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Simon Collins: Advisers can’t ignore FCA on incentives

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The fallout from the financial crisis made it clear there were significant issues with culture and business practices across the industry. Much work has been done since then to improve standards and rebuild trust in financial services but there is still more to do. The increased interest in institutions’ pay and remuneration packages confirms this.

Although often directed at the larger organisations and investment banks, it would be remiss of smaller firms to ignore the messages from the regulator. Indeed, a recent publication from the FCA demonstrates smaller firms would be wise to review their own remuneration structures in order to ensure they are encouraging good conduct.

Performance management and incentives have been an increasing focus, reflecting the emphasis on raising standards and personal accountability in financial institutions. The reasons are obvious: how a firm incentives its staff is a key indicator of its culture and how it treats its customers. A firm that is well run with incentive plans that reward good conduct outcomes is more likely to have the interests of consumers at the heart of how it operates. The primary objective for the regulator is to ensure this is the case.

Last July, the FCA issued guidance on performance management at firms, which should be read alongside its previous publications on incentives. While aimed at retail-customer facing firms, it can be applied more widely to most across the industry.

One of the triggers for the publication was a marked increase in the number of whistleblowing reports seen by the FCA relating to poor performance management practices, specifically in sales teams. The FCA highlights there is a significant risk of misselling resulting from “undue pressure” to meet high or unrealistic sales targets.

While it is important to note the regulator does not condemn all targets, it believes management should be realistic about what is attainable and how it can be achieved. Anything beyond that could be viewed as undue pressure and carry significant conduct risks.

At many firms it will usually fall to middle management to manage the conflicting objectives of sales targets and whether a service or product is being advised appropriately. Such managers must consider both the interest of the customer, including conduct risk and TCF, together with commercial and business interests. These should be balanced so that one does not conflict the other.

Managers should also consider regular performance management discussions, which include the use of objectives as a way of measuring development and performance, as well as determining whether targets are unrealistic or encouraging poor conduct.

Managers should also ensure any “humiliating” or distressing target-related pressures are minimised; for example, avoiding singling out weak performers without due consideration of the situation. Obviously, disciplinary action should also be considered in situations where an individual is misselling to customers, even if they are exceeding targets.

The tone from the top should encourage responsible selling practices and not over incentivise given the inherent risks. Rewards should be multi-faceted to take into account a number of different areas, including targets, customer relations, conduct and so on.

Firms should have in place adequate systems and controls to identify poor performance management practices and review any communications to staff that might lead to undue pressure (for example, using exit interviews to gauge levels of pressure). Supervisors and middle managers should receive training on how to coach and encourage staff, taking into consideration the strategic aims of a firm and its culture.

The regulators are taking an increased interest in how and where firms make their money and one obvious way to assess whether there is potential conduct risk is to look at remuneration structures and incentives. As with many other areas, the regulators will want to see that the firm has considered performance management and has applied a set of principles that reflects its aims and encourages consumer protection.

Expect to see more focus in this area in the coming months and be able to demonstrate that your firm has considered and applied a proportionate approach.

Simon Collins is managing director, regulatory, at Eversheds Consulting



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