes that incentivise good conduct that is in the interests of consumers, or where they enhance a firm’s ability to compliantly sell products that offer value to customers. Rather, the consultation aims to communicate to firms what the FCA expects to see in terms of the awareness and management of risks associated with incentive or pay schemes.
As such, the consultation provides a thorough set of examples of practices that the FCA would consider to be higher risk, and those which it does not consider being conducive to fair treatment of customers, and which in its view, can in fact encourage mis-selling and unfair treatment of customers. Wide ranging, and covering a range of practices with examples from all aspects of sales and collections including field agents, call centre staff and managers, the examples provided can help firms identify practices which may carry extra risks.
Eleven high-risk factors of schemes are broken down in the paper:
100% Variable Pay – where staff do not receive a basic salary and payment is made up purely of variable pay, such as commission. The FCA consider that this practice ‘significantly increases the risk that staff may engage in inappropriate sales or collections practices’ as they are dependent on making a minimum level of commission in order to meet their own outgoings. Risks in such a scheme were felt to be heightened where a member of staff was unable to work for part of a month (e.g. because of illness or annual leave), meaning they would have a limited time to meet the targets.
Disproportionate reward from marginal sales/collection – where, for example, staff earn a bonus for reaching a particular sales target, meaning that in practice, where a member of staff is one sale away from their target, there could be a high incentive to make that sale, carrying the potential of mis-selling. Examples provided included the point at which an agent reached a single collection that could increase their total commission for the month by over £600.
Accelerators or stepped payments – where staff only earn commission on sales or collections above a minimum level, for example, close to the end of bonus period, staff could try to complete as many transactions as possible before the start of the new period, which the FCA viewed could lead to the risk of staff pressuring customers to take out finance.
Incentives linked to the terms of the finance – where there is a direct link between the commission earned and terms such as interest rate charges or the amount borrowed. In such cases, the FCA were concerned that where, for example, staff had discretion over rates, there was a risk that staff might be incentivised to inappropriately sell loans that are more profitable for the firm, but unsuitable for the customer.
Product bias – where staff were able to offer different finance products that earn them different commission amounts.
Incentives for sale of finance – where staff earn more from commission for selling finance than they earn from the sale of the core product, and where it is possible that customers purchasing high-value retail goods may pay close attention to the features and price of the goods, but less attention to the terms of finance.
Variable salaries that change based on volume measures – where the salary is linked directly to the volume or value of sales made in the previous period and where changes in salary could have a prolonged effect on individuals where reviews were conducted quarterly, bi-annually, or annually. The FCA provided an example of a salary band leaderboard, meaning that staff could see their position and would be aware if they were moving up or down.
Volume based measures to determine whether incentives are paid – where salaries are only paid if minimum targets are met on a range of volume based measures and failure to meet the targets disqualifies an individual from earning commission. In such cases, it is possible that a member of staff might focus on meeting one target they felt to be more difficult to reach.
Competitions or promotions – which could increase high-pressure selling in those close to certain targets.
Incentive schemes for managers linked to team performance – where managers or team leaders earn bonuses directly related to the performance of the teams they manage. Such incentives were felt to increase the risk of management staff focussing on measures that determine their bonus payments; if these measures relate to sales or collections volumes rather than quality and customer outcomes, there is a risk that managers may put pressure on their staff to achieve those targets, creating risks to customers.
Incentives for sales of non-financial products – common among secondary brokers that sell retail goods on finance, where finance options are used to help secure a sale. Among the examples provided by the FCA was noting in training materials for new staff that increasing the number of customers taking out finance was their biggest opportunity to increase sales.
The FCA also found instances of firms combining two or more of the above factors, leading to a particularly high-risk environment. Firms should be aware of how elements of their schemes interact and the extent to which they amplify any risks from any single factor. It is also important to remember that examples provided by the FCA do not represent an exhaustive list but it is fair to say that if a scheme has similar features, it is likely to be considered high risk by the FCA.
Ultimately, the FCA will require that firms assess any risks from their incentive schemes, particularly if schemes may potentially increase customer detriment. Where properly assessed, managed and implemented, incentive schemes can be used to reduce risk, where they reward staff for achieving appropriate outcomes for their customers.
You might also be interested in our FCA Authorisation Guide, which sets out the areas you need to consider when preparing a firm to be regulated by the Financial Conduct Authority.