In July 2015, the FCA issued guidance on performance management at firms. The guidance should be read alongside the FCA’s previous publications and is aimed at firms whose staff deal directly with retail customers, although it can be more widely applicable to all firms.

The guidance should also be considered alongside the incoming accountability regime, which will apply to the banking sector from March 2016, with a view to being extended across the rest of the industry by 2018. The focus on increased accountability means those working in financial services have more responsibility for their actions and the behaviours at a firm. The FCA sees the new regime as an opportunity for employees to feel empowered to fulfil better their responsibilities to customers and challenge undue pressure.

Overview

Throughout 2014, the FCA saw an increase in whistleblowing reports regarding poor performance management practices, specifically in sales areas. One of the major concerns of poor performance management is the risk of mis-selling due to the pressure to meet targets. The FCA refers to this as ‘undue pressure’ whilst also recognising that some pressures / targets are to be expected in the course of business. The FCA is concerned regarding the risk that undue pressure can cause. Furthermore there is an inherent conflict in the role of middle management who manage the conflicting objectives of sales targets and the manner in which a product is sold. Such managers must consider whether the interests of the customer are taken into account together with the firm’s own commercial interests.

What is performance management?

The FCA defines performance management1 as ‘the process through which organisations manage how individuals and teams behave to achieve organisational objectives’. Firms can use performance management as one of a suite of tools to help staff develop and improve and ensure customers get the products and services they need. One of the risks of poor performance management is that staff can be subject to undue pressure to sell products or services to customers which are inappropriate (mis-selling).

The guidance sets out the following key points which firms should consider:

  • The type of pressure applied to staff and whether this is managed appropriately. In particular, the FCA highlights intensive micro-management of sales results; pressure to share sales results with peers and possible face-to-face humiliation; and performance management practices not reflecting the firm’s stated policy and aims.
  • Whether there is any hidden ‘undue pressure’. Firms must ensure that the ‘tone from the top’ is reflected in the management of frontline staff. The FCA notes that the continuous interactions between different levels of management and with frontline sales staff, which is often not documented, can present one of the greatest risks and is an area where poor practice could be hidden from direct view. Firms must ensure that sales results do not dominate any such interactions at the expense of the fair treatment of customers
  • The FCA recognises the commercial importance of sales targets. However, targets should reflect different aspects of the sales process including how individuals ensure customers receive the product(s) they need. There must be a balance between commercial targets and consumer benefits
  • Firms must ensure they do not ‘over-incentivise’ or apply unrealistic targets and must use performance management to root out poor performance
  • This guidance should be looked at alongside previous FCA studies on incentives

Next steps for firms:

  • Firms should ensure they have effective performance management processes in place
  • Firms should put in place adequate systems and controls to identify any poor performance management practices and review any communications to staff which might lead to undue pressure. Firms should also engage with staff to understand where there is any undue pressure, for example using exit interviews to gauge levels of pressure
  • Firms should consider whether disciplinary procedures and other documents such as standards of conduct should be amended to reflect the expectations on managers in the guidance. Examples of ‘misconduct’ should include mis-selling and applying undue pressure on staff to mis-sell. Firms should make clear what disciplinary sanctions may apply in the event of breach
  • Whistleblowing policies should make clear that staff can complain to the regulator about any undue pressure to mis-sell
  • Coach and train staff managers to manage appropriately and provide them with practical tools for assessment of performance
  • Firms should analyse customer complaints to measure whether overt pressure leads to mis-selling
  • Firms should focus on ensuring that financial incentives are appropriate and are determined using a range of factors (not just sales targets). A balanced scorecard can help reduce risk
  • A key driver of culture is how individuals are rewarded and incentivised. The FCA will continue to focus on improving the culture across the retail and wholesale markets through its supervision of firms and it will act on intelligence received from whistleblowers
  • Firms should think carefully about the best way to facilitate cultural change and should take into account recent regulatory changes (such as the accountability regime, Mifid ii and EBA remuneration policies) as the regulators’ focus will continue to be on improving culture across the industry

Further information

A link to the guidance is available on the FCA website