In the past few years the Financial Conduct Authority has shown its determination to ensure that firms embed a culture where good outcomes for consumers are central, as evidenced by the consumer duty.
Enforcement action also shows that management policies and practices, including pay and benefits, are seen as critical to doing so by the regulator, but nonetheless Bovill has seen firms fall short of expectations.
Staff need to act in good faith, which means conduct that is honest, fair, open and takes account of the customer’s interest. Company culture should support staff to act in this way, and not reward them for doing otherwise.
Where the FCA has found poor remuneration practices, it has acted.
In 2013, Lloyds banking group was fined just over £28mn for serious weaknesses in its controls. The FCA’s report found incentive schemes that created a serious risk of staff being put under pressure to hit targets to get a bonus or avoid being demoted.
Financial advisers’ incentive schemes meant they could increase their salaries by selling products to customers, leading to concerns they were failing to focus on what consumers actually needed or wanted.
The introduction of the consumer duty puts a new emphasis on remuneration, as firms need to think abut how they can align the duty’s consumer outcomes with the incentives created by their remuneration practices.
How staff are rewarded can be a key contributor to compliance with the duty, or, if poorly handled, a risk that leads to consumers suffering poor outcomes.
Focusing on good consumer outcomes means avoiding mis-selling, aggressive sales practices, or inappropriate pricing structures. Remuneration is a key lever available to managers to prevent this.
Reg flags
At Bovill we have seen complex incentive schemes where the impacts were not fully understood by the firm.
This will not cut it under the consumer duty. Management needs to ensure that it tests properly how the structure of its incentives might play out in practice.
Testing certain scenarios is a helpful way to pick out weaknesses, and can help inform any changes that need to be made to risk control frameworks.
Certain structures will be an immediate red flag to the regulator. For instance, the FCA will be wary of remuneration based on sales numbers.
Structures that give a disproportionate reward for marginal sales, where meeting a certain target triggers a large increase in earnings, will be seen as especially suspect.
These do not encourage staff to act in the best interests of consumers, but instead to pursue as many sales as possible, whether appropriate or not.
Add-ons for successful cross selling will likely come in for similar scrutiny, as they do not encourage the seller to consider whether additional products are necessary or even desirable for the consumer.
