Off the table: The FCA's continuing crackdown on risky staff remuneration practices

5 mins

Posted on 01 May 2014

The Financial Conduct Authority's (FCA) 2014/15 Business Plan and Risk Outlook published at the end of March reinforce the FCA's message that firms need to put consumers at the heart of their businesses. One area it will be focussing on in particular is how firms manage staff performance. Jessica Corsi looks at the background and considers what firms should be doing to improve staff performance.

The FCA has already identified poorly designed staff incentive schemes as a key driver of poor customer outcomes and has done a lot of work in the past year to address this. Expanding on that work, it now plans to look at other aspects of performance management, including whether or not putting pressure on staff through sales targets increases the risk of mis-selling. The FCA will be looking at firms' business models and culture to make sure that the protection of consumers and the integrity of the market are put before profits and remuneration. Its work in this area is planned to begin in the second quarter of 2014 and to end in the first quarter of 2015.

Recent high profile cases demonstrate why the FCA has identified managing staff performance as a key area to focus on this year. The FCA recently issued its largest ever retail fine of more than £30 million after it found that insurance intermediary Homeserve had serious, systematic and long running failings extending across many key aspects of its business, including mis-selling insurance policies and failing to investigate complaints adequately. In addition, its board was found to be insufficiently engaged with compliance matters and its senior management reluctant to address risks to customers if there was a cost implication involved.

Homeserve accepted that it needed to restore its customer focus and move away from a culture of putting profits before treating customers fairly. As well as the £30 million fine, it has already paid £12.9 million in compensation to customers and is expected to pay a total of £16.9 million.

Also, in March this year, Santander was fined more than £12.3 million after the FCA uncovered serious failings in the way it offered financial advice from its bank. The FCA found that there was a significant risk of Santander giving unsuitable advice to its customers, that its approach to considering investors' risk appetites was inadequate and for some people it failed to regularly check that investments continued to meet their needs, despite promising to do so.

In the light of this, what should firms be considering to tighten up staff performance?

Training, training and more training

This is crucial at all levels from the board to the lowest level, both in terms of the products being sold and the regulatory environment in which staff operate. Santander failed to make sure that new advisers were properly trained before being allowed to give investment advice. This led to customers being given misleading information about products and services and advisers not getting to grips with customers' personal circumstances before making a recommendation. At Homeserve, there was a failure to ensure senior management undertook adequate regulatory training, leading to a lack of regulatory knowledge and a failure to identify and address areas of risk where customers may not be treated fairly.

Regular performance appraisals

Appraisals help to identify and address areas of weakness and give staff a forum in which to raise areas of concern. Where individuals are found to be underperforming, employers should agree with them what steps will be taken to support and facilitate improvement. This could include additional help, supervision, training and a regular review so that performance is monitored to check that the required improvements are being made. Santander's failure to monitor the quality of investment advice meant that where poor advice was given it was not always picked up, with the significant negative consequences we have seen.

Capability procedure

In cases of continued or serious underperformance it may be necessary to take formal action under the firm's capability procedure, including issuing warnings and ultimately dismissing any employees whose performance remains unsatisfactory.

Change remuneration structures

Revisit and do not be afraid of lawfully changing remuneration structures. Are sales targets, or other remuneration practices such as bonus plans, resulting in profit being put before the needs of customers and the integrity of the market? At Homeserve, inappropriate bias was found within the remuneration structure of sales staff which incentivised them to increase the volume of products sold, irrespective of the customer's need for the product. Similarly, inappropriate bias within the remuneration structure of the complaints handling team which incentivised them to close as many complaints as possible led to a risk of complaints not being handled fairly and customers not receiving appropriate redress.

Review business models

Review business models, strategies and structures and assess whether they are contributing to poor practice, leading to profit being put before customer needs and market integrity.

The proposed replacement of the approved persons regime in banks and other deposit taking institutions with new senior managers and certified persons regimes is also intended to raise performance standards. The aim of the proposed new regimes is for senior managers to be made more accountable for their actions and more likely to be held to account for the conduct of the institution.

In addition, individuals whose role could cause significant harm to the bank or its customers will need to be certified as fit and proper by the bank on an annual basis. Firms will have to report non-compliance by certified staff and good performance management systems will therefore be essential if banks are to be able to comply with their new regulatory requirements. Finally, while the existing approved persons regime will continue for non-deposit taking firms, the FCA is looking at ways of improving its effectiveness.

Jessica Corsi is a partner at Doyle Clayton. Jessica practises in all areas of employment law, and has significant expertise in the financial services sector.

This article, written by Jessica Corsi, was originally published on Complinet at © Thomson Reuters 2014

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