FCA's Final Guidance and Rules on Staff Incentives and Remuneration in Consumer Credit

The Financial Conduct Authority (FCA) have published the final rules and guidance relating to staff incentives, remuneration and performance management in consumer credit, and have confirmed the implementation date of 1 October 2018. The publication confirms that the new rules take the form of a new section in CONC, along with non-handbook guidance designed to aid firms’ journey to compliance before the implementation date.

The FCA began their thematic review of firms’ arrangements for incentive and remuneration schemes in August 2015. The review identified that a ‘significant proportion’ of consumer credit firms had incentives that were high risk and likely to encourage high-pressure sales or collections, inadequate or ineffective controls and little understanding of the risks the practices presented, or the controls needed to address them. As a result, the FCA drew up proposals including the new high-level rule and non-handbook guidance, and began a consultation with affected firms in 2017. Thirteen responses were received, with a majority supporting the proposals. As a result, the new rules and guidance will be published in full, and non-Handbook guidance will be published with only minor amendments – there are no substantial changes.

The amendments to the Handbook take the form of the insertion of a new section in CONC – 2.11. This section applies to firms with respect to credit-related regulated activity and unregulated activity that is financed by a credit agreement in respect of the firm which is carrying on consumer credit lending, or credit broking. If you are unsure whether your firm is affected, it is always recommended that you consult an expert.

The key rule in the new section states that firms must:

1. establish, implement and maintain adequate policies and procedures designed to detect risk arising from remuneration or performance management policies, procedures and practices, and

2. put into place adequate measures and procedures designed to manage this risk.

Further FCA Handbook (2.11.3G, 2.11.5G, 2.11.6G) and non-Handbook guidance provide further information.

Whilst firms will need to ensure that their business is compliant before 1 October 2018, the FCA are clear that they understand that one-size does not fit all when it comes to incentive and remuneration schemes. Firms are required to take into account the nature, scale and complexity of the business they undertake when deciding how best to design their schemes. In addition, they respond to a concern that the non-Handbook guidance will be used as a prescriptive list during supervisions work or during authorisation with a confirmation that that is not their intention, and that they will maintain proportionality, considering each case on an individual basis.

Whilst the onus is very firmly on individual organisations to consider and design their schemes in light of the changes, the non-Handbook guidance aims to help firms embed the new expectations with a series of examples of scheme features that the FCA consider to increase the risk of customer harm. These examples include:

• Schemes based on the volume of sales

• Those based on the amount that staff collect

• Those that directly relate to sales or collections volumes (such as profitability measures)

• 100% variable pay (commission with no basic salary)

• Schemes where a single transaction can have a very large impact on an individual’s pay

• Accelerators or stepped payments (where staff only earn commission above a minimum target level, or earn it at a higher rate on all transactions above the target)

• Incentives linked to the terms of finance (which create a direct link between the commission earned by sales staff and terms such as the interest rate charged or the amount borrowed)

• Product bias (where staff are able to offer different finance products that earn them different commission amounts, this carries the risk they might recommend a product that earns them more commission)

• Incentives for the sale of finance (where retailers provide finance to fund the purchase, customers may pay less attention to the terms of finance. Where staff receive high levels of commission for selling finance compared with any commission earned on the main product, there is a greater risk they may sell the finance inappropriately)

• Variable salaries that change based on volume measures (where individual salaries can increase or decrease based on sales made, carrying the risk that staff will engage in inappropriate behaviours)

• Volume based measures to decide whether incentives are paid (which are only paid if staff meet all minimum targets on a range of different volume-based measures)

• Competitions or promotions

• Schemes that are linked to team performance

• Incentives for sales of non-financial products

• Schemes that combine several high-risk elements.

The list is long, and not exhaustive. While it might seem onerous to consider a re-examination, or in some cases a complete change, of current schemes in time for the October 2018 implementation date, it is also a worthwhile reminder that the cost of failure to comply with the FCAs expectation is high, and that moves towards compliance can be beneficial not only in terms of compliance with the regulator, but also in increasing current sales and productivity. The FCA has provided a range of examples of schemes they consider might reduce the risk of customer harm, opening up the possibility that a new set of schemes that also encourage good customer service increase the possibility of higher customer retention.

It’s also important to remember to consider performance management practices – which also come under scrutiny – including both formal (documented annual appraisals) and informal processes (day-to-day conversations between staff and their line manager). Given the subjectivity of performance management, and the inevitable variations in application, the FCA are keen to ensure that firms consider risks arising both from the design of their formal performance management process, and from the way they are implemented in practice.

In summary, affected firms need to:

• Identify risks arising from their current schemes, processes and practices

• Assess those risks, taking into account how likely a risk is to occur, and the potential level of harm to customers if it does

• Seek to manage those risks with controls (ensure staff have appropriate skills and knowledge, implement clear guidance, process manuals and ensure training is effective, include restrictions over which staff carry out specific tasks, implement forms to maintain records, implement defined criteria for making decisions, etc.)

• Satisfy themselves that staff are following their processes (monitor the risks via effective Management Information or other business quality monitoring that effectively reviewed whether the right outcomes are achieved for the customer)

• Ensure that controls are able to detect and address or prevent serious problems (carried out by staff or outside parties sufficiently skilled and independent of the staff and process they are monitoring).

The FCA have provided a range of information and examples designed to help firms consider their current position and re-design their schemes, if necessary, in time for the implementation date in just under six months. If your firm requires further assistance, contact us to undertake a full scheme, policy and process review. In addition, we can provide the necessary quality monitoring on a rolling basis, offering absolute independence from the staff and processes we monitor.

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