Regulation & Compliance Factsheet: Incentives and managing conflicts of interest

Transcription

1 Incentives and managing conflicts of interest Q Background Within the lease broker community there are a wide variety of incentive and performance management schemes currently in place. Traditionally these schemes have played an important role in motivating employees to maximise business performance. It is important that a regulated firm understands the influence that staff incentive schemes have on: driving employee behaviour; recognising that at times this may have the unintended consequence of encouraging unexpected and even undesirable customer outcomes. Performance management and organisational culture; encouraging and rewarding quantity over quality, for example. The Financial Conduct Authority (FCA) requires regulated firms to identify potential conflicts of interest between themselves and their customers and to put in place appropriate measures to ensure that these are not having a detrimental effect on customers. Firms are specifically required to adequately manage tensions created by their remuneration schemes and performance management arrangements. The FCA recently carried out a review of a range of firms from across the Consumer Credit sector which included a focus on how front line sales staff and line managers were assessed and remunerated. Consumer Credit Advisory Services Ltd All rights reserved 1

2 Continued... The FCA identified that 40% of firms operated remuneration and performance management schemes that resulted in a high or very high risk of customer detriment i.e. customers at risk of not being treated fairly. More specifically the FCA identified three main concerns, firms had: high-risk financial incentives and performance management practices, inadequate or ineffective controls lack of appreciation by firms and their senior management of the risks their incentive schemes represent to customers Therefore, if a firm s scheme is driven solely by a narrow range of sales focussed performance indicators (e.g. volume of sales; profit per sale, etc) and they do not incorporate other key factors (e.g. adherence to your internal sales process; evidence based Management Information; successful customer outcomes etc) then the firm is at risk of causing potential customer detriment and possible intervention by the regulator. FCA Action - new rules FCA issued Consultative Paper (CP17/20) proposing new rules and guidance on incentive schemes and performance management arrangements to all consumer credit firms, which includes lease brokers. They propose adding a new rule, CONC 2.11, which we expect will come into force in Q1 2018, requiring firms to make adequate and proportionate arrangements to identify and effectively manage these risks. What prudent steps should lease brokers be considering? 1. Review existing arrangements to identify any risks arising from their remuneration and performance management arrangements and understand the factors that may influence them. 2. Put in place appropriate mitigating controls to protect your customer and your business. For example, firms could consider the following approach. Consumer Credit Advisory Services Ltd All rights reserved 2

3 Cont d What prudent steps should lease brokers be considering? a. BALANCED SCORECARD - Using a balanced scorecard approach to remuneration so that employees and agents are remunerated on a range of measures that include qualitative and well as quantitative elements. This includes information outlined in the remainder of this factsheet. b. COMPLIANCE MONITORING - Compliance monitoring (e.g. regular call monitoring, sales file review checking, outcome testing). This enables firms to evidence they have appropriate systems and controls to monitor customer outcomes and that sellers adhere to company procedures. (Separate factsheet to follow with further detail) c. MANAGEMENT INFORMATION (MI) - Ensuring access to relevant, accurate and timely compliance MI and trend analysis. d. DISCIPLINARY PROCEDURES - Procedures for taking disciplinary action where employees have acted inappropriately. o o E.g. firm should ensure they have appropriate policies in place for poor non-sales related performance as well poor sales performance e.g. non-adherence to the sales process, regular complaints, poor administration etc. E.g. In what circumstances would an employee lose some or all of their incentive payment, this should be a lever to improve standards and also be a deterrent o # e. CONFLICTS OF INTEREST - Reviewing arrangements for identifying and where applicable addressing any potential conflicts of interest to ensure these are adequate. o Including the proper management of line managers conflicts of interest e.g. to objectively manage their team sales risks f. REVIEW PROCESS - Developing a process for the regular review, approval and oversight of schemes by the Governing Body of the firm. 3. Firms should also consider whether existing arrangements may have potentially given rise to customer detriment and if so, take action to address this. Consumer Credit Advisory Services Ltd All rights reserved 3

4 Examples of factors that may increase or reduce risks inherent in schemes Depending on the structure of your scheme firms may need to consider including or eliminating one or more of the following elements to achieve an appropriate balance and to mitigate the risk of adverse customer outcomes. Increase risks Volume, profit or productivity-based schemes with no balancing quality measures Accelerators or stepped payments linked to specific bonus periods Disproportionate rewards for marginal sales, e.g. retrospective accelerators whereby a salesperson meets a target and receives an enhanced payment for previous sales Incentives linked to the terms of the finance agreement, e.g. the size of the loan or the APR Product bias towards firms that pay higher commission or volume related bonuses Variable salaries based on volume measures Incentives that are only paid if certain targets are met Competitions or promotions linked to volume, profit or productivity Schemes where 100% of pay is from commission Manager incentives linked to team productivity or profitability Selling optional non-financial products where those products are typically sold with finance Decrease risks A fixed payment amount per sale irrespective of the amount of commission received by firm Cumulative or rolling target thresholds to avoid end of month pressures Incorporate a range of TCF/quality measures into the scheme, e.g. o Cancellation rate o Funder decline rate o Sales quality scores e.g. call recording feedback o Complaints (i.e. expressions of dissatisfaction) o Customer satisfaction scores o Administrative error rate % o Customer service KPI s (Key Performance Indicators) Loss of bonus for failing to meet TCF/quality standards Deferral or claw-back of incentives based on TCF/quality reviews Performance reviews that include TCF/quality measures, rather than a sole focus on sales Use disciplinary action for TCF/quality issues not just failing sales targets Raise internal profile of good and bad performance relating to TCF/quality issues Consumer Credit Advisory Services Ltd All rights reserved 4

5 Simplified example (N.b. The examples are for indicative purposes only and should not be adopted without consultation) Firm A - Incentive scheme pays an employee a flat commission of 100 per sale. Seller Y - Makes 10 sales and all scorecard indicators are acceptable Seller Z - Makes 10 sales, 1 upheld complaint (TCF) and a persistent admin error rate of 25%; all other compliance indicators are at an acceptable standard Scenario 1: Poor practice: (focus on sales only) Firm A - Does not record the issues or discuss them with the seller, no trend identified or action taken. - No non-sales factors are taken into account when calculating incentive payable Seller Y - Incentive payable (based on sales only) is (10 x 100) = 1,000 Seller Z - Incentive payable (based on sales only) is (10 x 100) = 1,000 Scenario 2: Good practice: (reward performance, prepared to impose penalties, 1:1 with actions conducted) Firm A - Introduce a balanced scorecard system, which will: - Uplift employee incentive by 10% (i.e. 100 to 110 per sale) when all balanced scorecard standards achieved (e.g. i. TCF and sales quality reviews; ii. Admin issues; iii. KPI s) - Penalise an employee 20% of the incentive payment for each of the scorecard category fail. - A 1:1 meeting is conducted to review employee performance, which are documented, root cause analysis conducted & actions set (e.g. increase risk monitoring, additional training). Seller Y - Incentive payable at uplifted rate (10 x 110) = 1,100 Seller Z - Incentive payable is calculated as follows: Sales element = 10 x 100 (i.e. does not qualify for 10% uplift) Loses 20% of incentive payment because of the upheld complaint and Loses an additional 20% for poor administration rate - Incentive payable is (10 x 100) 20% ( 200) - 20% ( 200) = 600 Summary There is no one size fits all scheme for all firms to follow as the requirements and resources of every firm are very different. Neither is there is a necessity for it to be complicated, but ultimately it must contribute towards producing fair customer outcomes. It is acceptable to reward employees for good performance, but equally, firms must be prepared to address poor performance. Therefore, the definition of performance must be linked to much more than sales and incorporate compliance indicators. Successful implementation (including buy-in from employees) has the power to improve sales performance and drive efficiencies as errors are reduced and customer outcomes improved. Factsheet produced in conjunction with CCAS For detailed advice and guidance including compliance support please contact CCAS Nathan Cornish, ncornish@ccas.co.uk0 For questions on the factsheet content contact Amanda Brandon at BVRLA Tel: amanda@bvrla.co.uk Consumer Credit Advisory Services Ltd All rights reserved 5