Consumer credit - staff remuneration and incentives

Posted: 21st October 2015

It’s set to be a busy 2016 for you if you’re in consumer credit, with two more thematic reviews announced in August, focusing specifically on your sector. One will focus on early arrears management in unsecured lending, and the second – the subject of this article – will look at staff remuneration and incentives.

In our work with consumer credit firms throughout the UK, we’ve seen the regulatory hurdles they face, particularly in terms of authorisation. If you’re not adapting and performing in light of regulatory change, there’s a danger of getting left behind; something many organisations have found in the wake of a previous FCA crackdown in their area.

Impact of staff remuneration and incentives

The FCA is all about customer outcomes and this thematic review is no different. How you manage your firm’s incentives weighs heavily on your ability to achieve fair outcomes for customers, and to give them a sufficient level of advice. The upcoming review will help to establish whether the methods of incentivising staff meet with the need to provide adequate information and give appropriate advice to customers.

Reason for the review

The FCA is clear in its view as it states that “many consumer credit firms may be operating high-risk incentive schemes, which can often lead to poor consumer outcomes if not managed effectively”.

This seems reason enough for a review, however additionally, between 2012 and 2014, the FSA/FCA asserted that “a number of firms (including banks and insurers) had schemes that were likely to drive mis-selling”, the high level reasons being:

• Few firms had fully considered the potential risks of their incentive schemes and had therefore not taken steps to mitigate them
• Many schemes were so complex that many employees did not understand them
• Where incentive risks had been recognised, the controls firms had implemented to manage them were often lacking and / or ineffective
• A number of managers received a bonus based on their team’s sales, creating a possible conflict of interest

Preparing for the review results

The FCA is scheduled to begin performing stage one analysis this quarter, with stage two on-site visits to a selection of firms taking place in Q4 of 2015. Conclusions of the study are expected to be published in Q1-Q2 2016.

The recent paper entitled; FG15/10: Risks to customers from performance management at firms – Thematic review and guidance for firms provided a similar but less specific review of incentivised selling within the financial industry. It is apparent that there will be some parallel issues, which immediate action prior to the new thematic review could help circumvent.

A case study in the paper makes reference to “excessive focus on sales results in the appraisal process”, the use of “‘name and shame’ tables” with regards to the performance levels of agents and excess pressure for agents to favour certain products while sometimes disregarding their suitability for the customer in favour of an easier sale or higher margin.

The FCA has strongly advised in this case that all firms with customer-facing staff in the retail sector should read the report and consider:

• How performance management may increase the risk of mis-selling
• Whether their governance and controls are adequate
• Taking action where required to ensure mis-selling risks are adequately managed
• Given the announcement of the thematic review, and the outcomes of the recent paper (FG15/10), it is clear that similar directives will be given in early 2016

Huntswood’s view

It’s obvious that the intention of this thematic review centres on good outcomes for customers. A good first step for consumer credit firms would be to augment quality assurance with outcomes testing (not satisfaction surveys) that test a good variety of their various customer interactions. This testing should concentrate on fairness, not satisfaction, and will help to answer the question: “How does our approach to staff remuneration and incentives negatively impact the prospect of our customers receiving a fair and suitable service?”

Once you’ve identified any points of negative impact, review your policies and procedures and change them to reflect your new outcomes-focused approach. Your staff should be incentivised to get things right rather than simply to do more.

It will also be important to take your staff on the journey and ensure you articulate the importance of any changes you have made to their incentives and remuneration, and why you have made them. Having your employees on board with your new way of doing things will mean an easier embedding process. Staying a step ahead by being primed and prepared in this way makes the best sense to avoid being left behind.

A sustainable business model is in everyone’s best interest. An inappropriate incentive scheme that delivers poor customer outcomes will simply not deliver this.