Pronouncing itself satisfied by the way in which financial firms are changing their remuneration structures to veer away from mis-selling, the UK's financial conduct regulator nonetheless wants those firms to put in more effort.

In a new document (FG15/10) the regulator says that in some cases the progress that firms are making towards financial incentives that are fully in line with the interests of retail customers, including high-net-worth individuals, may be leading to an increase in pressure being applied to staff through other means to achieve sales. The FCA defines 'performance management' as the process by which organisations manage the behaviour of people and teams as they try to achieve organisational objectives.

Thinking aloud

The paper is the result of a recent 'thematic review', whose findings the FCA lists in the first of three sections. The regulator bestows the title of 'finalised guidance' on the second section of the document, but its pronouncements in that section (or chapter, as it calls it) do not refer to a single change to its rulebook.

The only direct reference to the rulebook comes when the regulator exhorts firms to comply with Principle 3 (which orders them to take reasonable care to organise and control their affairs responsibly and effectively, with adequate risk management systems) and the rules of SYSC (the systems and controls section) when considering the risks arising from their various approaches to performance management and to have mitigation strategies in place to manage the risk that mis-selling might be taking place.

There is a footnote that mentions a rule, however. The FCA states that wherever an appointed representative has his own sales staff or advisors, the principal firm is responsible for managing the risks of mis-selling. The footnote lists this rule as SUP 12.3, in the 'supervision' part of the rulebook, which discusses the responsibility of firms for their appointed representatives. It states that every principal ought to have a sufficient understanding of its appointed representative’s approach to performance management. One crucial piece of text here is a real piece of guidance - SUP12.3.2G - which states that the firm is responsible, to the same extent as if it had expressly permitted it, for anything that the appointed representative does or omits to do, in carrying on the business for which the firm has accepted responsibility.

A mental disease?

Instead of coming up with new rules and 'guidance' in the rulebook-related sense, the document is a mere wish-list full of words such as 'should' and 'need to', punctuated by the regulator's musings about the nature of good practice. It was around 2007 that the Financial Services Authority, the FCA's predecessor, began to 'think aloud' in documents such as this.

The FCA believes that all firms with staff who deal directly with retail customers should read its report and:

• consider how their approaches to performance management may increase the risk that they will 'mis-sell' products;

• work out whether their governance is (and controls are) adequate; and

• manage the risks adequately.

Bad controls, badly explained

How can banks and other financial institutions put pressure on salesmen to make inappropriate sales while officially remunerating them solely according to the interests of the consumers? The FCA provides a helpful list entitled "practices that can create undue pressure."

One way is for sales managers to micro-measure people's sales results in the most petty and time-consuming way, forcing staff to give them continuous updates about sales, perhaps many times a day. The FCA says that this is bad if it happens "without sufficient consideration of customer needs." The unscrupulous manager can pile on the pressure by questioning every staff member intensively after every "client interaction," asking him why he did not sell anything. The FCA says that this is bad if done "without sufficient consideration of customer needs."

The sales manager can also order staff to share sales results with their peers in ways that expose them to humiliation or discrimination, perhaps also sending out communications about sales results in ways that cause undue pressure on staff. He might also organise frequent conference calls (or similar) in which staff-members are required to explain in front of their peers why they are not meeting cumulative targets or to ‘pledge’ improvements in their results. The FCA thinks that this should not happen "without sufficient consideration of customer needs," a phrase on which it never expands.

An unscrupulous manager might also consider paying disproportionate attention to sales results when deciding wheher a salesman can go on holiday and whether to give him opportunities to develop. Then there is the all-time number one: using sales results as the main consideration when deciding whom to promote. The regulator is adamant that this should not be done "without sufficient consideration of other factors like consumer outcomes." As before, it says nothing about its idea of what 'sufficiency' might entail, leaving the reader free to concoct and follow any interpretation that he likes.

Another 'dodge', according to the regulator, is for the sales managers of a firm to ensure that performance management practices are not in line with the firm’s stated policy and aims. The FCA says that written policies often indicate "a supportive approach to underperformance against sales objectives," whatever that may mean, but the culture of management is to rule by fear and to use threats of disciplinary action. It also complains that managers sometimes talk a lot about treating customers fairly but place the day-to-day focus on sales results alone. Often, it believes, the ‘tone from the top’ is good but does not impress itself on the day-to-day running of the business, especially when one descends into the murky world of middle management and lower down still.

The war against the 'what'

When the FCA tries to explain its ideas about 'good practice,' it does so in loose and ill-defined terms. One discrete passage on the subject begins: “Good practice: Objectives for sales staff are more balanced and include sufficient ‘how’ or behavioural measures, including consumer outcomes, as opposed to just the ‘what’ (e.g. sales results).”

Many would be forgiven for struggling with this. The previous page mentioned 'undue pressure' – an obviously important phrase that appears 23 times in the paper's 15 pages without being given an actual definition (although there are examples) once – so the phrase 'more balanced' presumably means 'without undue pressure,' but this is not certain. It is also not obvious how a sale is not a 'customer outcome' and the use of the words 'how' and 'what' is confusing. They presumably refer to the old compliance adage that it is more important to follow the right processes than to obtain any particular result, but this, too, is left cloudy.

'Undue pressure' is a value-judgment phrase that therefore requires clarification, but the regulator often gives circular examples of it by roping in other value-judgment phrases such as “poor practices,” “an excessive emphasis on sales results,” “pressure excessively applied” and “behaviour [that] goes well beyond the boundaries of what would be considered reasonable by rational observers.”

To its credit, the regulator also gives useful examples of 'undue pressure' such as pressure to achieve sales regardless of customer requirements, for example staff being encouraged to favour credit cards instead of personal loans to meet targets that had been set. However, it undermines most of its examples by asserting that the pressure in those cases can only be undue if it happens "without sufficient consideration of customer needs." Again, the word 'sufficient' is a nebulous, value-judgment word that can mean anything, especially when not defined by any recourse to a rulebook.

Whistling in the dark

With its vague pronouncements and repetitions of wooly, unexplained phrases, and above all with its refusal to add anything to the FCA rulebook, this document seems to represent a missed opportunity. With imprecision comes latitude for interpretation, especially on the part of the unscrupulous; more detail would therefore have been welcome.