New consumer credit rules and guidance published on staff incentives, remuneration and performance management

Written on 19 Apr 2018

The FCA has published its final rules and non-handbook guidance on staff incentives, remuneration and performance management to help firms carrying out consumer credit activity, identify potential risks to achieving good customer outcomes in relation to how they pay and manage staff.

Such risks can arise where remuneration and bonus schemes are driven by factors such as sales targets or the volume of debt collected. This can encourage mis-selling and poor customer outcomes, rather than focussing on product suitability, transparency and client satisfaction.

Specific rules in CONC 2.11 on remuneration and performance management policies, procedures and practices come into effect on 1 October 2018. These rules will apply to firms that carry on credit-related regulated activity, as well as to those carrying on unregulated activity, such as selling goods or services, where the purchase of those goods or services is to be financed by a credit agreement in respect of which the firm is acting as lender or credit broker.

The purpose of the new rules is to enhance the requirements in Principle 3 and SYSC 4.1.1R relating to governance and control, to ensure that firms can identify and effectively manage the risks to customers that may arise out of firms’ practices in remunerating or performance managing their employees, appointed representatives and individual agents. The rules will not apply to any commercial fee arrangements between firms, such as between a lender and a broker.

The new rules include:

  • a requirement to implement and maintain policies and procedures which identify and manage the risk of regulatory non-compliance derived from remuneration or performance management practices taking into account the firm’s business size and complexity; and
  • a reference to the newly-published non-handbook guidance entitled Staff Incentives, Remuneration and Performance Management in Consumer Credit which sets out the FCA’s expectations on mitigating risk and customer harm.

Consumer credit lenders and brokers will need to review their staff remuneration and incentive practices in view of the new requirements, to ensure that adequate policies are in place to detect and manage the risks relating to performance driven pay. Firms will need to be able to demonstrate to the FCA, if required, that they have effective governance and controls in place to monitor, identify and mitigate such risks.