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Financial Services Consumer Panel

We broadly support the Guidelines under section one but believe that they should be enhanced by including the following issues:

•As part of the design of remuneration policies and practices institutions need to consider mechanisms for monitoring and managing risks which might arise from these policies and practices. These should include sales quality monitoring to determine whether regulatory requirements are being met and root cause analysis to assess the patterns of, and reasons for, complaints made by consumers.
•Where necessary, institutions should change the design of their remuneration policies and practices to mitigate any identified risks of consumer detriment, or to address any actual detriment experienced by consumers.
•Where institutions move away from quantitative targets to entirely discretionary remuneration policies and practices they should ensure that the reasons for awarding discretionary bonuses are documented clearly and that discretionary remuneration is not being used to indirectly reward sales or to put excessive pressure on staff to sell products.
Institutions should disclose the risks they have considered which arise from their remuneration policies and practices alongside the action they have taken to mitigate them, including how they have complied with these Guidelines, in the operational risk disclosures of their Pillar 3 report.

The documentation referred to under paragraph 2.1 should also include:
•Disclosure of the number of occasions whistle-blowers have raised concerns about remuneration policies and practices. This disclosure should also include whether any changes to policies and practices were made as a result of concerns raised.
The Guidelines should be enhanced by including the following issues:

•The institution should gather appropriate Management Information (MI) to be able to identify and manage risks from their remuneration policies and practices. A summary of this information should be provided to the management body responsible for approving the remuneration policies and practices.
•Those responsible for sales quality monitoring, operating other controls and assessing compliance with these guidelines should be sufficiently independent to avoid influence from sales staff or sales managers.
•The institution should establish effective procedures to gather feedback from frontline staff about the operation of remuneration policies and practices. This should include effective whistleblowing or other monitoring procedures enabling staff to raise concerns about excessive pressure or bias caused by these policies and practices. A summary of feedback, including any concerns raised and how they were investigated should be provided to the management body.
Under paragraph 3.7, we do not agree that institutions should only be required to check annually whether any of the residual risks are crystallising and causing detriment to consumers. Instead, the Guidelines should require that “appropriate monitoring and controls are put in place to check whether any of these residual risks are crystallising and causing detriment to consumers”. The institution should also be required to record what action is taken in response to any detriment caused to consumers and make changes to the remuneration policies and practices to reduce the risk of consumer detriment arising in the future.
Please see our responses to questions 1-3.
We believe that the EBA should add the following undesirable remuneration practices to the list that the EBA is seeking to use the Guidelines to prevent:

Cliff edges: The EBA should aim to prevent practices associated with high rewards for thresholds, for which the reward for making additional sales increases dramatically. This can occur if staff are required to meet a specific sales threshold, such as 50 sales per quarter in order to receive any bonus at all, or have to meet a specific target to receive a large bonus. For example, in the UK the FCA found an occasion where the first 21 staff to meet a specific sales target received a special bonus of up to £10,000. This was a particularly risky practice as it combined a cliff-edge with a competitive element between staff, rewarding those who achieved this threshold first, increasing the risk of non-compliant sales methods.

Performance management: Managers use disciplinary action, extra monitoring or threats of dismissal for the sole purpose of encouraging staff to meet targets for the sales of banking products by disregarding the best interests of their customers.

Please also see the attached file which includes our cover letter.
Financial Services Consumer Panel