Consumer credit - what new rules on incentives and remuneration mean for firms
08 October 2018
As the summer draws to a close so too has the time for consumer credit firms to prepare for new Financial Conduct Authority (FCA) staff incentive rules published in March. The new rules came into force on 1 October. While firms will have prepared in different ways for the deadline, they should all be aware of the FCA’s underlying messages: that it expects firms to become more customer-centric and also to focus and understand the potential “harms” that customers could be exposed to.
The new rules have two main elements:
- Firms must have procedures in place to detect risks arising from their remuneration policies and practices; and
- Firms must have measures and procedures in place to manage these.
The main changes these rules bring are heightened clarity and specificity of requirements. The need for firms to prove their detection and management of risks is a development upon pre-existing FCA rules. This means accountability and governance for incentive schemes and performance management practices will need to be sufficiently robust. Furthermore, an indirect change brought about by the new rules is a strengthened enforcement position for the FCA.
The underlying message, then, builds upon the direction the FCA signalled in its Business Plan 2018/19, Mission Statement and Approach to Consumers earlier this year. The FCA will now assess issues in terms of harm, or potential harm, to consumers and markets. This is a nuanced position and means that firms should not solely focus on “risk” but need to look at harms posed with a wider lens, as these can be potentially broader in scope. However, this also brings an opportunity to become more customer-centric and build on cultural change.
The rules do not directly require firms to overhaul their existing policies or approach to remuneration and performance management. The examples of good practice in the guidance suggest a change in overall culture - a shift to customer-centric scorecards - is the desired approach. It is worth noting similar previous guidance, for banks and insurers, has driven a customer-centric change in these sectors.
Furthermore, it is important to remember the FCA did not ban commission. As discussed, the focus is on appropriate management of harm and the wider culture in firms. Firms should therefore consider a variety of mitigating policy and procedural changes, to ensure the most appropriate and proportionate fit for the business. These could include robust remuneration governance, performance management approaches and a culture that seeks to ensure fair customer outcomes. Firms should also be ready to evidence such policy considerations as the FCA has stated a follow-up review is possible.
Of course, each firm will have taken its own path to align with the rules. Also, some firms will have elements of their businesses that pose a higher risk of harm to consumers (e.g. variable pay), and may therefore have had more to do. But, crucially, have the changes implemented made your business more aware of consumer harm? This can help your firm build consumer trust, reduce regulatory risk and promote sustainability.