Risks posed to customers from incentive schemes

The FCA is continuing the review work started by the Financial Services Authority (FSA) into firms' remuneration and incentive schemes, and the risks which these may pose to customers.

The FSA's final guidance on ‘risks to customers of financial incentives' is available here

The FCA expects all firm's to fully consider the FSA's Guidance and its subsequent Thematic Review and take appropriate action. The Guidance and Thematic Review apply to a firms internal incentive (commission) schemes as well as their arrangements with third parties, such as the schemes lenders have in place with motor dealers.

The FCA will continue to focus on the issue of financial incentives in its supervision of the financial services markets because it believes it to be an area of inherent risk to consumers. Smaller firms are considered to be less engaged with this issue – so the FCA will direct its focus towards them.  

It will also look at the related areas of how firms manage the performance of their sales staff and whether pressure put on sales staff (for example, the setting of sales targets) increases the risk of mis-selling.  A customer's claim or complaint can include allegations of things done, or not done, by a lender's agent (which may include a motor dealer under Section 56 of the CCA).

The FCA considers that many firms need to improve their management information (MI) to make sure they have the right information to identify areas of increased risk from the features of their incentive schemes.

The FSA Guidance, published in January 2013, set out a number of examples of good and poor practice, which are summarised below.