Staff incentives and remuneration - within the rules

By Mark Greenwood, group regulatory policy manager at The SimplyBiz Group

In the few years since taking over responsibility for the regulation of consumer credit, the FCA raised concerns about how firms affected by consumer credit regulation pay and incentivise their staff and manage the risks arising from these arrangements. In CP17/20: Staff incentives, remuneration and performance management in consumer credit - Findings from our thematic review and proposed new rule and guidance (published in July 2017), it addressed these concerns and also confirmed the findings of its thematic review Staff remuneration and incentives undertaken in August 2015, where the FCA reviewed the incentives and the performance management policies and practices for sales and collection staff at 98 consumer credit firms.  

The high-level findings of the review were 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, and/or
• a lack of appreciation of the risks their incentives posed and the controls needed to address them.

The July consultation included proposed new rules and guidance in the consumer credit sourcebook (CONC) and non-handbook guidance designed to help consumer credit regulated firms:

• identify and appreciate the risks their practices might pose to customer outcomes
• communicate its expectations regarding how firms should mitigate/control those risks
• establish a level playing field between consumer credit firms and other Financial Services  and Markets Act-regulated firms to which previous guidance applies. 

The FCA also provided examples of good and poor practices in GC17/6: Draft non-Handbook Guidance relating to Staff Incentives, Remuneration and Performance Management in Consumer Credit. Areas covered included how the features of an incentive scheme might reduce the risk of consumer detriment by paying collections staff bonuses based purely on the results of quality assurance assessments for a sample of calls, which were independently scored for customer experience and outcome, rather than basing remuneration on the number of finance products sold, with only a very small payment relating to quality.

How performance management can increase or decrease the risk of customer detriment was also addressed. Appraisal discussions where quality measures and staff behaviours are focused on, and financial measures are not given undue prominence, may be contrasted with a focus on sales volume measures in isolation.

Firms need to take a view on how they manage the risk presented by their incentive schemes and the way they approach performance management. Remote monitoring of live calls allows for managers to get a true picture of activity. This contrasts with sampling a small number of calls per month at selected points, with staff being aware that once completed, no further monitoring activity would take place, so reducing the likelihood of calls at the end of the month (or bonus period) being included. This is likely to be a high-risk period, when staff could be more likely to engage in inappropriate behaviour to meet targets.

Remuneration remains a thorny topic for financial services firms more broadly, in particular remuneration and incentives – whether monetary or otherwise – that might deter individuals and firms from abiding by the overarching principle of acting in the customer’s best interests. In a word, the ‘culture’ of the firm, whatever its size, remains an area of significant focus for the FCA. 

Firms are strongly recommended to benchmark their own practices against all of the good and poor practices identified by the FCA in the Guidance Consultation, and to think about the culture of their firm and the way they reward both senior management and staff, to ensure they do not adversely affect their customers and take advantage of innate behaviour biases in the way they engage.