The FCA’s recent consultation on staff remuneration and incentives concerns not only lenders and collections professionals, but also anyone selling finance – including dealers and retailers, writes DWF’s David Wood

Employee reward and performance management based solely on sales or collections volumes is an established business practice leading to unfair customer outcomes – the perceived cause of many misselling scandals, including PPI.

The Financial Conduct Authority’s focus is on culture even in areas which fall outside its regulatory perimeter if this impacts on how a firm deals with its customers for regulated business. The customer’s interests must be at the core of everything the firm does. Rewarding high performance and penalising poor performance by reference solely to sales volumes or profitability, or sums collected, does not put good customer outcomes at the forefront of the firm’s culture.

The responsibility for driving culture rests with the chief executive and other senior managers. The new senior managers’ duty of responsibility – applying to all firms in 2018 – will make those senior managers responsible for a failure in culture which leads to non-compliance with FCA requirements and to significant customer detriment.

The FCA Consultation

The FCA’s consultation identified ways in which employee remuneration and incentives can result in poor customer outcomes, giving examples of both good and bad practice. It looked at schemes which:

  • Could encourage high-pressure sales or collections, and
  • Contained ineffective controls and/or no assessment or management of the risks which the schemes posed.

Key Considerations

Firms are reminded about the relationship between performance management and reward and the principles for business (Principle 3 – the responsible and effective organisation of affairs with adequate risk management, and Principle 6 – the requirement to treat customers fairly). The principles apply to both the regulated and unregulated activities of a firm.

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Various types of reward scheme were looked at by the FCA. The key message was that rewarding staff solely on the basis of volume or profitability of business created a high risk of consumer detriment, particularly so towards the end of a sales period.

Such schemes are not outlawed per se, but require more overview to identify and mitigate the risks of non-compliance, and more balance with factors that focus on achieving positive customer outcomes.

It was recognised that schemes that reward good behaviour, leading to positive customer outcomes, as well as financial performance, where risks were properly managed, could be good for business and so these were not discouraged.

The Balanced Scorecard

Businesses should manage performance by reference to factors other than volume or profitability, such as the quality of the sales process, customer satisfaction, properly ascertaining product suitability, identification of vulnerable customers and the manner of dealing with those customers. Sales or collections volumes should not be the principal factor, but should be given less emphasis than quality-based factors.

Objective Measurement

Financial target-based performance schemes for managers lead to inadequate emphasis on customer outcomes and quality of business when carrying out performance reviews. Managers might lack objectivity, so while internal process at managerial level for assessing compliance might be part of first-tier quality assurance, a second more independent assessment process is recommended.

Recognition is given to the difficulty of assessing the quality of face-to-face sales – observational techniques are less effective if the person watched knows they are being observed. Other methods of assessment should be considered, but reliance should not be placed alone on customer satisfaction as that does not always identify underlying root causes of detriment.

Message from the Top

Senior management communication should ensure the firm’s values are aligned with its culture as well as the financial performance of the business. Key targets should include reduced customer complaints and default and increased net promoter ratings, as well other metrics.

Senior management should receive reports on these issues and devise schemes which reward good behaviours and customer outcomes in addition to sales (or collections) performance but only where they relate to the quality of customer engagement or improve service and discourage poor behaviours.


The consultation proposes changes to the Consumer Credit Sourcebook which are to apply to all firms offering regulated consumer finance and even impacts on related activities which are unregulated (the sale of the underlying goods and services).

The new rule will require procedures for assessing and managing the risk posed by remuneration policies on the sale of products or services which might be financed by regulated credit agreements.

The accompanying non-handbook guidance will provide a good overview of the practices that the FCA believes work well, and those it views as being high risk. Consultation closes on 4 October 2017.