Many firms are using high risk remuneration and financial incentives practices, have ineffective or inadequate controls and do not appreciate the risks their incentive programmes pose and controls needed to address them.
Yesterday, the FCA published these findings in CP 17/20 following its thematic review of staff incentives and performance management in consumer credit firms. They are proposing new rules in CONC and non-Handbook guidance which all firms engaged in consumer credit activity should consider.
For some time, the FCA has been focused on the way in which firms pay their staff, how this might influence staff behaviours, and the possibility that some remuneration programmes could lead to poor customer outcomes. It has already done some work in this area in relation to other financial service sectors, and committed to reviewing incentive schemes in consumer credit firms in its 2015/16 Business Plan.
Clearly, it is concerned with the findings of this recent thematic review, as new rules in CONC (and guidance) are being proposed for firms engaged in consumer credit activity – both where consumer credit is their primary activity or secondary to their business (eg credit is provided with the sale of retail goods where they are either carrying on regulated lending or credit broking activity).
We summarise the findings and proposed new rules and guidance below.
Although it found some examples of good practice, the FCA found that a significant number of firms had:
- high risk financial incentives and performance management practices that were likely to encourage high pressure sales or collections;
- inadequate or ineffective controls around their incentive programmes; and
- a lack of appreciation of the risks that their incentive programmes posed and the controls needed to address these risks.
In particular, the FCA highlighted that risks from incentive schemes arose primarily where staff earned bonus or commission payments based on the volume of sales or collections and where such schemes had certain features, such as the rate of commission varying depending on staff reaching certain targets. Where firms maintained these higher risk schemes, the FCA found that most lacked sufficiently robust controls to address the risks these presented. One example cited was monitoring arrangements, where in some firms, this was the responsibility of line managers, whose own pay was dependent on the staff they were monitoring.
Proposed new rules
A new Rule 2.11.4 of CONC is proposed that would require firms engaged in consumer credit activity to:
- put in place adequate arrangements and have adequate policies and procedures to detect and manage any risks associated with their remuneration and performance practices; and
- take into account the nature, scale and complexity of their business when deciding how to carry out the above arrangements
Guidance is provided in the draft CONC 2.11.5 of examples of measures and procedures which firms could adopt, such as monitoring the nature of sales activity and debt collecting and collecting management information (MI) to enable the identification of trends in staff behaviour and outcomes.
Examples of good and poor practice in non-Handbook Guidance
The FCA acknowledge the positives of staff incentive schemes – if appropriately designed, they can be used to drive good behaviours and reduce the risk of customer detriment. Consumer credit firms should consider the examples of good and poor practice that the FCA has set out in their proposed non-Handbook guidance – which has been drafted to help them to reduce and manage the risks appropriately. This forms a large part of the CP.
Responses to the consultation are due before 4 October 2017. A policy statement containing the final rules and guidance will then be published.