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Finalised guidance
Contents
1 Our expectations
2 Incentive scheme features that increase the risk of customer harm
3 Incentive scheme features that might reduce the risk of customer harm
4 Performance management practices that might increase or reduce the risk of customer harm
5 Managing the risks from incentive schemes and performance management
6 Glossary of terms used
FG18/2 Staff incentives, remuneration and
performance management in consumer
credit
March 2018
Guidance consultation
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Finalised guidance
1 Our expectations
1.1 The way staff are paid and managed can often influence the way they behave with
customers.
1.2 Before we took over responsibility for regulating consumer credit in April 2014, our
predecessor, the FSA, carried out work on financial incentives across a variety of firms
including banks, insurance companies and investment firms. In January 2013 we issued
guidance in FSA-FG13/01 Risks to customers from financial incentives.
1
1.3 We have reviewed incentives schemes in consumer credit firms. As a result, we have
introduced a new rule, handbook guidance and this non handbook guidance to specifically
help consumer credit firms identify the risks their practices might pose to consumer
outcomes and understand what is expected of them.
1.4 Firms carrying on credit-related regulated activities must follow certain rules and take
into account relevant guidance about how they manage their business and treat their
customers. These are set out in the FCA Handbook.
2
They include provisions in the
Consumer Credit sourcebook (CONC)
3
, as well as other rules such as the Threshold
Conditions and Principles for Businesses.
4
1.5 Our rules and guidance does not specify how firms should design and run their pay
(remuneration) and reward (incentive) schemes. But they must take reasonable care to
organise and control their affairs responsibly, effectively and with adequate risk
management systems.
5
A firm’s business model must be suitable for the regulated
activities it carries out.
6
COND 2.7.12G states that our assessment of this threshold
condition may not just be limited to a firm’s regulated activities, if we believe that its
other business activities may have an effect on its regulated activities.
1.6 The Senior Management Arrangements, Systems and Controls sourcebook (SYSC) of the
Handbook sets out the organisational and systems and controls requirements for firms.
We expect firms to apply Principle 3 (A firm must take reasonable care to organise and
control its affairs responsibly and effectively, with adequate risk management systems),
the Threshold Conditions and SYSC when it develops incentive and remuneration
schemes for their staff. We also expect them to have a mitigation strategy in place to
manage any risks to consumers.
1
www.fca.org.uk/publication/finalised-guidance/fsa-fg13-01.pdf
2
FCA Handbook: www.handbook.fca.org.uk/handbook/
3
Consumer Credit sourcebook (CONC): www.handbook.fca.org.uk/handbook/CONC/
4
See for example Principles for Business (PRIN) www.handbook.fca.org.uk/handbook/PRIN/ Senior
Management Arrangements, Systems and Controls (SYSC) www.handbook.fca.org.uk/handbook/SYSC/ and
Threshold Conditions www.handbook.fca.org.uk/handbook/COND/
5
Principle 3 of the FCA’s Principles for Businesses
6
paragraph 2F(1) of Schedule 6 to the Financial and Services and Markets Act 2000 (FSMA)
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1.7 This guidance does not apply to firms to whom CONC 2.11 does not apply.
1.8 The types of controls and governance a firm must have in place should reflect the nature,
scale and complexity of its business and the risk its activities may pose to customers.
There is no ‘one size fits all’ approach to incentives and controls. This guidance gives
examples of both good and poor practice we have seen at consumer credit firms, but it is
each firm’s responsibility to assess whether these examples could apply to their business.
These examples are not exhaustive and firms can use other approaches as long as they
work effectively.
Identifying risks
1.9 We expect firms to identify and assess the potential risks to customers that might arise
from their consumer credit activities. In particular, we expect firms to consider how
incentives or performance management might cause, or increase, the risk that they may
not comply with our requirements (we abbreviate this below to ‘consumer harm’).
1.10 Risks are likely to occur where staff can be rewarded for actions or behaviours that are
contrary to achieving good consumer outcomes and which could result in customer harm.
For example, staff who are rewarded for selling consumer credit products regardless of
whether they sold them appropriately. Or where staff are rewarded for the sale of retail
products in circumstances where the sale of finance was inappropriate and helped secure
the sale of the retail products.
1.11 Firms may reward staff in different ways. This could include financial incentives (eg
bonus or commission payments), praise or recognition (eg in performance discussions
with their line manager) or other non-monetary incentives (eg prizes or extra holiday).
1.12 Some incentive schemes can result in particular transactions being at greater risk than
others. For example, where a staff member is coming towards the end of a bonus
calculation period, or is close to reaching a sales or collections target. Firms should
identify whether any transactions are at greater risk so that they can ensure controls
adequately manage the risk.
1.13 We consider that firms should assess risks by taking into account how likely a risk is to
occur, and the potential level of harm to customers if it does. The level of harm can differ
between customers. For instance, vulnerable customers may suffer greater harm because
of inappropriate practices.
1.14 Section 2 of this guidance sets out some examples of how incentive schemes may
increase the risk of customer harm. Section 3 gives some examples of how firms have
introduced features into their incentive schemes that reduce this risk, along with
guidance on how firms might implement these effectively. Section 4 explains how
performance management practices may affect the risks to customers.
Managing risks
1.15 We expect firms to have effective systems and controls in place to manage the potential
risks that may arise from their incentive schemes and performance management. It is
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equally important for firms to have the right culture and policies in place to deliver the
right outcomes for consumers. Because the nature of the risks posed by firms’ business
models and incentive arrangements vary, so does the nature of appropriate controls to
manage those risks. A firm’s assessment of the controls it needs should take into account
its assessment of risks, including those from incentives schemes or performance
management as discussed above.
1.16 There are a wide range of controls built into the way firms conduct business and the
processes their staff follow. These differ widely between different firms, but could include
having:
staff with appropriate skills and knowledge to perform their duties
clear guidance, process manuals or training for staff on how to complete tasks
restrictions over which staff can carry out specific tasks
forms that staff complete or evidence they record to show they have carried out
required tasks or obtained required information
defined criteria for making decisions about transactions (such as lending criteria)
review, approval or sign-off for certain transactions
management oversight of, and support for, staff
1.17 Firms should satisfy themselves both that staff are following their processes and that
they are leading to appropriate customer outcomes. They may choose to do this using:
management information that helps to identify potential indicators of risk and can
direct other testing or controls to the highest risk areas
business quality monitoring that reviews whether transactions are completed
appropriately and, importantly, whether the right outcomes are achieved for the
customer
1.18 Firms should ensure that controls are able to detect and address or prevent serious
problems. To do this, controls should:
be carried out by staff (or outside parties) who are sufficiently skilled and sufficiently
independent of the staff and processes they are monitoring
be sufficiently challenging and robust
address key risks (including for example, where incentive schemes mean that
particular transactions are at greater risk of causing harm)
consider customer outcomes as well as the process that was followed
result in the firm taking appropriate action where it finds problems
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be supported by senior management to emphasise the importance of controls and
business-wide support to ensure the controls have the intended impact on staff
behaviours
1.19 If firms find that it is not practical or cost-effective to manage the risks posed by some
high-risk elements of their incentive schemes, they may choose instead to remove or
amend those elements.
1.20 Section 5 sets out further guidance on ways firms may try to manage the risks arising
from their incentive schemes and performance management.
Monitoring and reporting risks
1.21 Firms should have effective governance processes in place to assess and regularly review
their incentive schemes, the risks they present and how effective controls are. To do this,
senior management should ensure they receive sufficient information to effectively
assess the extent to which risks are materialising, any likely customer harm and the
effectiveness of any actions taken to manage or reduce them.
1.22 Where issues occur that have a significant impact on customers, the firm should identify
them promptly and bring them to the attention of senior management. Management
should, in turn, assess the seriousness of any issue and whether it is appropriate to
notify the FCA at the earliest opportunity.
7
1.23 Section 5 includes guidance on some ways firms may exercise challenge and oversight
over controls and use management information to monitor how effectively they are
managing risks.
1.24 We remind firms of their record-keeping obligations in SYSC 9.1. The purpose of these is
to enable us to monitor how well firms are complying with their regulatory requirements.
7
See Principle 11 ‘Relations with regulators’: www.handbook.fca.org.uk/handbook/PRIN/ and SUP 15.3.8
‘General Notification Requirements’ www.handbook.fca.org.uk/handbook/SUP/15/3.html
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2 Incentive scheme features that increase
the risk of customer harm
2.1 Part of our thematic review considered whether the way firms paid their staff increased
the risk of customer harm. Incentive schemes where staff receive higher pay or
commission for additional sales can increase the risk that those staff might cause
consumer harm by breaching their regulatory obligations. Similarly, schemes that reward
collections staff for the amount they collect can increase the risk of poor practice such as
aggressive collections or inappropriate lack of forbearance.
2.2 We recognise that firms may want to incentivise their staff and may choose to implement
pay schemes that reward appropriate sales or collections activity. But it is important that
firms recognise the risks from their pay schemes so that they can either introduce
appropriate controls to manage those risks, or adjust their schemes to reduce them.
2.3 We have given some examples of elements of schemes that increase the risk of customer
harm, below. This is not an exhaustive list but may help firms to identify and assess the
risks posed by their own schemes.
Volume, profitability or productivity-based incentive schemes
2.4 Incentive schemes based on the volume of sales can increase the risk that staff will seek
to secure sales inappropriately. Many firms now recognise that promoting a focus on
treating customers fairly can have longer term benefits, such as increased customer
loyalty. As a result, they have moved away from sales bonuses that are purely based on
sales volumes.
2.5 Incentive schemes for collections staff based on the amount they collect can increase the
risk that staff will use inappropriate methods to collect repayments. Some firms told us
that when they moved away from incentive schemes based on cash collected to schemes
based on quality and customer service, they have seen many benefits. These included
improved staff satisfaction and retention and an overall decrease in customer default
rates.
2.6 Schemes based on other measures that directly relate to sales or collections volumes,
such as profitability measures (eg commission calculated as a percentage of the profit
generated by each loan sold), can also have a similar negative effect to volume-based
bonus schemes.
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2.7 Incentives based on productivity metrics (such as average handling time or number of
transactions handled) can also carry risks. Firms should treat customers in arrears that
are particularly vulnerable, such as those with limited mental capacity or mental health
difficulties, fairly and appropriately. Productivity-based incentives could discourage staff
from recognising vulnerability if doing so is likely to affect their bonus.
100% variable pay
2.8 Where staff pay is purely variable (such as sales or collections commission with no basic
salary) they may become dependent on making a minimum level of commission. This
significantly increases the risk that staff may engage in inappropriate sales or collections
practices to earn commission.
Example of
increased risk
Example of
increased risk
2.9 Risks may be increased where a member of staff is unable to work for part of a month,
for instance because of a period of holiday or illness. They may have very limited time to
make the volume of sales or collections they need to earn enough commission to meet
their own commitments for that month.
2.10 There are similar risks if staff receive an element of fixed pay, but a significant proportion
of their pay is variable, as staff may depend on the variable pay.
Disproportionate reward from marginal sales/collections
2.11 Where one transaction (eg a sale or collection) can have a very large impact on an
individual’s pay, that transaction may be at particularly increased risk. This could
happen, for example, where staff earn a bonus for reaching a specific sales target. If a
staff member is one sale away from reaching that target, they could have a very high
incentive to make that sale. This type of transaction is known as a ‘marginal transaction’.
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2.12 One type of scheme that can lead to disproportionate rewards for marginal transactions
is where the commission for each sale in a period is dependent on the total number or
value of sales in that period. This is known as a ‘retrospective accelerator’. In this type of
scheme there will be a point where one extra sale will both earn commission on that sale
and increase the rate of commission on all the other previous sales made in the period.
So there is an increased risk of mis-selling where a salesperson is close to reaching the
number of sales that will increase their commission rate. Similar risks apply where
retrospective accelerators are used for collections staff.
Example of
increased risk
Example of
increased risk
Accelerators or stepped payments
2.13 In some schemes, staff only earned commission on sales or collections above a minimum
target level, or earned it at a higher rate on all transactions above the target. While this
may not present the same level of risk as the ‘retrospective accelerator’ above (where
increased commission is paid for past, as well as future, transactions), it could still
encourage inappropriate behaviour.
2.14 Near the end of a bonus period, staff could try to maximise the number of transactions
completed before the start of the new bonus period, when their commission rate would
drop back down. This could, for example, increase the risk of staff inappropriately
pressuring customers to take out finance.
Example of
increased risk
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Incentives linked to the terms of the finance
2.15 Some firms paid staff incentives that were linked to the profitability of the loan products
sold. This created a direct link between the commission earned by sales staff and terms
such as the interest rate charged or the amount borrowed. This could increase the risk
that staff might inappropriately sell loans that are more profitable for the firm but
unsuitable for the customer. Staff might also subject customers to high-pressure selling
to take out loans for a larger amount than they originally requested.
Example of
increased risk
Example of
increased risk
Example of
increased risk
Product bias
2.16 If sales staff are able to offer different finance products that earn them different
commission amounts, there is a risk they might recommend a product that earns them
more commission – even if it is unsuitable for the customer’s needs.
Incentives for sale of finance
2.17 When customers are purchasing high-value retail goods, they may pay close attention to
the features and price, but less attention to the terms of finance to fund the purchase. So
if the retailer provides finance to fund the purchase, there may be greater opportunity for
staff to influence the sale of finance through inappropriate sales conversations.
2.18 Where sales staff receive high levels of commission for selling finance compared with any
commission they earn on the main product, there is a greater risk that they might sell
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the finance inappropriately. For example, by misrepresenting the terms of the finance or
not making it clear that the finance is optional.
Example of
increased risk
Variable salaries that change based on volume measures
2.19 In some firms, sales staff did not receive commission on individual sales, but were paid a
salary that was directly linked to the volume or value of sales made in the previous
period. An individual’s salary could either increase or decrease based on sales made. We
have also seen similar schemes for collections staff based on the amounts they collected.
2.20 With such a scheme, any change in salary level can have a long-term effect on individual
staff members. For example, if sales salaries are reviewed on a quarterly basis, staff will
know that failure to meet sales targets could affect their pay for the next three months.
This effect would be even greater with half-yearly or annual reviews.
2.21 Where there is a clear link between staff sales or collections performance and their
movement between salary bands, there is an increased risk that staff will engage in
inappropriate behaviours to achieve the relevant targets.
Example of
increased risk
Example of
increased risk
Volume-based measures to decide whether incentives are paid
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2.22 Incentives which are only paid if staff meet all minimum targets on a range of different
volume-based measures can lead to sales or collections which meet staff quotas, rather
than customer needs. Staff may focus disproportionately on meeting one particular
target that they perceive to be more difficult or which they are performing poorly against
in the current period.
Example of
increased risk
Competitions or promotions
2.23 Campaigns or promotions designed to increase sales volumes, amounts collected or
similar can increase the risk of inappropriate behaviour. Where staff receive prizes or
rewards for their performance during the campaign, the risk of inappropriate behaviour
may increase depending on the monetary value of the prizes available.
Example of
increased risk
Incentive schemes for managers that are linked to team performance
2.24 Some managers of customer-facing staff earned bonuses directly related to the
performance of the team they managed. Such schemes are likely to encourage managers
to focus on the measures that will determine their bonus payments.
2.25 Managers’ bonuses that depend on sales or collections volumes, rather than, for
example, quality measures, could make managers put pressure on customer-facing staff
to achieve those volumes. This creates obvious risks of harm to customers.
2.26 Where customer-facing staff and their managers are both rewarded on similar volume-
based measures, this can reinforce and amplify the risks.
Example of
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increased risk
Incentives for sales of non-financial products
2.27 Where sales staff can earn incentives for the sales of non-financial products, finance
options can be used to help secure a sale. This is particularly relevant for expensive
products that a customer may not be able to pay for outright. This is particularly
common among secondary credit brokers that sell retail goods on finance, such as cars,
furniture or home improvements.
2.28 In these circumstances, even if there is no direct incentive for selling the finance, there is
a risk that sales staff might behave inappropriately to earn commission on the sale of the
retail goods. This kind of inappropriate conduct could include misrepresenting the terms
of the finance product or inappropriately pressuring customers into taking finance.
2.29 If any of the higher risk features covered earlier apply to incentives for the sale of non-
financial products, these may increase the risk related to selling linked financial products.
Example of
increased risk
Example of
increased risk
2.30 Some firms sell retail goods to customers using an associated rolling credit account
facility. An example would be online accounts where customers buy goods through a
linked credit account. These firms may choose to incentivise their staff to sell the retail
goods. This may lead staff to use high-pressure selling to encourage customers to buy
goods using the available credit facility, particularly where the staff can see the amount
of credit customers have.
2.31 In these cases, firms should consider whether the incentives could affect how appropriate
their approach is to setting or increasing credit limits or monitoring account activity, eg
for signs of financial difficulty. If staff are incentivised to sell retail goods, this could lead
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them to pressure customers to use more of the available credit than they can
comfortably repay.
Schemes that combine several high-risk elements
2.32 Where incentive schemes include more than one of the high risk elements above, these
elements can combine to create a particularly high risk environment. Firms should be
aware of how the different elements of their schemes interact and how much they may
reinforce or increase risks from each individual element.
Example of
increased risk
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3 Incentive scheme features that might
reduce the risk of customer harm
3.1 The way staff are paid can have a significant influence on the way they behave. So
incentive schemes that reward staff for achieving appropriate outcomes for their
customers can, if properly implemented, reduce the risk of customer harm. But these
schemes do not completely eliminate all risk, and firms should still manage the remaining
risk.
3.2 We have identified below some examples of schemes that firms have successfully used to
reduce the risk of harm. We have also given examples of where schemes have been
poorly implemented; reducing the positive impact they might have had on risks. For the
purposes of this report, ‘poor practice’ may include schemes that do not mitigate risks in
the way intended because they are poorly implemented, may increase risk or miss
opportunities to reduce risk. The incentive schemes in this section may not be practical
or appropriate for some businesses. Firms should consider whether the features listed
might, together with their performance management, governance and controls, reduce
the risk to their customers.
Incentive schemes based purely on quality or customer service measures
3.3 Where staff receive bonus payments based mainly on quality measures that assess
customer outcomes effectively, it gives these staff a direct incentive to act in the best
interests of customers. This can also give staff a tangible demonstration of the value the
firm places on treating customers fairly.
Good practice
3.4 Measures that assess customer satisfaction may not necessarily reflect customer
outcomes. For example, if staff misrepresent the terms of a finance product during a
sale, the customer may feel very satisfied with the transaction but not be aware that the
product terms actually make it unsuitable for their needs.
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3.5 However, bonus payments based on customer satisfaction can encourage staff to
consider the needs of their customers, particularly if there are no other volume-based
bonus payments that could encourage inappropriate behaviour.
Good practice
Reductions in, or disqualification from, bonus for failing to meet quality standards
3.6 Some firms operate schemes where a quality requirement or gateway must be met in
order to qualify for any bonus. If a gateway is implemented properly, based on robust
checks and/or measures that detect inappropriate behaviour, it can reduce the risk of
staff selling inappropriately to earn high bonuses.
Good
practice
Every month a lender undertook QA reviews for a sample of
calls with customers to assess both the process followed and
outcome achieved for the customer. Each call was scored and
if the overall QA score for a staff member fell below the target
level, that individual would not qualify for any bonus in that
month. If any call included a severe breach that was likely to
result in customer harm, that staff member would not qualify
for a bonus, regardless of their QA score on any other calls.
Poor practice
Staff at one lender could be excluded from receiving any
bonus if their QA scores were too poor. However, the QA was
unlikely to pick up many issues as the number of transactions
sampled was very low and were unlikely to cover crucial time
periods like the end of a bonus calculation period when staff
might be under pressure to meet targets. The qualifying QA
requirement was set at a low level. This meant that if a
problem was identified it was unlikely to result in a bonus
being withheld, and if severe misconduct was found it would
not result in automatic withholding of a bonus.
3.7 Some schemes reduced the bonus to reflect poor QA scores. However, effectiveness of
these schemes depends on the extent of the reduction relative to the bonus that can be
earned based on other measures. For instance, if the increase in commission that staff
can earn by selling inappropriately is greater than any deduction for QA failures, the QA
reduction is unlikely to influence their behaviour significantly.
Poor practice
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Deferral or clawback of incentive payments
3.8 Firms use a number of measures as indicators of potential quality issues. However, in
many cases these may not be measurable until some time after the original transaction
has been completed. For instance, if a product is cancelled within a short period of the
sale, the customer may simply have requested to cancel because they changed their
mind. Alternatively, it could be because staff described it inaccurately to the customer or
did not give them enough time to consider the terms of an agreement before entering
into it.
3.9 To incorporate these measures into bonus schemes, some firms either defer bonus
payment until a measurement can be made, or have clawback arrangements to recover
commission or bonus payments if a measure later suggests it may have been earned
inappropriately. Such arrangements can help to reduce the risks posed by some elements
of pay schemes but are unlikely to eliminate risks associated with, for instance, volume-
based bonus schemes.
3.10 Deferral or clawback arrangements can be most effective where transactions that would
trigger a deduction are investigated to understand the reasons. Reasons include whether
a customer cancelled a product because they felt pressured to buy, or because of
changes in their circumstances that neither they nor sales staff could reasonably foresee
at the time of the sale.
Good practice
Good practice
Incorporating quality measures into incentive schemes
3.11 Bonus schemes based on a number of elements including quality measures (eg ‘balanced
scorecards’) can help balance the risk arising from volume or profitability elements. The
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more prominence given to quality measures in the bonus calculation compared with
volume elements, the more effective this is likely to be in reducing risk.
3.12 The most effective quality measures assess customer outcomes (rather than, for
example, just customer satisfaction). While these schemes may reduce the risk
associated with other elements of the bonus calculation, they will not remove it entirely.
So they may be most effective in mitigating risk when they are combined with penalties
for quality failures, such as withholding a full bonus for any quality failures that result in
customer harm.
Good practice
Good practice
Poor practice
3.13 Staff at some firms received bonuses based partly on their individual performance on
quality measures and partly on team performance on volume measures. This can reduce
the incentive for any individual to increase their personal sales or collections figures by
treating customers inappropriately. This is because staff face individual penalties for
quality failures but would share any reward for increased sales or collections figures.
Good practice
3.14 However, team bonuses can also lead to peer pressure, which can significantly increase
the risk of poor treatment of customers to maintain team performance. This may be a
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particular problem in small teams where team members know each other’s performance
figures.
Poor practice
Cumulative or rolling target thresholds
3.15 Where a firm pays volume-based incentives, these can be based on cumulative figures or
on a rolling average, such as average monthly sales for the last 12 months. This can
reduce the immediate impact on an individual if they perform poorly on volume measures
in one specific month. It can also reduce pressure on them to maintain consistent
volumes every month because they need to meet their own financial commitments.
However, firms employing such a threshold should be aware that potential conduct risks
may still arise. For example, where sales staff underperforming in one period seek to
exceed averages in the following month to ensure that they meet the target moving
average.
Good practice
Recognising actions that are in the interest of customers within incentive schemes
3.16 With some volume-based incentive schemes, there are scenarios where acting in the best
interests of a customer could have a negative impact on a staff member’s bonus. An
example of this could be where the staff member exercises forbearance that would affect
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their cash-collected target. Some firms have adjusted their bonus scheme so that staff
members who take the most appropriate course of action for the customer’s
circumstances in particular scenarios do not lose out financially. For example, if a
customer is referred to debt advice and enters a debt solution (eg a payment plan), this
could be treated in the same way as if they had paid in full for the purposes of bonus
calculation.
Good practice
Poor practice
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4 Performance management practices that
might increase or reduce the risk of
customer harm
4.1 While monetary incentives can have a major influence on staff behaviour, performance
management can also be crucial. Performance management includes both formal
processes (such as documented annual appraisals) as well as informal processes (such as
day-to-day conversations between staff and their line manager).
4.2 Performance management is often quite subjective, and is therefore open to variations in
the way it is applied locally. Informal performance management processes can make it
difficult for senior management to see any local variations. It is therefore important that
firms consider risks arising both from the design of their formal performance
management process and from the way formal and informal processes are implemented
in practice.
Focus of performance management discussions
4.3 Where performance management discussions focus on one particular set of measures or
aspects of performance, this is likely to encourage staff to focus on those aspects they
will be challenged on. This can encourage appropriate behaviour where, for example,
quality and customer outcomes are discussed prominently.
4.4 However, if performance management discussions focus on volume or profitability-based
performance measures, with relatively little discussion of quality or customer outcomes,
this can encourage staff to focus on volumes at the expense of quality.
4.5 Where performance management discussions are documented, this may give an
indication of where the majority of the discussions focused. However, management
should be aware that documentation might not reflect the true focus of verbal
discussions, particularly if those discussions move away from the direction senior
management has given line managers.
Good practice
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Poor practice
Volume-based or monetary targets vs quality-based targets
4.6 In some firms, staff were given targets they were expected to meet for a range of
different measures. While these were not directly linked to staff pay or bonuses, staff
were challenged where they failed to meet the target figures.
4.7 Where targets are predominantly or exclusively about the number of sales, value of
sales, cash collected or similar measures, they can encourage staff to focus on reaching
volume targets at the expense of maintaining quality.
Example of
increased risk
4.8 Targets for quality measures that are discussed regularly and prominently with line
managers can encourage staff to treat customers appropriately and help reinforce the
importance that management places on quality.
Good practice
Poor practice
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Use of disciplinary action
4.9 Where failure to meet monetary or volume-based targets can result in disciplinary action,
or ultimately dismissal, this can provide a very strong incentive to generate additional
sales. For example, if a member of staff has received a warning for failing to meet sales
targets and knows they will be dismissed if they do not meet targets in the current
month, they might engage in inappropriate sales practices to generate additional sales.
Example of
increased risk
4.10 Even where there is no direct formal link between volume-based performance measures
and disciplinary action, managers could still use the threat of disciplinary action to drive
sales or collections volumes. For example, managers might take disproportionately
harsher actions for quality failures by staff who perform poorly on volume measures. So
senior management should satisfy itself that disciplinary action is used appropriately to
help drive the correct desired outcomes.
4.11 Where disciplinary action that is genuinely and fairly based on the results of quality
testing or customer outcomes can encourage staff to appropriately consider the interests
of customers. This can be particularly effective where firms differentiate between quality
failures that relate purely to process and those that could result in customer harm.
Results affecting other decisions
4.12 Where performance against volume targets is used to influence other staff-related
decisions, this can increase the pressure on staff to perform against those targets.
Examples are where managers will only approve leave for staff who reach sales volume
targets, or where promotion or development opportunities are dependent on sales
volumes without any consideration of customer outcomes.
Multiple targets for different elements
4.13 Staff may be measured on a wide range of different measures and expected to meet
targets for all measures, or risk being challenged on why they have not met any
individual target. This could drive an inappropriate focus on elements of the targets they
have not yet met. In the case of sales targets for different products, a salesperson might
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direct customers to products where they haven’t yet made their sales target even if that
product is clearly unsuitable for the customer’s needs.
Example of
increased risk
4.14 However, monitoring the sales achieved by individual staff down to different product lines
may be useful to help identify indicators of risk. For instance, if one staff member
consistently sells a particularly high volume of a product where the potential benefits to
customers are not immediately obvious, it could indicate that they are targeting
customers with unsuitable products.
Publicising ‘good’ or ‘poor’ performance
4.15 Publishing individuals’ performance on monetary or volume figures (eg leaderboards of
highest sellers or most cash collected) can lead to staff feeling significant peer pressure
to perform against those published measures. This can potentially be at the expense of
quality. This pressure can be increased where the ‘worst’ performers are highlighted for
attention, for example by managers asking them to publicly explain their low
performance during team meetings.
Example of
increased risk
4.16 Conversely, recognising good performance on quality measures or examples of good
customer outcomes can help promote appropriate behaviour in the interests of customers
and create pride in achieving good customer outcomes.
Good practice
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5 Managing the risks from incentive
schemes and performance management
5.1 Customers can lose out if firms do not have effective governance arrangements and
controls to identify and manage the risks arising from their incentive schemes. Firms
should assess the adequacy of any controls in relation to the risks they seek to address.
The previous sections give firms guidance on some features that might increase or
reduce the risk. But these are not exhaustive and it is important that firms perform their
own assessment, taking into account any issues that are particular to their business.
5.2 Effective governance and controls may include:
robust risk-based business quality monitoring and adequate controls to mitigate
the risk of inappropriate behaviours from staff during sales or collections
conversations, or other customer interactions
management information to identify, and act upon, trends or patterns in individual
staff activity that could suggest an increased risk of customer harm as a result of
incentive schemes or performance management
proper management of line managers’ conflicts of interest
effective oversight, approval and regular review of incentive schemes
5.3 We have identified below some examples aspects of governance and controls that may
help firms manage their risks effectively. We also give some examples of features that
may undermine how effective controls are. Firms remain responsible for ensuring that
they have adequate controls in place, regardless of any role a third party may play in the
control environment.
Understanding of risks
5.4 Firms should ensure that they have adequately identified, understood and assessed the
risks that may arise from the ways they incentivise their staff. This should include a
proper consideration of the impact of financial incentives. It should also include formal
or informal performance management in the context of wider factors that might influence
the behaviour of staff, such as recruitment and training.
5.5 Some firms may not directly incentivise or measure staff on sales of finance products. In
these cases, firms should consider how incentives or targets on other products, such as
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targets for sales of retail products that can be bought on finance, might have an impact
on how the related finance product is sold.
5.6 Some firms were able to demonstrate a clear understanding of the risks in their incentive
schemes. They gave a clear explanation of how elements of their incentive schemes,
such as minimum quality standards, were designed to mitigate some of the risks, which
risks remained, and how their controls were designed to manage them.
Good practice
5.7 However, some firms did not demonstrate a clear appreciation of the risks in their
schemes. They also failed to show that they had either properly considered these risks
when designing their schemes, or that that they had controls in place to address them.
In some firms, one member of staff was able to articulate and explain some risks, but
staff directly responsible for controlling the risk did not demonstrate a similar
understanding. Where risks are identified it is important that these are effectively
communicated to, and understood by, those staff best placed to manage the risk.
Example of
increased risk
Quality monitoring
5.8 Well-designed business quality monitoring carried out by competent staff can be an
effective component of a firm’s control environment. For the purposes of this report,
quality monitoring includes Quality Assurance (QA) processes. We set out below some of
the aspects firms should consider to design an effective business quality monitoring
approach.
Focus on customer outcomes
5.9 Quality monitoring should consider whether the outcomes for the customer are
appropriate. This may include whether the customer was treated fairly, that the products
sold were not unsuitable, that the credit offered was affordable, that customers in default
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or in arrears difficulties were treated with forbearance and due consideration, and that
due regard was paid to the customer’s circumstances and interests.
5.10 While process-based quality monitoring may play an important part in the overall control
environment, monitoring that focuses on whether the required steps in a process have
been followed is unlikely to identify many situations that could lead to customer harm. If
a process is poorly designed, it could lead to customer harm even if it is followed
correctly. Process-based quality monitoring is unlikely to detect that the process has led
to poor customer outcomes and should be revised.
5.11 Quality monitoring that is based purely on reviewing documents is likely to encourage
staff to focus on procedure rather than outcomes. It also runs the risk that
documentation might not accurately reflect the substance of staff interactions with
customers. Quality monitoring that includes listening to recordings of phone calls, sitting
in on discussions with, or directly contacting, customers are more likely to identify a
wider range of possible failures.
Good Practice
Sampling approach
5.12 Both the number of transactions a firm samples and the way they are chosen affect how
effective quality monitoring is.
Transactions sampled should enable management to form a representative view across
all transactions. If staff are aware of which transactions will be sampled, they may
behave differently for these calls or these face-to-face sales. Similarly, if staff know that
some transactions will not be, or are very unlikely to be, sampled, they may be more
likely to behave inappropriately for those transactions.
5.13 Transactions sampled should cover key risk areas. These may be risk areas arising from
features of incentive schemes or performance management, such as transactions that
could earn significant commission. Or they may be transactions that inherently carry
greater risk, such as dealing with financially vulnerable customers.
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5.14 The number of transactions sampled should be sufficient to give the firm a reasonable
chance of detecting significant issues. Some firms use a combination of transactions
chosen at random from the full population, plus a sample of higher risk transactions. This
gives them sufficient coverage of key risks while also providing a representative view.
Good
practice
Managers at one lender could sit at their own desks and listen
in to live calls being made by any member of their team. The
team member would not know their manager was listening to
the call, so could not change their behaviour. Managers were
able to give prompt feedback to staff immediately after the
call.
Poor practice
Collections staff at one lender had three calls per month
sampled. Samples were selected at three points during the
month and were only from the current month. Staff knew that
when the three samples had been selected, no more calls in
that month would be sampled. So calls in the last days of the
month were extremely unlikely to be included in any samples.
But towards the end of a month is a particularly high risk
period. It is the end of the bonus period, when staff could be
more likely to behave inappropriately to meet targets.
Impact of quality failures
5.15 Business quality monitoring is most likely to influence the behaviour of customer-facing
staff if they believe that any failures detected will be taken seriously and may have
serious consequences. Consequences could be financial penalties, such as deductions
from bonus, or through performance management, such as disciplinary action for serious
or repeated failures.
5.16 Where quality failures carry a financial penalty, this may be ineffective in influencing
behaviour if the penalty is less than the extra bonus or commission an individual could
earn through inappropriate sales or collections activity.
5.17 Quality monitoring is also likely to be ineffective if staff believe that the standard
required is so low that any failures detected are unlikely to trigger a financial penalty. It
will also be ineffective if testing is not robust or challenging enough to detect
inappropriate behaviour. Of the firms in our sample who said they would apply a financial
penalty for quality failures by staff, less than half had done this in the past month. One in
six had not made any deductions in the last year. While this could be evidence that the
control was working well, we found that for some of these firms it was likely to be a
result of inadequate controls.
Good practice
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Poor practice
Monitoring face-to-face sales
5.18 Face-to-face sales present particular challenges. It is difficult to monitor interactions
effectively, and staff could potentially influence customers inappropriately. These
challenges are also greater where transactions are carried out in a customer’s home.
5.19 Live observations of face-to-face sales can be a useful tool to assess customer-facing
staff’s ability to perform their role effectively. But some firms may rely on them too
much. They are difficult to do without the staff member knowing they are being
observed, which limits how useful they are in assessing a sales person’s normal
behaviour. So some firms have added other controls, such as mystery shopping and calls
to customers after transactions are complete.
Good practice
Good practice
Poor practice
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Independence and capability of staff carrying out quality monitoring
5.20 For a firm to have confidence in the results of its quality monitoring, it needs to be
confident that staff undertaking monitoring can identify issues and will report fairly and
accurately on any issues they find.
5.21 Staff carrying out quality monitoring should be competent and experienced enough to
understand how risks might happen, assess how serious any issues they identify are and
present or defend their conclusions to the relevant part of the firm. They should also
have sufficient resources to carry out their quality monitoring effectively, including access
to required information and records, and sufficient time to do their work.
5.22 Some firms had put in place measures to separate control functions from customer-
facing staff. This helps to ensure the controls remain independent and are fair and
objective. For example, this independence makes it less likely that someone will start
reviewing a sales call by automatically expecting it will be good because they know and
like the person who made the sale. Some firms had implemented other measures to
prevent bias in how controls are used, such as choosing telephone calls from a list of
reference numbers to prevent staff picking calls of a similar length.
5.23 If the staff carrying out quality monitoring are not sufficiently independent, this could
result in them overlooking issues. This can be a particular concern where staff are in the
same department – for instance, where a manager’s bonus or performance appraisal
depends on the performance of the team they both manage and monitor for quality.
Good practice
Good practice
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Poor practice
Poor practice
Challenging and overseeing of quality monitoring
5.24 Firms should monitor and review the results of their quality monitoring. This can help to
identify common themes or underlying issues which they might need to tackle through
procedural changes. It can also enable management to satisfy itself that the quality
monitoring is being carried out robustly, is focused on key areas of risk, assesses
customer outcomes and raises areas of concern so that the firm can act on them.
5.25 In a number of firms where quality monitoring had not detected significant issues, we
found potential weaknesses in the way the monitoring was designed, such as a lack of
independence. Many of these firms had not sufficiently questioned whether the lack of
issues detected meant these issues didn’t exist or if weaknesses in the design of the
quality monitoring meant issues were not being detected or reported.
Management information
5.26 We expect firms to collect sufficient information to be able to properly manage risk with
their incentive schemes and performance management arrangements. They should have
the right information to monitor the activities of customer-facing staff. They should also
have the information to identify individual members of staff who carry out higher risk
transactions.
5.27 The most effective management information for identifying risk may be that which does
more than identify trends at a team, department or firm level. Being able to monitor the
activities of customer-facing staff at an individual staff member level can help identify
staff members who carry out higher risk transactions. This could, for example, include
staff who:
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have exceptionally high sales or collections levels
have sold a higher than normal proportion of products that attract a higher rate of
commission
are close to reaching a volume target that would earn additional bonus
are not meeting volume measures, which might trigger a performance review or
disciplinary action
5.28 Firms might also identify transactions as higher risk for other reasons. These might
include sales of a newly introduced product, or customers with patterns of repeat
borrowing that could indicate they are struggling to manage their debts.
5.29 Management information can be useful in informing a business’s quality monitoring
approach. It can allow risk-based quality monitoring that ensures transactions that pose
the greatest risk are subject to quality monitoring.
Good practice
Good practice
Poor practice
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Poor practice
Line management conflicts of interest
5.30 Line managers of customer-facing staff perform a vital role in overseeing day-to-day
conduct and promoting a customer-focused culture.
5.31 Some line managers’ financial incentives or performance appraisals are directly related to
the monetary performance of their team. This can lead to line managers encouraging
staff to prioritise profitability over treating customers appropriately. It could also
discourage line managers from identifying or raising poor conduct if this could negatively
influence the monetary performance of their team.
Example of
increased risk
Processes that discourage action
5.32 Controls to mitigate risks arising from incentive schemes or performance management
should be sufficiently effective to manage the risks they pose to consumers. If, however,
staff must go through multiple levels of review and approval to get agreement to act in
the customer’s best interest, they may be discouraged from doing this.
Good practice
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Example of
increased risk
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6 Glossary
This glossary sets out some key terms we use and how we have defined them for this
guidance.
Accelerator – an element of an incentive scheme where sales or collections above a certain
level earn a higher rate of commission.
Cash collected – the monetary value of payments collected on outstanding loan or finance
products.
Collections staff – staff that collect amounts owed under a credit agreement. This may
include collecting regular loan payments under the terms of a loan agreement, or pursuing
amounts owed from customers who have fallen behind on payments.
Customer-facing staff – staff that interact directly with customers, for example, face-to-
face, by telephone or by email. Examples of customer-facing roles include sales, collections,
customer service and complaints handling.
Incentive scheme – a scheme that sets out the pay and reward structure for staff. This
may include salary, bonus, commission and non-monetary rewards, such as prizes, or
benefits such as a pension or company car.
Performance management – processes a firm uses to manage how individuals and teams
behave. This includes formal arrangements like annual appraisals or regular one-to-ones, as
well as informal day-to-day interactions between staff and their line managers which may
influence how those staff behave.
Quality Assurance or Business Quality Monitoring – processes through which a firm
assesses whether transactions have been completed appropriately. This may include
reviewing or observing a sample of sales or collections transactions and customer
interactions.
Quality measures – measures which indicate whether a transaction, or group of
transactions, have been completed appropriately. This may include whether staff have
followed the correct process and whether the right outcomes have been achieved for the
customer.
Retrospective accelerator – an element of an incentive scheme where reaching a certain
target increases the rate of commission both on sales (or collections) above that target, and
also increases the commission earned on all sales (or collections) already made below the
target.
Sales staff – staff that sell or recommend a finance product to a customer. This includes
where that finance product is subsidiary to another product, for example, when the firm sells
retail goods (such as furniture, cars or electronics) on finance.
Volume targets or volume-based measures – targets or measures that are based on the
number, or the total monetary value, of sales made or loan payments collected.