The final rules will come into force on 1 October 2018.
All firms that are engaged in credit-related regulated activity will be affected by these rules. They must now actively look to identify and manage any risks arising from their remuneration (pay) and performance management practices.
What are the new rules aimed at addressing?
High risk incentives can result in the inappropriate sale of products to customers.
Performance management discussions can be subjective and lead to staff being encouraged to focus on volume or profitability-based performance measures, with little or no discussion of quality or customer outcomes.
Both of the above can cause or increase the risk that firms may not comply with the FCA’s requirements, which is referred to by the FCA as consumer harm.
Examples of high risk incentives are:
End of bonus period incentives leading to inappropriate behaviour;
Sales volume-related incentives;
Variable pay schemes leading to inappropriate sales;
Marginal transactions, where staff earn a bonus for reaching a specific sales target;
incentives linked to the profitability of the finance product sold and product bias;
Sale of finance inappropriately where finance is optional and the terms of the finance have been misrepresented to the customer, so that they take out a finance product;
Variable salaries based on volume measures;
Competitions or promotions;
Manager incentive schemes linked to team performance;
Sale of finance to secure the sale of non-financial products e.g. insurance products,
All of the above are considered to be high risk factors which can result in inappropriate outcomes for customers, driven by sales staff behaviour.
Why is the FCA introducing these rules?
By introducing these rules, the FCA is not specifying how firms should design and run their pay (remuneration) and reward (incentive) schemes.
It is introducing this non-handbook guidance specifically to help consumer credit firms to identify risks in their business practices, handbook guidance and new rules laying down its expectations that firms will take care in ensuring that customers are not placed at harm as a result of pay and reward arrangements.
Firms will now be held to account if they are found to not be managing and monitoring these risks appropriately. The way staff are paid can have a significant influence on the way they behave.
Actions to be taken in anticipation of the new rules
All firms with consumer credit permissions should now review their arrangements to ensure that their remuneration and performance management activities comply with the FCA’s requirements.
To reduce risk to customers, pay and reward schemes should be set to achieve a balance between commercial interests and quality measures, which, if not met, result in overall performance being affected. This will in turn drive the correct behaviours in staff, ensuring that deals are done in customers’ best interests and not solely in the firm’s interests.