I heard once that you can’t learn music from the noise that a grand-piano makes when you drop it down a staircase. Alas, we should be able to learn something about risk management from the FCA’s enforcement notices. That’s one of my ambitions for 2014.
I am starting with the FCA’s enforcement action on Lloyds TSB, Halifax and Bank of Scotland announced on 10th December 2013 (here – all references are from this document). The case relates to the lack of appropriate controls around financial incentives to advisers in branches.
The FCA clarifies at the outset that there is nothing in the rules against “[incentivising] staff to sell a particular product” provided that a firm’s “systems and controls are sufficiently robust and sophisticated to mitigate effectively the risk of any adverse impact the incentives may have on staff behaviour”.
It is therefore not entirely surprising that the FCA articulates in detail the specific features of the remuneration system that added to the risk of consumer detriment, including
1. variable basic salaries;
2. bonus thresholds disproportionate effects for marginal sales;
4. advanced bonus payments that could result in advisers being in debt.
The FCA makes an interesting comment about the sophistication of the performance reward and the concern that senior management did not appreciate the potential consequences. “The root cause of these deficiencies was the collective failure of the Firms’ senior management to identify sufficiently remuneration and incentives given to advisers as a key area of risks.”
Given that, it is not surprising that these performance incentives were not backed by appropriate controls. In particular, it is not surprising that quality controls such as file reviews focused on sales that were regarded as ‘high risk’ by reference to customer rather than the adviser profile or track record.
2. “The large number of people involved in the process [of governance over the incentive schemes] and the fragmented nature of the controls.”