Find out how financial incentives for staff could potentially have a negative effect on customers.
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Our work on the risks to customers from financial incentives has looked at firms with staff or representatives dealing directly with retail customers, such as:
- staff selling products or providing a service
- advisers and those in discretionary and non-discretionary investment management roles
- intermediary firms and firms with appointed representatives
- smaller firms, where sales staff or advisers are employed or self-employed.
This includes firms where people receive all of their remuneration from a proportion of fees, income or commission paid to the firm. This is referred to as ‘100% variable pay’.
What do firms need to do?
We expect all firms to consider our latest publication on this, Risks to customers from financial incentives (TR14/4)[1], as well as our guidance[2] where necessary, and review their financial incentive arrangements to ensure they are appropriately managing the risks from mis-selling.
Some of the key issues that firms should focus on when managing their incentive arrangements include:
- Checking for incentive features that are high risk because they strongly promote aggressive sales behaviour, and ensuring they are appropriately controlled.
- Using management information to check for spikes and trends in the sales patterns of individuals to identify areas of increased risk.
- Doing more to identify inappropriate staff behaviour in face-to-face sales conversations.
- Managing the risk in discretionary schemes and balanced scorecards.
- Monitoring non-advised sales to ensure staff are not giving advice.
- Improving oversight of incentives used by appointed representatives.
- Recognising that remuneration that is effectively 100% variable pay based on sales increases the risk of mis-selling, and managing this risk.
Questions for firms to consider
These will be particularly helpful for smaller firms, and should be considered alongside a normal range of compliance monitoring activity (e.g. file reviews):
- Do we consider how the way our people are remunerated might cause them to act in a way that benefits them but is bad for clients? How would we spot such activity, for example an increase in business in the run-up to a deadline that could impact on an adviser's earnings?
- Do we need to review the key performance indicators we currently use, to ensure they provide this information?
- Do we undertake extra monitoring for potentially suspicious or unusual activity, or extra monitoring for our people who achieve increased levels of business (and hence increased levels of remuneration)?
- Do we proactively look to identify where customers could be misinformed or wrongly advised in a face-to-face conversation, in a way that might not show up in a file review? For example, do we call a sample of customers to independently verify their understanding of the products or service they have taken up, why it was suitable for them and the risks/costs/charges?
Also:
- How do we satisfy ourselves that anyone speaking to clients is not putting their own interests before those of the client?
- Can we demonstrate effective controls in these incentive-related areas?