The banking crisis may be a particular driver for this consultation, as the financial incentives in banking were seen to be a key contributor to risk taking that was retrospectively deemed to be reckless. Even though the banking crisis may be the driver, this consultation does not aim directly at one sector so the FCA do expect insurance and mortgage brokers to take note of their guidance. In fact, the paper states several times that this paper does most definitely apply to smaller firms.
The FCA recognises that some progress has been made in this area in recent years, but still worries that undue pressure to sell certain products could be exerted by firms and/or managers, and this could ultimately lead to products being mis-sold. In fact, the FCA cites evidence from whistleblowers and increased levels of intelligence suggesting that there may not have been a genuine shift away from a sales-driven culture in some financial services firms.
An over-emphasis on sales results in performance management systems is one of the first examples of bad practice tackled by the consultation paper. Examples of bad practice listed include, amongst other things, a “name and shame” approach to people not achieving sales targets, asking staff to report several times a day on updated sales results and using sales results when making other decisions (such as promotion, annual leave and development opportunities).
The sort of good risk management process expected to be in place at a regulated firm would include ways of identifying any instances of poor performance management which could lead to undue pressure of staff. This should include ways of identifying how middle management deal with the potential conflict of interest which may be caused by having to balance objectives linked to the corporate plan with other objectives, such as ensuring the appropriateness of sales techniques deployed.
The FCA suggests a range of actions which could be used to identify undue pressure. This includes measures like the percentage of staff on a personal improvement plan or disciplinary procedures related to individual sales results, rates of staff turnover and leavers within 12 months of joining and the use of exit interviews. You should also have clearly communicated grievance procedures in place which are seen to be independent and confidential by staff.
Ultimately, this paper is about firms having systems in place which allow them to identify whether staff are under undue pressure to meet sales targets which could lead to inappropriate sales. The regulator states that this paper is the first step in a dialogue with industry on evolving practice in this area. This means that they will be incorporating questions about performance management in their supervisory visits/assessments, and I wouldn’t rule out a thematic assessment on this subject at some point in the future.
Phil Lewis is head of HR and compliance at Source Insurance
