03Apr

The Financial Conduct Authority (FCA) has issued both a policy statement and a finalised guidance document entitled “Staff incentives, remuneration and performance management in consumer credit.”

These are both fairly lengthy documents, however it is extremely important that consumer credit firms of all types read these documents carefully, and consider whether they need to make any changes.

From October 1 2018, FCA rules will compel firms to have policies and procedures to detect and manage risks arising from their remuneration or performance management policies. This applies not just to sales activity, where staff are often incentivised to achieve high sales volumes, but also to areas such as debt collection, where remuneration may be based on how effective staff are in getting customers to repay their debts.

If firms have remuneration systems of this type, then it inevitably gives rise to concerns that staff will recommend unsuitable products, or get aggressive with customers who have not repaid, simply to boost their personal pay packet.

Incentives can also include holidays, days out and other non-monetary benefits, and firms need to appreciate that offering these types of rewards to their staff can also increase the risks of inappropriate behaviour towards customers.

Alongside the new rule, the FCA Handbook will include guidance on how firms might ensure they comply, which includes:

  • Monitoring the nature of sales activities and debt collecting
  • Collecting management information to monitor and identify trends that are relevant to risks associated with remuneration systems
  • Implementing procedures to take action against staff who behave inappropriately towards customers
  • Ensuring remuneration and performance management arrangements are reviewed by an appropriate governance committee, or by the firm’s senior management

Some of the issues covered in the accompanying guidance paper include:

  • Some staff are incentivised to sell loans at higher interest rates as this could earn them more commission
  • Staff may have an incentive to encourage customers to borrow more than they require, simply because they would receive more commission on higher value loans
  • Any remuneration system involving a ‘cliff edge’, i.e. one where an individual’s remuneration can increase dramatically when they enter the next performance bracket, is likely to be higher risk
  • Firms should consider whether targets need to be amended if an individual is absent for part of an assessment period due to sickness or holiday. Otherwise they may feel the need to push hard to achieve additional sales on their return, to make up for the time they have been away
  • If a firm threatens disciplinary action against staff who fail to meet sales or collection targets, then this could also adversely affect the way they behave towards customers
  • Firms should consider whether it is appropriate to publicise to all employees how their colleagues are doing in meeting performance targets. Some firms for example publish ‘league tables’ and make these available to all staff
  • Firms should consider whether it is appropriate for an individual’s line manager to assess their performance, given that supervisors are often financially rewarded according to the performance of their team

The paper suggests additional ways staff can be incentivised, such as basing performance-related pay on the results of compliance or quality assurance (QA) assessments, or the results of customer satisfaction surveys. The FCA does add a note of caution here though, and adds that it has seen examples of firms who used QA results when calculating individuals’ remuneration, but where the QA element was so small that it was dwarfed by the remuneration that could be achieved by effecting additional sales.

In summary, the customer’s interests should be at the heart of everything a firm does. The FCA is not imposing an outright ban on firms giving staff additional remuneration for selling more, or for achieving better collections results. It is however saying that firms must understand the risks that such a remuneration system might pose, and that these risks must be managed to ensure that there is no detriment to customers.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article