The FCA's take on your Christmas Bonus

As we enter into November it is probably the time of year you are planning your team’s Christmas bonus. You may decide to pay your bonus based on individual or company performance, or, provide an equal bonus to all concerned. Either way, you should make sure you do not fall foul of the FCA.

With the closure of the Financial Conduct Authority’s Staff Incentives, Remuneration and Performance Management in Consumer Credit consultation in early October and new guidance set to be released in early 2018 now is the time to “get it right”.

During its investigation the FCA has highlighted certain practices it considers to be high risk in relation to incentives:

• 100% variable pay – where salary is made up purely of, for example, commission payments

• Disproportionate reward from marginal sales / collection – where bonus targets may encourage staff to mis-sell to gain a sale

• Accelerators or stepped payments

• Incentives linked to the terms of finance

• Product bias

• Incentives for sale of finance

• Variable salaries that change based on volume measures – where salary is linked directly to sales

• Volume based measures to determine whether incentives are paid – where salaries are only paid if targets are met

• Competitions or promotions

• Incentive schemes for managers linked to team performance

• Incentives for sales of non-financial products – common among secondary brokers

Amongst others…

Following a thematic review of 98 consumer credit firms, the FCA concluded that some firms did not have adequate systems and controls in place to manage their remuneration and incentive packages and that this had the potential to influence the way staff behave with customers.

Crucially, the FCA found that ‘a significant proportion’ of firms had high-risk financial incentives and/or performance management practices which carried an increased risk of mis-selling. The FCA also found instances of firms combining two or more of the above factors, leading to a particularly high-risk environment.

The consultation and proposed rules rests on the idea that the way that staff are paid may influence the way they behave with customers. The FCA recognise that firms may want to incentivise their staff to achieve more, but in these cases, firms should take steps to manage the risk of non-compliance as a result of these incentives, including identifying and managing risks.

The FCA are keen to point out that firms using such schemes aim to motivate staff to succeed, and that the consultation and resulting changes to rules and guidance is not aimed at making firms remove bonus schemes that incentivise good conduct that is in the interests of consumers, or where they enhance a firm’s ability to compliantly sell products that offer value to customers. Rather, the consultation aims to communicate to firms what the FCA expects to see in terms of the awareness and management of risks associated with incentive or pay schemes.

As such, you should cast an expert eye over your incentive packages, ideally before launch to ensure that your incentives do not match any of the high risk indicators identified by the FCA. Equally you should ensure your incentives do not cause any unintended consequences.

We regularly review incentive schemes and have seen schemes, such as one where the person with the best call quality score received a small cash prize, drive division between colleagues both within the call centre as well as between agents and the QA team. We’ve seen incentive schemes which, due to their design, allow members of staff to identify that it would be impossible for them to win before the scheme has closed. This has the obvious effect of failing to encourage behaviours throughout the whole period of time.

Why not engage with us to review your incentives scheme and ensure compliance? Happy to give discounts to any work received during the month of November.

For more information from RBCCL, read our previous post on Staff Incentives and Remuneration for Consumer Credit Firms - A Quick Guide

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