FCA to review lenders' remuneration practices as consumer complaints rise by 25%

The announcement coincides with new research by Pinsent Masons, the law firm behind Out-Law.com, which found that consumer credit complaints from consumers to the Financial Ombudsman Service (FOS) increased by 25% in a year to 9,542 in 2014. The research also showed that 34% of complaints received by the FOS consumer contract team, which deals with complaints about unfair contract terms and practices, were in relation to consumer credit.

Financial regulation expert Michael Ruck said that the FCA was "beginning to make progress" with consumer credit firms and was "seeking to regulate it in line with its approach to other areas, including [through] the use of tools such as thematic reviews".

"Following on from the attention given to payday lenders the FCA is now seeking to review topics it has reviewed in various other sectors, in this case remuneration and incentivisation of staff," he said. "Any consumer credit firm wishing to understand the FCA's approach should consider its approach and findings in relation to other sectors on similar topics."

"The rise in the number of complaints to the FOS may reflect both the increased media and regulatory focus in this area as well as customers’ increasing awareness of the processes available to them when they are unhappy with the service they receive. Consumer credit firms are likely to see this continue as they are further integrated into the wider financial services regulatory regime," he said.

The FCA took over responsibility for regulating over 50,000 firms offering consumer credit services on 1 April 2014, succeeding the Office of Fair Trading. The UK consumer credit sector is worth approximately £200 billion and includes all firms and individuals offering overdrafts, credit cards and personal loans, selling goods and services on credit, offering goods for hire or providing debt counselling or debt adjusting services to consumers.

Early work by the FCA and by its predecessor, the Financial Services Authority (FSA), addressed sales incentives offered by banks, insurers and other financial firms which had the potential to encourage mis-selling. Between 2012 and 2014, the regulators found that few firms had considered that incentivising high sale volumes could potentially drive mis-selling, and that those that had done so had not implemented effective controls. They also found that some managers received bonuses based on the sales made by their staff, creating a possible conflict of interest. The FSA published new guidance on incentives and mis-selling in 2013.

According to the latest announcement, the FCA wishes to understand whether "similar or new" issues also apply to consumer credit firms, including those that offer credit as a secondary service to their main business. It will examine how these firms pay and incentivise their staff, what risks may arise from these pay practices and how firms control and minimise these risks.

The FCA will begin by reviewing each firm's written guidance on pay, bonuses and controls. It expects to conclude this exercise by the end of this year, according to the announcement. It will then conduct site visits and more detailed testing, before publishing its conclusions and final report in the first half of 2016.