Tyrie writes to FCA on remuneration and sales-based incentives

04 February 2014

In advance of Tuesday’s evidence session with the Financial Conduct Authority, the Chairman of the Treasury Select Committee, Andrew Tyrie MP, has written to the Chief Executive of the FCA, Martin Wheatley, regarding the Final Notice issued against Lloyds in December 2013 for serious failings in its controls over sales incentive schemes.

Commenting on the letter, Andrew Tyrie MP, said:

"Banks have rewarded poor behaviour, causing losses to their firms, their reputations and their customers. In some cases, remuneration structures encouraged behaviour which added great risk to the financial system.

Incentives have been deeply misaligned for significant numbers of front-line staff, not just highly remunerated traders or the most senior executives. Deep cultural change is needed.

The Banking Commission made a number of detailed proposals fundamentally to reform remuneration and accountability structures in banks. A core principle of the Commission’s work has been the need to align much more closely the payment of the reward to the maturity of the risk.

The Government legislated to implement some of these recommendations - including the Senior Managers’ Regime and Certification - in law. It is now crucial that the regulators make them work.

The Governor of the Bank of England also recently announced that the PRA will launch a consultation in April on changes to the current remuneration code in order to give effect to the Commission’s proposals.

This is necessary and welcome but it won’t be sufficient fully to address all the problems of misaligned incentives. The remuneration code applies only to staff deemed to be ‘Material Risk Takers’. In its response to the Banking Commission, the FCA has already clarified that, in its view, the definition of ‘Material Risk Takers’ does not extend to sales staff in retail banks.

That is why - having examined the ‘Material Risk Taker’ definition - the Banking Commission also made clear that it wanted specific provisions empowering the regulator to limit the use and scale of sales-based incentives to prevent the kind of conduct failure outlined in this Final Notice.

So far, the FCA has shown little enthusiasm for taking such action. Following the record fine levied against Lloyds, it should reconsider.

Unless such issues are addressed now, the risk of conduct failure at some point in the future can only increase."

Parliamentary Commission on Banking Standards recommends:

Parliamentary Commission on Banking Standards, Final Report Volume II, June 2013, para 119 and 864

  • Though they have been much less generous than in investment banking, poorly constructed incentive schemes in retail banking have also hugely distorted behaviour. They are likely to have encouraged mis-selling and misconduct. Senior management set incentive schemes for front-line staff which provided high rewards for selling products and left staff who did not sell facing pressure, performance management and the risk of dismissal. It shows a disregard for their customers and front-line staff that some senior executives were not even aware of the strong incentives for mis-selling caused by their own bank’s schemes. These remuneration practices are ultimately not in the interests of banks themselves, still less of the customers they serve.
  • Misaligned remuneration incentives have also contributed to conduct failure, including scandals such as PPI. The Commission welcomes announcements by some banks that retail staff will no longer be rewarded based on their sales, but notes the widespread warnings that sales-based rewards may persist informally even where their explicit inclusion in incentive schemes is removed. The Commission recommends that the new Remuneration Code include a provision to limit the use and scale of sales-based incentives at individual or business unit level, and for the regulator to have the ability to limit or even prohibit such incentives.

In response to the PCBS’ Final Report, FCA comments:

The current Remuneration Code and relevant Directives only apply to ‘Material Risk Takers’ – those individuals who pose the greatest risk to the financial stability of an institution. Applying the Code to other individuals would go well beyond the international standards on remuneration. While we do not believe the Code should be extended beyond Material Risk Takers, we agree with the Commission that remuneration, including sales-based incentives, can cause conduct failings and poor consumer outcomes. We are currently conducting thematic work on sales-based incentives, after which we will consider the need for high-level remuneration principles for UK staff.

Image: iStockphoto

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