The FCA has released finalised guidance on performance management for firms (FG15/10). This is aimed at all firms that have staff dealing directly with retail customers. It can be tempting to think that it applies only, or mainly, to banks and other firms with a vast direct sales force but the regulator has made it clear this is not the case.
In the opening section of the guidance there are several very clear messages, most of which should not take firms by surprise:
- A poor culture starts at the top. It is therefore the responsibility of senior management to ensure that whatever performance management processes are used, they do not drive poor behaviours that in turn lead to poor customer outcomes.
- Whatever performance management or incentive tools are used, they will inevitably drive behaviours by staff at all levels looking to optimise their performance in the eyes of the firm under those processes. Firms and their senior management should largely be able to predict this and should ensure that appropriate controls are in place to deal with it.
- Form over substance: removing a direct link between “sales” and performance/remuneration will make no difference if an indirect link between the two persists through practices on the ground.
It is interesting to hear that much of the FCA’s work has been prompted by whistleblowing from staff within firms. This indicates that staff subject to poor performance management processes are aware of it and are choosing to do something about it, rather than just go along with it, as may have been the case before.
The flip side of this is that it could also indicate firms’ senior management are not getting the message, which is only likely to increase the FCA’s focus in this area. If staff at lower levels can see there is a problem, then the FCA would expect senior management to be aware of and dealing with it. If they are not and it comes to the FCA’s attention via whistleblowing, then senior management are likely to be very much on the back foot when they come calling.
If asked by the regulator, all firms should be able to demonstrate quickly and clearly that they are taking the following steps:
- An analysis should have been undertaken of what risks a firm’s performance management processes are likely to generate. The firms should then decide if those risks are unacceptable or if they can be managed.
- If a firm considers that the risks can be managed, they need to have decided how they will manage them, then do it and document it.
This is an exercise that all firms, if they have not done it already, should be looking at now. The process for ongoing monitoring of the risks should also be robust.
Another important point is the whistleblowing. As already mentioned, it appears a lot of the FCA’s work has been driven by such. If staff are whistleblowing to the FCA that must mean they do not feel they can do so internally, or that if they did it would not be taken seriously. This is a clear sign of poor internal culture. Firms should work on ensuring they have an open and supportive culture under which feedback from staff is proactively encouraged. This is a no brainer. It must be better for firms to seek this feedback internally than risk a member of staff going straight to the regulator.
Furthermore, firms have to show they then act on any potentially negative feedback from staff and take steps to address the issues raised. It is all pretty obvious stuff. The FCA wants to see firms completing the circle: good senior management attitude, risks identified and managed through appropriate procedures, open and supportive culture from top to bottom, regular reporting and feedback, and that feedback being considered and used back at the start of the process to tweak any areas where the firm is falling short.
One thing is certain: the FCA will not be letting up in its focus on this area. It is still not satisfied that firms are taking the issue seriously. Clear warnings and some very practical guidance is being offered to firms. It is now up to them to take up the mantle.
Alan Hughes is partner at Foot Anstey LLP