The final FSA guidance on staff incentive schemes, examined by Karen Wagstaffe.
The Financial Services Authority (now Financial Conduct Authority) published its final guidance back in January 2013 and it aims to help financial services firms avoid creating and operating incentives schemes (pay plans) which potentially cause mis-selling.
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Does this guidance apply to automotive dealers?
In short, Yes. If you are selling insurance products and your pay plans incentivise sales staff or advisors on those insurance products then this guidance will apply to you whether you are directly authorised or an appointed representative of another firm. Principal firms may contact you to discuss your arrangements under this guidance.
Note also: The guidance may also apply to staff in more senior sales roles where individual incentives are linked to sales volumes (such as sales or general managers who may be paid bonuses linked to departmental sales).
How to manage your incentive scheme: Analyse your current scheme
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By GlobalDataThe FCA does not set out prescriptive rules on how you should incentivise your staff but firms need to make sure they are following Principle 3 of the FSA Principles for Business where "a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems". (See: fshandbook.info/FS/html/FCA/PRIN/2/1)
It also states that firms should be adhering to the Senior Management Arrangements, Systems and Controls sourcebook (see: fshandbook.info/FS/html/FCA/SYSC/3) which sets out the organisational, systems and controls requirements for firms to follow. The FSA expects firms to apply these when developing and monitoring incentive schemes.
What are the main points from the guidance for automotive dealers?
The FSA in publishing this guidance document:
- Sets out its expectations of firms in relation to incentive schemes;
- Identifies features which increase (or significantly increase) the risk of mis-selling;
- Identify features which decrease the risk of mis-selling; and
- Lists the controls firms should have to monitor schemes and mitigate any risk to consumers of mis-
- selling.
The guidance includes examples of good and poor practices to assist implementation.
What can lead to mis-selling?
The guidance states that the risks of mis-selling within automotive dealerships can result from financial incentives, sales targets, performance management and, potentially, complaints handling.
What are you expected to do?
- Review incentive schemes and consider if they increase the risk of mis-selling by sales advisors and/or the management team and, if so, how;
- Review whether your internal controls are adequate;
- Take action to address any inadequacies – this might involve changing your incentiveperformance management and development schemes;
- Where risks cannot be mitigated or adequately controlled by management, take action to change their schemes; and
- Where a recurring problem is identified, investigate, take action and pay redress where consumers have suffered detriment.
Good and bad incentive features
Any incentive scheme which increases the risk of mis-selling must be addressed.
Examples of poor incentive schemes are included within the guidance but one feature that is particularly highlighted is the "retrospective accelerator" scheme, where passing a target increases the level of incentive earned for all sales over a period, rather than just those above the target.
Other features include: where high performance can trigger significant additional incentives, higher rate of reward for higher volumes of sales, inappropriate incentive bias between products and variable salaries depending on sales.
From a positive point of view, firms should work towards incorporating features which may help to reduce the risk of mis-selling. Examples include: rewarding quality or good compliance, applying debit back (for cancelled sales) together with monitoring the reasons for cancellation, capping or reducing bonuses when sales reach a certain volume, deferring part of the bonus and linking a later payout to a quality measure, rolling targets thresholds and paying bonuses not just on sales volumes, but a balanced scorecard of other measures: sales results, customer satisfaction, sales quality results, upheld complaints and so on.
Monitoring schemes
The main message of the guidance is that firms should, on an ongoing basis, monitor their incentive schemes to identify early and mitigate the risk of mis-selling. Effective controls are listed as:
- Management information: firms should collect appropriate and sufficient information to be able to manage risk properly. They should hold regular reviews with their product suppliers to identify any trends or issues;
- Well-designed business quality monitoring: this should identify inappropriate behaviour for example, by reviewing recorded calls, observing a set sample of mystery shops, calling a set number of customers post-sale); and
- Avoiding conflicts of interest: the staff undertaking any monitoring should be sufficiently independent of the sales staff. Managers whose incentives are linked to sales volumes by staff they supervise are also in a conflict situation.
What should firms do now?
Firms should benchmark their systems against the guidance to ensure that they conform. In particular, firms should:
- Review their incentive schemes to identify features which may lead to a risk of mis-selling and make changes if necessary;
- Gather meaningful information about the operation of their incentive schemes; and
- Assess this information for any signs of increased risks on an on-going basis.
Karen Wagstaffe is director of compliance and training at Finance Cover & Training Limited
