Christmas bonus? Don’t fall foul of the remuneration changes

Incentivising staff through bonuses and other remuneration schemes is a common practice for many firms in the sector who want to encourage their staff to achieve their best possible performance. The benefits to such schemes are numerous; the chance to augment a standard income can promote productivity in individual staff and teams, increase motivation and focus staff on achieving business targets.

With Christmas just around the corner, many firms will be gearing up for the bonus season. However a firm's incentive scheme is organised, the Financial Conduct Authority's recent staff incentives, remuneration and performance management in consumer credit consultation provides a useful backdrop. The thematic review undertaken by the industry regulator discovered a number of practices it considers to be high-risk, and as a result, plans to publish a new Handbook rule and guidance in the new year.

Central to the FCA's findings was the discovery that a number of firms did not appear to be aware that their schemes presented any risk to the consumer, and consequently, did not have adequate systems and controls in place. Given that a 'significant proportion' of firms were found to be using high-risk schemes, the Christmas season offers a good opportunity to consider afresh any incentive or bonus schemes before the new rule comes into force.

The consultation sets out in some detail what the FCA consider to be high-risk practices, along with examples of poor practice for each risk type. See our article for more detailed information. The consultation also offers some positive examples of good practice, providing firms with a good guide if, on audit of current schemes, some adjustments do need to be made.

The intended amendments to the Handbook will require firms to establish, implement and maintain adequate policies and procedures designed to detect risk of failure by the firm to comply with its obligations to the regulator in relation to its remuneration schemes. The following questions offer a good starting point to guide you through the first steps:

• Have we considered whether staff are encouraged to act in a way that benefits them but is bad for clients? How could we spot such activity?

• Does the firm seek to collect management information to enable monitoring and identification of trends or patterns in behaviour?

• Do we undertake monitoring for any suspicious activity, including unusually high levels of business?

• Do we monitor staff-customer communication to be able to identify where customers could be misinformed?

• Do our current policies and procedures demonstrate effective controls?

What does a good bonus scheme look like? The FCA have provided a number of examples of good practice, but key to a compliant scheme is a good outcome for the customer. The scheme examples suggested by the FCA ensure the usual benefits of staff incentives, along with encouraging the best outcomes for the customer. Ensure that the customer's interests are at the heart of your scheme, and you won't go far wrong.

While it's clear from the consultation that the FCA would not promote salaries based entirely on commission, they provide a variety of schemes where bonus or incentive payments would be considered good practice, for example:

• Bonus payment based on the results of a customer telephone survey, conducted randomly and by an independent third-party.

• A team-wide bonus, paid on the basis of the performance of the team as a whole, where the performance is judged on QA reviews. If an individual's quality scores fell below a target level, they would not qualify.

• Bonuses based on loans in a 'positive' status, including those where the customer was fully up-to-date with payments, or had entered into a payment or Debt Management plan.

• Bonuses based purely on the results of Quality Assurance assessments for a sample of calls, which were independently scored for customer experience and outcome. In such a scheme, line managers' bonus would be subject to the QA results of their team, encouraging focus on the right outcomes.

Volume base incentives could still be used, as long as they are based on cumulative figures, or on a rolling average - this reduces the immediate impact on an individual if they perform poorly in any given target period, especially relevant just before Christmas. Firms should be aware that risks may still appear with this sort of scheme and should take this into account in their policies and procedures. Suitable controls can include call quality monitoring for signs that elements of bonuses are encouraging inappropriate behaviour, reviews of loans or collections for compliance with process, sampling of live calls without the member of staff being aware, allowing for prompt feedback.

Check back in the New Year for details of the final guidance and Handbook rule.

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