You will have seen last week in Tisatalks our LinkedIn page a blog explaining the publication of the latest FCA findings on incentives. This newsletter follows up giving additional information to small firms & business owners. The FCA has published a follow up report on financial incentives. It stated it has seen significant improvements in how firms manage the risks from their financial incentive schemes, but that there is still more to be done. There is also a question over whether changes are part of a genuine long term change leading to better outcomes for consumers.

 

The FCA says that financial incentives will continue to be a key priority and it will continue to focus on the issue. It will also be carrying out follow up work looking at how firms manage the performance of their sales staff, including whether pressure put on staff (for example through stringent sales targets) increases the risk of mis-selling.

 

What does the FCA expect firms to do? It has said that all firms (including those that have participated in the review) should consider the report and take action where they need to, to ensure they are managing the mis-selling risks from their financial incentives. The report highlights some of the key areas that firms should focus on when managing their incentive arrangements. These are:

• Using management information to check for spikes or trends in the sales patterns of individuals to identify areas of increased risk.

• Doing more to monitor behaviour in face to face conversations.

• Managing the risk in discretionary schemes and balanced scorecards.

• Monitoring the risk of staff who are incentivised for non-advised sales giving advice.

• Improving the oversight of incentives used by appointed representatives.

The report is published on the FCA website (http://www.fca.org.uk/static/documents/thematic-reviews/tr14-04.pdf) TISA members should also consider the guidance, which has other examples of good and poor practices. (http://www.fca.org.uk/your-fca/documents/finalised-guidance/fsa-fg131)

Many smaller firms have not realised that the FCA’s guidance applies to them. It is important that all firms consider the risks posed to their business by the way advisers and sales staff are paid.

Where a small firm has sales staff or advisers (employed or self-employed) who 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’.  It is a form of incentive scheme and the risks need to be managed.

 

The FCA guidance on financial incentives does not apply to small firms where the business owners (e.g. a sole trader or partners in a partnership) are the only individuals selling products or services, or providing advice to retail customers. These firms will, though, still have other mis-selling risks that need to be controlled effectively.

 

In addition to 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 and is bad for clients? How would we spot such activity if it occurred? For example, an increase in business in the run up to a deadline that could impact on the earnings of the adviser?

• 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 that achieve increased levels of business (and hence increased levels of remuneration)?

• Do we pro-actively look to identify where customers could be mis-informed 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?

e-mail: peter.smith@tisa.uk.com