May 2018
By Mark Greenwood, group regulatory policy manager at SimplyBiz
As our theme for Advantage this month is conduct in the market, this naturally leads to thoughts of treating customers fairly – but we’re leaving this topic for another contributor. However, the FCA recently released details of its review into staff incentives, remuneration and performance management in consumer credit and set out some examples of good and bad practice. If you want to look for information on the FCA site, the policy statement was PS18/7 with feedback to CP17/20 and final rules. The thematic review was undertaken in August 2015.
As a useful overview, the high-level findings were that a significant proportion of firms had:
As a result, the FCA has issued rules and guidance in the Consumer Credit Sourcebook (CONC) and non-handbook guidance designed to help those firms affected by consumer credit legislation
It also helped establish a level playing field between consumer credit firms and other, Financial Services and Markets Act-regulated firms to which previous guidance applies.
Subsequently, the new rules include:
These are designed to ensure firms identify and effectively manage risks from their policies, procedures and practices for the remuneration and performance management of their employees, appointed representatives and agents who work with customers.
The new rules and guidance will come into force on 1st October 2018 and firms should ensure that, if their practices are affected by consumer credit regulation, that their business is compliant before this date.
Perhaps a more useful document is the finalised guidance in FG18/2 that was issued at the same time as the policy statement on how firms affected by consumer credit regulation should manage risks related to how they pay and manage the performance of their staff.
The finalised guidance identifies examples of good and poor practices and examples of increased risk areas for firms, which are identified below. While these appear to be directed towards retailers and firms providing short-term loans, with individuals involved in collection, for example, take time to read this and ask whether there are some specifics that could be applicable to your firm and its general practices.
Incentive scheme features that increase the risk of customer harm
Examples of increased risk
A retailer paying staff commission based on the profitability of loans sold, with the staff having discretion over the interest rate they can offer to customers and with higher interest rates earning staff higher commission.
A lender paying collections staff on a 100% commission basis. The commission scheme also includes a ‘retrospective accelerator’ where reaching a collections target increases the commission earned on all previous collections.
Incentive scheme features that might reduce the risk of customer harm
Good practice
A lender paying customer-facing staff a fixed salary, plus a bonus based purely on the results of customer telephone surveys conducted after the transaction on a random basis by an external third party.
Poor practice
Sales staff at one retailer earned commission based on the number of finance products sold, and could also earn a 5% bonus for achieving 100% quality scores. However, the sales commission accounted for up to 79% of an individual’s pay, which meant the potential quality bonus was insignificant compared with the volume element.
Performance management practices that might increase or reduce the risk of customer harm
Good practice
One lender set staff a target of achieving a minimum of 95% quality score. Quality scores were discussed at the start of annual reviews and formed the basis of staff objectives and periodic one-to-one discussions. The focus of performance management was on quality scores, customer outcomes and employee development.
Poor practice
At one lender, staff were given quality targets that were covered in regular one-to-one meetings. However, quality was just one of seven targets, with the others all relating to volume. In one instance, a staff member had three out of 16 calls reviewed and scored as red, with one scoring zero. This indicated serious issues. However, the reasons for these red scores were not discussed and the staff member still achieved the overall quality target of 80% with the number of green and amber calls highlighted as an area of success.
Managing the risks from incentive schemes and performance management
Good practice
A lender included an element of ‘cash collected’ in its bonus scheme, but they also explained that most of the bonus was based on quality and other non-monetary measures to reduce the risk of too great a focus on amounts collected. The controls included call quality monitoring to review for any signs that the ‘cash collected’ element of the bonus was driving inappropriate behaviour. They also included performance management that focused on and emphasised the importance of quality.
Poor practice
One retailer deducted 5% from the bonus of relevant sales staff if they found evidence of potential customer harm through quality checking. As the average salesperson in this role earned around 74% of their total pay as commission, this deduction for quality failures was comparatively insignificant.
We would strongly recommend that firms benchmark their own practices against all of the good and poor practices identified by the FCA in its paper.
We also encourage firms to read the full finalised guidance that can be accessed by clicking here.
If you require support in respect if your compliance and your firm’s processes, please feel free to contact the FIBA team on 0207 033 8899.