The TCF initiative has been with us for a number of years now. It is common sense of course to put the customer at the heart of everything that we do, after all the customer is the reason that we are all in business, but the regulator’s financial incentives policy guidance take this a step further and put it in indelible ink.
Fundamentally the financial incentive guidance addresses the way that advisers sell and whether what is sold is in the best interests of the customer or whether there is temptation to provide an alternative solution in order to hit targets. The key concern of the FCA is the perception that most incentive schemes create a risk of misselling.
The FCA recognises that firms may want to incentivise staff to sell and, in general, they do not have a problem with properly managed incentive schemes, but such all schemes must be designed to eradicate or manage the potential for customer detriment i.e. Customers must be confident that they are being sold a product for the right reasons – and the FCA must be confident that you are selling products in the right way for the right reasons. Moreover it is essential that any potential risk that could be associated with such schemes are controlled and that the mechanisms for control are clearly documented.
This may be of particular concern for any firm that does not have the appropriate expertise in-house to make sure they are doing the right thing in the right way. Now the guidance is in force, it is essential to get this expertise as soon as possible, either by recruiting someone or having access to a compliance service. It will not be good enough to just do the right thing; you will also need to prove you are doing the right thing, and that you understand the risks associated with incentivisation and that you are managing and reviewing them correctly.
Managing therefore has a broader perspective, not only how you manage any incentive scheme that you might run, such as sales targets or even a bonus at the end of the year, but the FCA also expects firms to look carefully at their staff performance management as this can also influence the behaviour of sales staff.
There are some areas that are of real concern to the FCA which means that measures are likely to be brought in so that adviser firms can prove they are doing the right thing.
Top amongst these are firms failing to identify how incentive schemes might encourage staff to mis-sell; the FSA’s research suggested that many firms had not sufficiently thought about the risks of misselling associated with their incentive schemes or if they had thought about the risks, they had turned a blind eye to them.
Another area of FCA anxiety is firms failing to understand their own incentive schemes because they are so complex, therefore making it harder to control them.
Other key areas are: Sales managers with clear conflicts of interest that are not properly managed; firms which have ineffective links to sales quality built into their incentive schemes and finally, firms not doing enough to control the risk of misselling in face-to-face situations. The FCA feels that risks to customers from incentive schemes may also arise in areas such as complaints handling, claims processing, mortgage arrears and customer retention.
This area of concern for the FCA is likely to be much more far reaching than it may seem at first and it could have a fundamental effect on the way that advisers conduct their business and even to whether they offer a bonus or not. When assessing the risk arising from an incentive scheme you will now need to consider factors such as the type of product you’re selling and the method of distribution, for example whether the sale is advised or non-advised, face-to-face or telephone.
You are likely to need to take steps to remove high risk features or change your incentive schemes if they could be perceived as high risk such as a scheme where passing a target increases the level of incentive earned for all sales over a period, rather than just those above the target.
Where incentive schemes do increase the risk of misselling, the FCA then expects firms to take account of these increased risks in their approach to monitoring, assess the specific features of their incentive schemes that might increase the risk of misselling and put steps in place to address and adequately mitigate against these. For bigger firms this includes having monitoring staff that are sufficiently independent of the sales function to avoid inappropriate influence by sales staff or managers – but even if you are a very small firm with just one employee, it will also include how you manage your staff and how you correct any issues when you do come across them.
No matter how big or small your firm, it’s essential that you can demonstrate that you have controls in place and that all schemes are controlled in a way that assures the best interests of the customer.
Karen Hedges is mortgage manager for TMA and First Complete