Why Consumer Credit Firms Need to Audit Their Staff Incentive Schemes
The FCA’s consultation on staff incentives - covering remuneration, incentive schemes and performance management – in consumer credit firms closed in early October, with the policy statement and finalised guidance due out in Q1 of 2018.
Key to the findings of research conducted by the FCA was the number of existing practices it considered to be high risk. The thematic review found that ‘a significant proportion of firms’ had high risk financial incentives and/or performance management practices likely to encourage high-pressure sales or collections, inadequate or ineffective controls, or a lack of appreciation of the risks their incentives posed, and the controls needed to address them.
Given that many firms in the consumer credit sector use the schemes subject to the consultation paper to either supplement staff salary, or, in the case of 15 firms investigated for the thematic review, pay their staff on a 100% commission basis, every firm in the sector should be considering the impact of their schemes in line with the proposed consultation.
Whilst it can appear initially overwhelming – the proposed changes affect high-level policy and procedure both in considering risk and then working adequate measures into policy and procedure to manage any risk – the good news is that the FCA make clear they will not prescribe the nature of schemes, allowing firms a range of options, or ban schemes that reward appropriate activity. Done correctly, incentive schemes can be an effective way of rewarding staff for achieving appropriate outcomes for their customers and encourage good practice.
Key to remaining compliant is having a good overview of the possible risks posed by current incentive schemes, remuneration and performance management schemes. Prior to the implementation of any of the upcoming new FCA rules or guidance, these should be audited for risk to customer detriment. Illustrations of increased risk for incentive schemes, for example, include where an individual’s income relies on making sales (e.g. 100% commission based salary), where a single sale could significantly increase their total commission, or where commission is linked to the terms of finance (i.e. risk that staff could give false or misleading information to customers).
Once the audit has taken place, a firm’s governance should consider whether any amendments to current practice are required to bring them into compliance. At this stage, minor amendments may be appropriate, or a firm could consider implementing a new scheme. Whilst the latter option may seem like a major undertaking, it offers the opportunity for the firm to effectively start afresh, with a scheme, range of schemes and performance management policies and procedures that have at their heart compliance with the FCA's rules and principles.
A good understanding of the FCA Handbook, and their proposed guidance on incentives is essential to avoid the pitfalls that were uncovered in the thematic review. A major factor in the review was that the firms investigated had failed to recognise the risks in their own schemes and policies. Engaging a third party to conduct the audit ensures your firm receives expert consideration of current practices, meaning that errors and risks are more likely to be discovered, and can provide tried and tested recommendations for amendments or new schemes, where required. Certainly, incorporation of some of the FCA’s proposed scheme features to reduce the risk of customer detriment – where they would be appropriate – necessitate an expert input.
RB Compliance Consultancy offer a range of services including audit and gap analysis and consultancy services; our expertise and experience with the FCA is reflected in our reputation throughout the credit and debt collection industries. Contact us to see how we can help.