FCA raise concerns over sales incentives

Following a review of incentive schemes and performance management arrangements of 98 firms from across the Consumer Credit sector the FCA are set to address their concerns.

As a result of identifying that 40% of firms had a high or very high risk of customer detriment, FCA has issued Consultative Paper 17/20 which proposes new rules and guidance regarding incentives and performance management within Consumer Credit firms.

Firms now have until 4th October to respond and the expectation is that the new rules and guidance will come into effect in Q1 2018.

FCA’s review identified many high risk financial incentives and performance management practices, inadequate or ineffective controls and a lack of appreciation by firms and their senior management of the risks arising from their remuneration and performance management practices. The review focused on both sales and collections activities and included not only front line arrangements but also how line managers were assessed and remunerated.

Whilst FCA state that they classified practices at 40% of firms as High or Very High risk they have not actually published the criteria they used in achieving these classifications, though one assumes they are based on the elements outlined in the proposed new non-Handbook guidance that they plan to issue with the new rules. FCA state that the proposed new rules will apply to firms engaged in “credit related regulated activity”.

Whilst this term is in italics in the draft new CONC 2.11, indicating it is a defined term, it is not a term currently defined in the Glossary nor is a proposed definition included in the draft new rules. This is, presumably, an oversight by FCA. A key question is therefore whether the new rules will apply to consumer hire firms such as lease brokers which, technically, are not engaged in a “credit related” regulated activity, as well as to consumer credit firms.

One would assume that the principles are just as relevant for hire firms but at the moment it is unclear whether they are covered by the proposed amendments. Hopefully this will be clarified through the consultation process. The proposed rules and guidance will also apply to unregulated activity, such as car sales, that is financed by a “credit agreement”. Again, no specific reference to hire agreements.

FCA propose adding a new rule, CONC 2.11, which will require firms to make adequate arrangements to identify and effectively manage risks arising from remuneration and performance management schemes. The extent of the arrangements should take into account the nature, scale and complexity of the business. The new rule includes examples of the measures and procedures that firms might introduce, including:

  • Sales and collections monitoring
  • The use of management information and trend analysis
  • Procedures for taking action where employees have acted inappropriately
  • Arrangements for the approval, oversight and regular review of remuneration and performance management schemes by the firm’s governing body.


Firms must also monitor any potential conflicts of interest where the responsibility for monitoring an employee’s activities rests with their line manager.

Firms must take account of the proposed new non-Handbook Guidance, which includes examples of good and bad practices that can increase or reduce the risks from remuneration and performance management schemes.

Factors that may increase risks in remuneration schemes include:

  • Volume, profit or productivity based schemes;
  • Schemes where 100% of pay is from commission;
  • Disproportionate rewards for marginal sales, eg retrospective accelerators where, if a salesperson meets a particular target, they receive an enhanced payment for all previous sales;
  • Accelerators or stepped payments linked to specific bonus periods;
  • Incentives linked to the terms of the finance agreement, eg the size of the loan or the APR;
  • Product bias;
  • Incentives to sell finance where goods could be sold without finance;
  • Variable salaries based on volume measures;
  • Incentives that are only paid if certain targets are met;
  • Competitions or promotions;
  • Manager incentives linked to team performance;
  • Incentives to sell non-financial products where those products are typically sold with finance;
  • Schemes that include a combination of the above elements


Factors that may reduce or mitigate risks in remuneration schemes include:

  • Schemes based purely on quality;
  • Use of customer satisfaction surveys;
  • Loss of bonus for failing to meet quality standards;
  • Deferral or claw-back of incentives based on quality reviews;
  • Quality measures incorporated into the scheme;
  • Cumulative or rolling target thresholds to avoid “end of month” pressures.


Factors that may increase or reduce risks in performance management arrangements include:

  • The focus of performance management discussions – is this focused purely on sales/collections targets or on quality?
  • How disciplinary action is used – does it focus sufficiently on quality?
  • Publicising good or bad performance. Does this focus on quality?


Consumer credit firms need to understand the risks from their schemes and put in place appropriate controls, including:

  • Quality monitoring, which:
    • Should be outcome focused;
    • Should be independent;
    • Should use appropriate sampling;
    • Should be done by capable staff;
    • Should include an appropriate amount of challenge and independent oversight.
  • Appropriate MI and trend analysis.
  • Proper management of line manager conflicts of interest.


In light of this all consumer credit firms should be reviewing their remuneration and performance management arrangements to make sure they understand any risks and put in place appropriate mitigating controls. Firms should also consider whether existing remuneration and performance management schemes may have given rise to customer detriment and, if so, take action to address this.

CCAS is expert in helping consumer credit firms address such issues. With refined regulatory knowledge, operational expertise and specialist associates, CCAS successfully partner with clients to deliver broad regulatory consulting services. We focus on delivering solutions that are sustainable, robust and cost-effective to help alleviate regulatory pressure and mitigate future problems.

Please contact Nathan Cornish, Client Partner on ncornish@ccas.co.uk or 07753 451609 for more insight or to discuss how we could assist your business.


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