Bankhall urges small firms to review financial incentives schemes following latest FCA review and increased scrutiny

→ Bankhall is urging small directly authorised (DA) firms to review their financial incentives schemes in light of the FCA’s latest thematic review.

Following the FCA’s finalised guidance FG13/1 – ‘Risks to customers from financial incentives’ issued last year, a further update was published in March 2014 with the FCA’s Thematic Review TR14/4. This set out the regulator’s findings following assessment of the changes firms have implemented.

The FCA’s guidance has increased the pressure on firms to ensure that their incentives culture does not lead to poor outcomes for consumers. In response, Bankhall has launched a financial incentives assessment tool to help directly authorised firms identify any potential areas of concern. The tool and supporting guidance is designed to provide an initial assessment based on the scheme features which may pose a risk, and highlight any potential gaps in a firm’s systems and controls.

The resulting document can be retained to help evidence to the FCA that the firm has assessed the risks and put measures in place to manage them, ensuring that customers’ interests are protected.

Linda Preston-Todd, Head of Operations at Bankhall, says:

Whilst progress has been made, the FCA warned in its findings that some smaller firms have not fully understood that policies and agreements they have in place could be considered to be an incentive.

Financial incentives will remain high on the FCA’s agenda in 2014 and form part of its supervision programme. That is why it is important for all firms, regardless of size, to demonstrate that they have reviewed their scheme and taken action where appropriate. This will ensure that firms’ financial incentives policies do not pose any risks to customers. The FCA will be looking to see whether any improvements made become part of a firm’s culture, and that there is a clear change in relation to the financial incentives provided to its staff.

Some of the issues that Bankhall recommends firms consider when reviewing their financial incentives scheme, include:

  • Changing incentive schemes so they are not solely based on sales volumes and introducing a cap on payments;
  • Introducing more effective links between incentive schemes and the results of business quality monitoring;
  • Improving controls, including monitoring for higher performing sales staff, along with additional MI and monitoring around the features of incentive schemes that increase the risk to customers;
  • Strengthening governance arrangements around the design and sign-off of incentive schemes; and
  • Undertaking past business sampling to identify if any systematic mis-selling has occurred because of higher risk features in schemes.

Adviser firms who would like further information can email: [email protected] or call 0845 300 5326.

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