FCA has published draft handbook rules and non-handbook guidance for consumer credit firms on managing the risks posed by incentives and remuneration.
This applies not just to firms engaged in consumer credit activities but also to firms selling goods or providing services financed with credit, for which they are brokers.
Broadly the requirement is for all firms to have procedures to identify the risks posed by their remuneration policies and to effectively manage those risks.
The proposed rule specifically references the risk as being that the firm fails to comply with its obligations under the regulatory system, so this is a 'compliance' problem.
The policies and procedures to detect and manage the risk must be 'adequate' and proportionate to the nature, scale and complexity of the firm's business and the range of financial services and activities it undertakes.
The non-handbook guidance is interesting in addressing both how to risk assess the incentive scheme and a number of the measures required for adequate procedures.
The FCA has identified the following practices as tending to drive the 'wrong' sort of behaviour:
From the perspective of the product, the FCA alerts firms to schemes that are skewed in favour of the more profitable products or that reward high borrowing by the customer.
The regulator found examples of staff being able to control the interest rate being offered and incentivised accordingly.
Such schemes can be at the expense of the customer, encouraging potentially unaffordable levels of indebtedness, and being unlikely to embed a 'TCF' culture.
In the case of retailers of high value goods, where commission on the sale of the goods is usual, the FCA highlights schemes that only reward sales that are on finance. In another example of regulatory standards being applied to unregulated activity, the regulator further highlights the risks to the customer created by the approach to commission setting either in relation to the finance, or the goods themselves.
The regulator's review however went wider, spotlighting the risks posed by many types of arrangement, ranging from quarterly targets with salary reviews, to team score boards, or cash prizes for high performers.
The FCA is bringing to this sector a message that is very familiar to other sectors – that commissions alone are risky and that "balanced score cards" that measure quality of sales and customer outcomes are essential.
The FCA has provided guidance on how risks such as these could be mitigated, including some good and poor practice points. The guidance is detailed but key points are:
Although many firms will have looked at their staff incentives in preparation for authorisation, this is still a high risk area for this sector.
Of the 25 firms where the FCA carried out a "high-risk" assessment, the overwhelming majority were considered at risk of customer detriment with inadequate control frameworks.
As a minimum every firm should risk assess its incentives scheme and consider how it could be improved to reduce the highest risks.
For more information contact Emily Benson.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2017. Specific advice should be sought for specific cases. For more information see our terms & conditions.
On 12 October 2018, the FCA published a Guidance Consultation (GC 18/4) on the Senior Managers and Certification Regime on statements of responsibilities (SoRs) and responsibilities maps (which apply to enhanced firms).