Staff incentive payments could harm consumer credit customers

Some consumer credit firms are failing to recognise the potential harm that their staff incentive schemes could have on customers, the City watchdog has found.

A review by the Financial Conduct Authority (FCA) found a "significant proportion" of consumer credit firms had issues including high-risk financial incentives and/or performance management practices likely to encourage high-pressure sales or collections.

It is proposing to tighten up guidance for consumer credit firms, which it said could improve the matching of credit products to customer needs, through better management of incentive-related risks.

The findings come at a time when Bank of England figures have been showing strong growth in consumer credit, prompting fears that some households could be in danger of over-stretching their borrowing amid the array of low interest rate deals currently available.

The Bank's Prudential Regulation Authority (PRA) said on Tuesday that it was "requesting evidence from all firms with material exposures to consumer credit" of how they are protected against risks of consumer arrears.

The FCA said that at the end of 2016, households owed £193 billion in consumer credit debt, reflecting a 36% increase in consumer credit net lending between 2012 and 2016.

It said the way staff are paid and managed may influence how they behave with customers.

The way staff are incentivised could potentially increase the risk that customers may suffer a variety of forms of detriment, including being given inaccurate or misleading information on the costs, benefits or features of credit products, or being pressured to take out inappropriate or unaffordable products.

Potential risks could also come from firms not treating customers in default or in arrears difficulties with forbearance and due consideration, including collections staff pressuring them into paying unreasonably large amounts.

The FCA's review, which included catalogue and internet shopping firms, hire purchase firms, debt collectors, credit brokers and store/credit card providers among others, looked at the controls placed on staff working in sales and collection roles.

The FCA said risks arising from incentive schemes arose primarily where staff earned bonus or commission payments based on the volume or value of sales or collections.

Factors that could raise the risks included schemes where commission accounted for the bulk of customer-facing staff's pay, different rates of commission applying to different products and the rate of commission varying depending on reaching certain targets.  

It found examples of good practice, where firms had incentivised staff to act in the interests of their customers, or had put in place effective controls to manage the risks from their incentive schemes and performance management.

But the FCA also said: "However, too many of the firms in our sample had high-risk elements in their incentive schemes and had either not recognised the risks these posed to customers, or had not taken sufficient steps to manage those risks."

The FCA is now consulting on a package of rules and guidance to help consumer credit firms identify and manage their risks effectively. Feedback should be received by October 4. It is also providing examples of good practice for firms to help them ensure they have robust approaches to risk management.

Jonathan Davidson, the FCA's executive director of supervision - retail and authorisations, said: "The way firms pay and manage the performance of their staff is a key driver of culture and customer outcomes, and a continuing priority for the FCA.

"We expect firms to understand the effects their staff incentives might be having."

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