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Under the spotlight: FCA focus on remuneration structures

Under the spotlight: FCA focus on remuneration structures

A Q&A explaining what the FCA are doing on remuneration, what they expect to see and what they deem 'good' to look like.

What is the FCA doing about this at the moment?

The FCA is currently undertaking a ‘thematic review’ on remuneration structures. It’s initially been looking at how staff are remunerated within a firm, with a focus in particular on how front-line sales staff are rewarded. The FCA has now broadened out its work to look at how ‘intermediaries’ (like dealers and brokers) are remunerated too – through commissions.

What does the FCA expect to see?

As with all areas the FCA looks at, it wants to be sure that all customers are treated fairly and the outcomes are good regardless of whatever commission structures are used. It will ask two questions in particular; do commission structures reflect the work done and are the long-term customer outcomes good?

What does ‘good’ look like?

The FCA is likely to look more favourably at commission structures which:

  • give good customer outcomes
  • have other quality metrics linked to, for example:

ü  customer satisfaction

ü  performance of credit agreements

ü  level of arrears

ü  complaint volumes

ü  regulatory compliance

  • build in appropriate controls and risk mitigation
  • arejustified by extra work involved, if rates vary.

What does ‘bad’ look like?

The FCA is likely to scrutinise two particular commission models very closely:

  • incentives linked to interest rates which allow sales staff to increase rates, without regard to additional costs, and;
  • instances where rewards grow significantly once certain volume targets are reached, without regard to additional costs.

What action is the FCA likely to take?

It’s too early to say – it depends what the FCA finds. But, if the regulator’s previous actions in markets other than credit is a guide, it is likely to consider options such as mandatory disclosure of commission to customers.

Where can I find out more?

It’s worth reading the findings of the FCA’s 2014 review of incentive schemes for sales staff across all types of firm. This provides some good practice examples, such as: replacing short term monthly bonuses with longer term schemes; offering team or site based incentives rather than individual bonuses; capping bonuses; and involving sales quality and treating customers fairly testing throughout.