Staff incentives in consumer credit - putting customer experience front and centre

The FCA has completed a thematic review of staff incentives, remuneration and performance management in consumer credit firms. The outcomes of this review have been published this week in a consultation paper, which also sets out the FCA’s proposals in terms of new rules and guidance as a result of its findings. The consultation period runs until 4 October 2017.

The FCA has found that there is a material risk of poor customer outcomes as the incentive schemes and performance management processes currently employed by consumer credit firms are based on volume or value of sales or collections.

The FCA is consulting on a new rule designed to impose a high level requirement that consumer credit firms understand the risks that their incentive schemes might pose to customers and have in place adequate procedures and measures to detect and manage such risks.

Firms should now start thinking about how they might restructure incentive schemes and performance management processes to shift the focus away from profitability and refocus on customer outcomes and service

Outcome of Review high cost short term credit; catalogue and internet shopping firms; store and credit card providers; hire purchase; primary and secondary credit brokers; and debt collectors.commission accounts for the majority (or all) of customer facing staff pay; different rates of commission is earned for different products (particularly substitutable ones); products sold on different terms; other rate of commission varied depending on reaching certain targets.

New Rule & Guidance

A high level rule requiring firms to have establish and maintain adequate measures, procedures and policies to

• Detect any risk to customers as a result of its remuneration or performance management policies, procedures and practices; and Manage this risk.

• A proportionality provision that requires firms, when they are deciding how to comply with the high level rule, to take into account the nature, scale and complexity of their business (including the nature and range of financial services and activities undertaken)Potential Costs to Firms of Proposals

Category of Firm Estimated Number of Firms Impacted Average one-off Costs per Firm (£)Average Ongoing Costs per Firm (£ P/A)

• Firms with 3-15 staff 7,39869-Lending (more than 15 staff)1,0132,2311,565

• Credit Broking (16-500 staff)1,8146,9441,800

• Credit Broking (more than 500 staff)9816,0004,840Debt Collection (more than 15 staff)4155,4201,043

Total Impacted Firm10,7381,786536

Comment

• The balance between fixed pay and a variable element;

• How any variable element of staff pay is constituted - the variable element should not only be tied to sales/collections volumes/targets but should also include (or alternatively comprise) a requirement tied to positive customer outcomes/treating customers fairly. The balance should be such that failure to meet the customer requirement has material impact on the variable element of staff pay;

• Possible conflicts of interest where managers are remunerated and incentivised based on the financial performance of the teams/departments they manage;

• The focus of performance management discussions – there should be a move away from focus on volume or profitability-based performance measures and a re-focus on discussion about customer outcomes/quality of service and customer experience; and

• Understanding and monitoring risks presented by incentive schemes – looking at quality monitoring by independent and capable staff focused on customer outcomes and not just process-based monitoring.