Consumer credit – Remuneration and incentive schemes that drive the right behaviours

Posted: 23rd March 2017

The FCA is soon to publish the findings of its thematic review into staff remuneration and incentives in the consumer credit sector.

They have already said that “many consumer credit firms may be operating high-risk incentive schemes, which can often lead to poor consumer outcomes if not managed effectively”. With remuneration and incentive schemes being so closely connected to new business volumes and the drive for profitability, firms and associated third parties are no doubt eager to see its contents.

The regulator of course has no issue with incentive schemes as a concept, but asserts that they need to be appropriately controlled. The FCA has previously announced the high-level reasons why it believes remuneration and incentive schemes can lead to poor customer outcomes, and we outlined these in 2015. However, with the thematic review report landing imminently, we look at what firms can expect, and how they can respond to the likely implications.

the two major Factors underpinning incentive success

A balanced approach to incentives

For incentives to be truly aligned to customer outcomes, the right culture must be embedded into the firm. The culture of any organisation filters down through the messages that emanate from the top. In turn, the customer-focused message has to be reinforced by the right infrastructure if it is to achieve its goal; there has to be a tangible way for making sure the desired culture is lived out day-to-day by everyone in the organisation.

Attracting and securing new business is vital for any firm, and sales staff will want to succeed in their roles too; but reward schemes need to be balanced against other performance measures if they are to avoid delivering poor customer outcomes. A staff remuneration and incentive scheme that is heavily weighted towards new business volumes will inevitably lead staff to concentrate primarily on that activity, which could be at odds with the need to make the right decisions for customers. Firms need to consider how they can include customer and quality measures into the weighting of incentive calculations.

A package that rewards the delivery of good customer outcomes (while still maintaining a commercial focus) must be supported by a firm’s internal culture, but more than this, there needs to be an appetite within the business to assess whether incentive schemes continue to provide the desired customer outcomes on an ongoing basis.

A robust performance management system

If a firm truly wants to deliver good outcomes for its customers, both the performance management regime and incentive scheme should align with this objective. A strong and ongoing performance appraisal system should enable the firm to keep a close eye on performance and provide for necessary action to be taken – e.g. training in knowledge and skills, as well as robust sanctions options for persistent underperformance. Management information (MI) should be used to check for spikes and trends in the sales patterns of individuals to identify areas of increased risk.

It is now common to see some of the following in firms’ assessment of staff performance:

• Productivity – the financial contribution a member of staff makes to the business remains an important factor and can take many forms, for example sales volumes and collection rates
• Quality assurance – ensures the financial contribution is a true reflection and not a short term view; the checks and balances of various tasks (including sales, collections, complaints and claims) will validate productivity figures. Crucially in this area, firms will need to make sure that they are not overly prescriptive with their views on adherence to process – can you determine instances where a member of staff has gone above and beyond process for the benefit of the customer outcome? It is absolutely vital that this does not result in penalisation, and ideally should be recognised and rewarded when appropriate
• Learning and growth – rewards for staff who take the opportunity to improve their knowledge in order to help assist any of the above elements of their performance

An overarching view of these factors can help provide assurance that staff are themselves balancing commerciality with the fair treatment of customers and adherence to internal procedures (if these internal procedures are effective, this can in turn provide some assurance over the regulatory compliance of the firm). A remuneration and incentive scheme should be designed to reward staff performance fairly and encourage development in all areas without introducing an unfair bias towards certain behaviours, intentionally or unintentionally.

Evidencing the effectiveness of incentives

Any risks that incentive schemes might carry should be recorded and monitored, as should any action you take to mitigate them. The FCA of course has no problem with people being rewarded for their productivity, but this needs to be done in a way that protects customers.

Controlling this requires appropriate MI that assesses staff performance against the right measures. Indicators of poor customer outcomes could include customer complaints, arrears and default rates, customer satisfaction scores and retention levels. The MI needs to be visible at the appropriate levels of senior management and customer outcomes need to be high on the agenda at their meetings. There needs to be robust review, challenge and implementation of remedial actions.

Moving towards the right goal

There are many permutations around incentives, and each firm needs to determine its own approach relative to the type of business it does, its target market and the risks it faces.

Rewards and incentives can be used to drive sales activity,  and their structure can provide an indication of the internal culture and level of customer-centricity in a firm.

So, when the FCA publishes its findings from the thematic review, firms will have a good opportunity to examine their own schemes against the FCA’s recommendations to assure themselves they are sending the right messages to their staff – and that their remuneration and incentive schemes are driving the right behaviours.