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FCA publishes review of financial incentives

The Financial Conduct Authority (FCA) has published its review of incentive schemes for sales staff in financial services firms.

The regulator found that their intervention to date had resulted in significant changes being made and welcomed the increased focus and awareness on financial incentives, but were concerned about the level of engagement and changes made by the smallest firms.

The FCA identified the following list as areas firms should concentrate on:

  1. focusing on management information and checking for spikes or trends in the sales patterns of individuals to identify areas of increased risk;
  2. doing more to monitor poor behaviour in face-to-face sales conversations;
  3. managing the risks in discretionary incentive schemes (schemes were the link between sales and bonuses is not completely formulaic and there is an element of discretion in allocating those bonuses) and balanced scorecards where staff are appraised against a range of objectives, not just sales;
  4. monitoring non-advised sales to ensure staff who are incentivised to sell do not give personal recommendations (bad behaviour was mainly found in face-to-face conversations);
  5. improving firm oversight of incentives used by appointed representatives; and
  6. recognising that remuneration that is effectively 100% variable pay based on sales, increases the risk of mis-selling and managing this risk.

For smaller firms, the FCA set out some additional points to focus on:

  1. understanding when remuneration arrangement acts like an incentive scheme, ie: where staff receive all of their remuneration from a proportion of fees, income or commission paid to the firm; and
  2. acting on the FCA guidance and taking action to improve controls where required.

Over the next 12 months it will be important for the FCA to see whether changes to incentives schemes have become part of a genuine change in the remuneration of staff or not.

The FCA expect firms of all sizes to embed their new schemes and controls, and will determine if they are delivering the intended outcome. They recognise this will be part of a wider programme of cultural change and appreciate this may take time, but will continue to focus on this area through supervision of firms and engagement with smaller firms.

The FCA has committed to further work in this area, adding that firms need to ensure that they do not put pressure on staff to similar effect through other performance management approaches instead of financial incentives.

They will launch a thematic review on performance management in Q2 looking at how firms use other performance management measures. The ABI will follow up on this piece of work.

Finally, when the FCA begins overseeing the consumer credit market in April, they will also look at the extent to which financial incentives drive poor customer outcomes as part of its work with these firms.

Background

In September 2012, the FSA published a report on the findings of a thematic review into financial incentives for sale staff.

This report showed that most firms had incentive schemes that were likely to drive mis-selling, without effective controls in place to manage the risks.

On the back of this review, guidance was drafted that set out expectations for firms to consider if their incentive schemes increased the risk of mis-selling; review whether their governance controls were adequate, and to take action to address any inadequacies.

The FSA said it would undertake follow-up work to assess how firms had responded to the guidance.


Last updated 01/07/2016