The FCA’s Remuneration Rules for the Consumer Credit Sector
With the end of 2020 fast approaching, the bonus season is upon us once again. After a difficult year, it is understandable to want to reward the staff who have dealt with the considerable challenges posed by the pandemic. With so much to think about at this time of the year, it would be easy for the FCA’s rules and expectations on remuneration in the consumer credit sector to slip the mind.
The FCA’S specific rules on staff incentives and remuneration were implemented in October 2018. Helpfully, they also published non-handbook guidance to support a clear view of their expectations through practical examples.
Remuneration is clearly still on the FCA’s priorities list, and in July of this year, a letter was sent to Chairs of remuneration committees across the industry to confirm how the regulator will assess remuneration policies and practices throughout 2020/21.
In the letter, the regulator noted that the particular challenges of 2021 have changed the way we work, which can bring significant risks as firms adapt to these new ways of working, but that there is also significant risk to a firm’s compliance with regulation through changes in staff behaviour, as they adapt individually to these different ways of working. The FCA is also concerned that there is a risk that firms deprioritise what they may see as ‘culture’ issues, in order to focus on the response to immediate risks from COVID-19. In the FCA’s view, it is just as important to drive correct behaviours during times of uncertainty, and it suggests that this can help to make firms more resilient.
Remuneration schemes can play a role here – the FCA has identified a number of scheme types that, if well designed, could help to promote and reinforce positive behaviour and a focus on good customer outcomes in staff, even when they are working remotely. It is especially key that schemes don’t reward – accidentally or otherwise – behaviours that ask staff to balance their income with what is right for the customer.
Broadly, the reminder from the FCA suggests that firms make sure that policies positively promote diversity and inclusion, and that appropriate steps are taken to address areas of weakness or concern.
The FCA note that firms that do well tend to embed conduct objectives in their policies and practices through performance assessment measures. They expect that remuneration policies and practices remain aligned with the firm’s long-term business plans, and that they are designed to reinforce healthy cultures.
With that in mind, let’s run over the key rules for consumer credit remuneration:
Firms must implement and maintain policies, procedures and practices that are designed to detect any risk that its remuneration practices threaten non-compliance with regulatory obligations.
There must also be ‘adequate measures and procedures’ to manage this risk.
In practice, this means that remuneration schemes, including bonuses, should not either be designed to or have a fault within them that means they can be exploited to, prioritise profit or individual gain above customer outcomes. Schemes should be designed with quality assurance and the fair treatment of customers in mind.
As for the management of the risk that schemes could result in unfair treatment of customers, firms can collect management information to analyse patterns in groups of staff, or in individual staff behaviour to confirm that existing schemes work well, and prioritise the quality of work and customer outcomes. The FCA also suggest having clear procedures covering ‘appropriate actions’ that can be taken in the event that a member of staff is found to have acted inappropriately.
There isn’t a one-size-fits-all approach to remuneration – the differing business types, practices and sizes of firms in the sector make this impossible. However, the FCA has made clear what types of schemes it views as poor examples, and what it views as good practice.
Examples of poor practices include:
Where staff salary, bonus or commission is determined entirely, or even in part, by the amount of credit provided or debt collected e.g. targets for the volume of credit provided
Incentives to sell goods which can be financed where the scheme incentivises individuals to sign someone up to credit that isn’t suitable for the customer or in their best interests, in order to meet a target
Any scheme based on the volume of sales
100% variable pay (commission with no basic salary)
Any scheme where a single transaction can have an impact on an individual’s pay
Incentives linked to the terms of finance, as these create a direct link between commission earned by sales staff and terms such as the interest rate charged
Variable salaries that change based on volume measures, e.g. where salaries can increase or decreased based on sales made, which carry a risk that staff will engage in inappropriate behaviours to increase their salary
Competitions or promotions
Any scheme that combines several high-risk elements
Good practice examples include:
Bonus payments based on the results of a customer telephone survey conducted randomly and by an independent third-party
A bonus paid on the basis of QA reviews, for example, assessments for a sample of calls that have been independently scored for customer experience and outcome
Bonuses based on loans in a ‘positive’ status, including those where the customer was fully up to date with payments
Reductions in bonus for failing to meet quality standards
Deferral or clawback of incentive payments, for example, where quarterly bonuses are not paid until the end of the following quarter, at which point the assessment of customer outcome has been finalised, or where commission earned is ‘clawed back’ if customers cancel or defaults within the first three months of a credit agreement sold.
The FCA’s approach to ensuring fair outcomes for customers is wide-ranging. Our online training sessions can be completed in around an hour, at the learner’s convenience, and provide clear, focussed training and practical solutions that embed best practice and fair treatment of customers. Our Treating Customers Fairly course comprehensively covers the FCA’s TCF expectations, the six outcomes and how to put them into practice. Our Financial Difficulties course looks at the underlying issues, the FCA’s definition and then guides learners to understand how to identify customers in financial difficulties, the importance of soft skills, the FCA’s rules and requirements, and support solutions for customers. All of our online courses use a mix of videos, quizzes, practical scenarios and presentations, and issue a certificate on successful completion of a final exam.