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Retailers, Dealers and Lenders. Will sales commissions become a thing of the past?

The FCA’s recent consultation on staff[1] remuneration and incentives[2] should really come as no surprise to lenders, but its reach beyond regulated lending into sales practices in retailers and dealers, the success of whose businesses is down to the growth in retail finance, may cause shockwaves throughout that sector but should it come as any real surprise, even more so for those involved in collections?[3]

Background

Maximising revenue and profit and performance management by reward schemes based solely on sales volumes is an established aspect of business practice. Similarly, consistent failure to meet sales targets has threatened the livelihoods, not only of those directly involved in selling, but also their managers and business leaders and owners.   High pressure selling, largely driven by such schemes, has been a feature in a number of sectors, as well as the perceived cause of many misselling scandals, including PPI.

Similarly, reward schemes in relation to arrears and debt based on collection volumes have been the traditional method of remuneration for collections personnel. This presents its own issues given that a customer who is in default is likely to be potentially, if not particularly, vulnerable.

Business culture

FCA messages are consistently about culture in FCA regulated businesses. The FCA has also made it clear that it would be prepared to deal with poor culture and practices in areas which fell outside its regulatory perimeter if it impacted on how the business dealt with its customers for regulated activities[4]. A business cannot have a different culture for different business activities. The customer’s interests must be at the core of everything the business does, whatever the nature of that business. Rewarding high performance and penalising poor performance by reference solely to sales volumes or profitability of sales, or sums collected, does not put customer outcomes at the forefront of the firm’s culture.

This is not a new message whether for lenders, brokers or debt collection agencies, but one which has been more difficult to embrace for those credit brokers who are dealers or retailers whose sales volumes are driven by retail finance but whose focus is on retail sales rather than finance.

The responsibility for driving culture rests with the Chief Executive and other members of the senior management team. When all firms are made subject to the new Senior Managers’ Regime (expected in 2018) the duty of responsibility will make those senior managers responsible for a failure in culture which leads non-compliance with FCA requirements and to significant customer detriment.

The FCA Consultation

The FCA’s consultation has identified a number of ways in which remuneration and incentives can result in poor customer outcomes and, based on its thematic review, provides examples of good and bad practice in incentive schemes. It looked at schemes which were likely to encourage high-pressure sales or collections, which contained ineffective controls and/or where there was a lack of appreciation of the risks which the incentives posed and the controls needed to address them.

Overriding considerations

Firms are reminded about the relationship between the FCA’s Principles for business (Principle 3 – the responsible and effective organisation of affairs with adequate risk management) and performance management and reward. Principle 6 (the requirement to treat customers fairly) is also of considerable relevance. The Principles apply to authorised firms without any distinction between regulated and unregulated activities.

Rewarding performance and dealing with non-performance – individual sales targets

Various types of commission and bonus schemes were looked at in the FCA’s review. The key message was that rewarding staff solely on the basis of commission for volume or profitability of business created a high risk of consumer detriment. This was particularly so towards the end of sale periods were a sales person was aware of a need to increase sales to achieve a particular target or commission “accelerator”.

Incentive schemes which rewarded sales or collections performance are not outlawed per se, but require a greater degree of overview to identify and mitigate the risks of non-compliance, by being balanced with factors that reward staff members for achieving positive customer outcomes.

The FCA appeared to recognise that incentive schemes that rewarded good behaviour leading to positive customer outcomes as well as sales or collections performance, where risks were properly managed, could be good for business and that the withdrawal of incentive schemes altogether might not be the right approach.

Performance Management-The Balanced Scorecard

Sales used as a key driver for performance management also created a high level of risk.

Performance management by reference to factors other than volume or profitability, such as the quality of the sales process (assessed by reference to listening to telephone recordings and independent observation), customer satisfaction, properly ascertaining product suitability, identification of vulnerable customers and the manner of dealing with those customers could be other factors for incentivising and rewarding staff. Sales performance should not be the principal factor in any assessment and should be given less emphasis than quality based factors.

Performance should be subject to objective measurement

Fear of loss of their job, as well as inability to earn bonus or additional commission, by failing to meet sales targets and the failure of managers to achieve targets within their area of responsibility, leads to inadequate emphasis being placed on customer outcomes and quality of business when carrying out performance reviews. Managers under pressure might lack objectivity so whilst internal process at managerial level for assessing compliance might go some way towards providing first tier quality assurance, a second more independent process for assessing quality of business is recommended.

Recognition is given to the difficulty of assessing quality in sales performance in face to face sales – observational techniques are less effective if the person observed knows that 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.

The Message from the Top

Earlier in this article the key role of senior management was emphasised. Senior management communication should ensure the firm’s values are aligned with its culture as well as the financial performance of the business. Key business targets should include reduced customer complaints and default and increased net promoter ratings, as well other metrics, such as how the business has improved accessibility and the quality of the marketing and sale of its products and services, from a compliance perspective. Senior Management meetings 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.

Conclusion

The Consultation proposes changes to the Consumer Credit Sourcebook which are to apply to all firms offering regulated consumer finance and impacts even on related activities which are unregulated (the sale of the underlying goods and services). The new rule will require firms to have in place procedures for assessing the risk that remuneration policies might have on the sale of products or services which might be financed by regulated credit agreements and managing that risk. The new rule will be accompanied by non-handbook guidance[5] which provides a good overview of the practices which the FCA perceive to work well and practices which they view as being high risk. Consultation closes on 4th October 2017.

For further information please contact David Wood »

[1] Covers agents and appointed representatives

[2] CP17/20- https://www.fca.org.uk/publication/consultation/cp17-20.pdf

[3] Particularly given that the risks presented by performance management schemes was highlighted in an earlier report – FG15/10

[4]  See FCA Mission Statement 2017- https://www.fca.org.uk/publication/corporate/our-mission-2017.pdf and the reference to how a firm in organising its non-regulated activities in COND 2.7.12 can affect its ability to meet the Threshold Conditions.

[5] A draft of which appears at the end of the consultation document

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FCA & Consumer Credit Regime DWF help you navigate through the changes.