FCA performance management consultation and the role of human resources

The Financial Conduct Authority (FCA) has turned its attention to the role that performance management systems can play in mis-selling and poor customer outcomes. On March 16, 2015, the FCA started a period of consultation on proposed guidance on risks to customers from performance management at firms. It is relevant to all firms with staff who deal directly with retail customers. This was an area which the FCA had highlighted as needing attention in its 2014/15 Business Plan and Risk Outlook, published in March 2014. It follows on from its earlier work focussing on poorly designed staff incentive schemes, identified as a key driver of mis-selling. The FCA is keen to ensure that its progress in this area is not undermined by other poorly executed performance management practices.

Comments on the proposed guidance are requested by May 15, 2015.

Why now?

Although the FCA has not identified that the problem is widespread, intelligence from whistle-blowers and evidence obtained through discussions with firms suggest that changes to reward structures have not always resulted in a genuine shift away from a sale-focused culture. Instead, pressure to achieve sales is being exerted via other means, such as performance management practices which place an excessive emphasis on sales results. Poorly executed performance management can encourage or drive mis-selling because of pressure to meet individual targets and /or corporate plan objectives.

What sort of practices is the FCA concerned about?

The FCA is looking at formal processes, such as appraisals, underperformance procedures and sales targets, as well as less formal day to day interactions and communications between sales staff and managers about sales results that can influence behaviour.

The FCA has identified a number of practices that can create undue pressure including:

• intensive micro-measurement of sales results, without sufficient consideration of customer needs. Examples include excessive requirements to continuously report updated sales results and intensive questioning of staff after every client interaction as to why a sale was not achieved;
• pressure from having to share sales results with peers and the potential for individuals to face humiliation or discrimination. Examples include: frequent conference calls where staff are required to explain in front of peers why targets are not being met and are made to pledge to improve results; managers using sales results to influence other decisions such as when holiday can be taken, or access to development opportunities; and using sales results as the main consideration when deciding on promotions, without sufficient consideration of other factors, such as customer outcomes;
• actual performance management in practice not living up to the firms' stated policy and aims. Examples include environments in which: policies set out a supportive approach to underperformance against sales objectives, but the management culture is to rule by fear and use threats of disciplinary action; managers stress the importance of treating customers fairly, and yet the day-to-day focus is on sales results alone; and the 'tone from the top' is good, but is not always translated into the day-to day running of the business, in particular from middle management level down. 

The FCA's proposed guidance

The proposed guidance is addressed to all types of firms, of all sizes, who have staff who deal directly with retail customers.

The FCA recommends that:

• firms should review the level of pressure exerted on staff and satisfy themselves that the risk of mis-selling is being managed. Objectives for sales staff should be more balanced and include sufficient behavioural measures, including consumer outcomes, rather than just sales results. Training may help managers to be more effective in assessing staff behaviours and ensuring that the reality is that the focus is on behavioural measures and not solely sales results. In addition, sales targets should be kept under review and reduced if factors beyond an individual's control impact on results (for example economic factors affecting demand for a product);
• firms should have adequate systems and controls to identify poor performance management practices. They should pro-actively identify where ad hoc communications about sales performance could lead to undue pressure and check localised practices to ensure that prohibited practices are not continuing. Senior management should listen to what frontline staff are saying about the culture within the firm and the pressures they face and support an environment where staff are encouraged to raise concerns. Individual performance management records should be clearly documented and an appropriate portion sampled, with sampling increasing if issues are highlighted about how an individual is managing staff. Firms should maintain good relations with trade unions and staff bodies to share information about potential performance management issues and investigate concerns. Robust moderation processes should be in place to assess the fairness and consistency of staff performance appraisals, particularly as regards the evidence used to assess performance against objectives relating to expected behaviours and how products are sold;
• firms should collect information to create a picture of where undue pressure on staff might be occurring. This could compare individual or regional sales teams or staff across the firm as a whole and include information such as the percentage of staff not meeting formal or informal sales targets; the percentage of staff on personal improvement plans linked to individual sales results and how many then leave the role; rates of staff turnover; responses to staff surveys which should ask direct questions about pressure over sales results; concerns raised at exit interviews, in whistleblower cases or through 360 degree feedback schemes; and records of grievances and other complaints from staff. Mechanisms for gathering staff feedback should be independent, protect confidentiality and ensure issues are escalated and appropriate action taken;
• firms should be alert to how pressure on sales staff from performance management can increase the risk of mis-selling and take this into account when identifying when and how to focus sales quality monitoring. Areas of increased risk include managers and staff being subject to undue pressure about sales results (either from their own manager or senior staff), being assessed as underperforming (by being put on a performance improvement plan or receiving a poor appraisal grade) or being subject to disciplinary procedures.

What HR managers need to do

HR managers will have a significant role to play in ensuring that the guidance is implemented in their firm. Indeed the proposed guidance itself states that HR should have an input into how their firm sets its performance management approach, challenge how the business implements it and identify poor practice, as well as helping to ensure that any concerns are escalated to senior management. They will need to consider how their firm's approach to performance management may increase the risk of mis-selling, whether governance controls are adequate and take necessary action to ensure risks are adequately managed.

Action points include:

• reviewing appraisal objectives to include behavioural measures and reduce emphasis on sales results;
• reviewing capability procedures and the performance issues that trigger action;
• reviewing management practices to that staff are not under undue pressure to achieve sales;
• amending (and carrying out) staff surveys to include direct questions about pressure over sales results and ensuring that similar questions are asked in exit interviews;
• assisting with management training in managing staff performance; and
• designing and implementing effective moderation processes to assess the fairness and consistency of staff performance appraisals.

This article, written by Jessica Corsi, was originally published on Thomson Reuters Accelus at http://www.complinet.com/hr/news/article.html?ref=177897&high=fca+performance+management