Who: The Financial Conduct Authority (“FCA”)
Where: UK
When: 22 May 2013
Law stated as at: 1 July 2013
What happened:
The FCA published a “one minute guide” on the risks to customers from financial incentives.
Financial incentives can influence the manner in which staff sell products or services to retail customers and can potentially cause mis-selling.
An example of a financial incentive is where advisers or sales staff have 100% variable pay based on a share of commission or fee income. Between September 2010 and September 2011, as part of its work on the Retail Distribution Review, the FCA conducted a review of authorised firms and found that out of 22 firms, 20 had features in their incentive schemes that increased the risk of mis-selling. The FCA considers that most firms are still failing to manage these risks.
The FCA expects firms to show that they are managing the risks created by incentives and, if necessary, making changes to the way staff are paid. Such changes can include reducing the value of incentive schemes linked to sales, strengthening governance arrangements around the design and sign-off of incentive schemes, claw-back arrangements, deferral of incentive payments, improving controls to monitor higher performing sales staff and identifying inappropriate behaviour by sales staff during sales.
The FCA states that it will be carrying out further work in this area beginning with an online assessment of how firms identify and manage the risks linked to their financial incentives arrangements.
Why this matters:
The “one minute guide” follows more detailed guidance published earlier in 2013.
Using one minute guides to make firms aware of their regulatory obligations is certainly helpful in making guidance more accessible, but the guide was not so easy to find on the FCA website when we searched in early July 2013.
It is also disappointing that the points covered in the guide do not seem to be reflected in the FCA’s voluminous Handbook of Rules and Guidance relating to remuneration of staff.
Nevertheless, with mis-selling of financial products hitting the headlines with depressing regularity, any guidance available on how employers can reduce the chances of this occurring amongst their workforce must be a plus.
The “one minute guide” and more detailed guidance (published in January 2013) can be found here.
