The European Banking Authority (EBA) is asking the Retail segment of the industry to rethink sales compensation, relying heavier on customer satisfaction and safeguarding the client’s interests.
“The draft guidelines apply to remuneration paid to staff employed by credit institutions, creditors, credit intermediaries, payment institutions and electronic money institutions, when selling mortgages, personal loans, deposits, payment accounts, payment services, and/or electronic money.” EBA paper
Scheduled to go into effect January 3rd of 2017, the main purpose of these new rules is to “discourage mis-selling and misconduct amongst sales staff, by fighting poor remuneration policies and practices inside financial companies.”
The supervising authority gave an assessment of the costs of noncompliance, motivating its change of approach. An analysis conducted on a sample of 56 major EU banks resident in 21 jurisdictions shows litigation and misconduct costs of EUR 75 bn. since 2009.
Guidelines for Change in Sales Compensation
EBA is now asking companies to make sure they are considering customers’ interests when they calculate variable remuneration for sales staff. One way to achieve this goal is to take into account both qualitative and quantitative criteria.
Most of the guidelines target variable compensation, but the paper also includes some general recommendations that target fixed pay, as well as non-monetary forms of reward.
The implications of the EBA guidelines for sales operations are far-reaching. The new EBA regulation will impact everything from comp plan design to quota setting, salespeople training and education, sales comp data collection, storage, audit, reporting, and analytics.
With effects as vast as these, sales organizations in financial companies will need a comprehensive approach to people, processes, and systems to comply with the new regulations. Sales Operations as a Service (SOaaS) can be a great answer.
But first, let’s take a closer look at the biggest changes that the new guidelines will probably bring to sales organizations in the European financial industry.
Here are some poor compensation policies and practices that EBA wishes to prevent in the future:
- If a financial institution defines its strategic goals focusing solely on the total volume of products provided, without taking into account consumers’ rights and interests.
- If sellers receive remuneration linked to one or several specific products, and as a result they offer those products irrespective of the consumers’ rights and interests.
- If incentives increase as the number of sales grows in a particular time frame (a so-called ‘accelerator feature’), so that sellers are stimulated to offer financial products irrespective of the consumers’ best interests.
- If a financial institution organizes competitions where members of the sales staff are incentivized to outperform their peers or to meet challenging thresholds in a short timeframe, in order for them to receive financial or non-financial remuneration.
- If managers adjust non-monetary forms of reward solely according to the volume of products sold, for instance when dealing with promotions, training opportunities and annual leave requests.
“Competent authorities may wish to consider applying these guidelines in relation to persons other than consumers, such as micro-enterprises and small and medium-sized enterprises (SMEs).” EBA paper
EBA mentions some desirable remuneration policies that it expects financial companies to apply in the future:
- Calculate the variable part of the remuneration on a linear basis, rather than being dependent on meeting a predefined ‘all or nothing’ target.
- Pay out the variable remuneration in several tranches over an appropriate time frame, taking into account the long-term outcomes for the consumers.
- Establish variable remuneration based on factors that are common across the products provided to consumers, including qualitative criteria, such as the outcomes for consumers (e.g. based on the number and content of the complaints received) or on consumer retention targets. Also, implement a remuneration policy that does not place more weight on the offering of some financial products over others.
- Use a wide range of information on the quality and patterns of the products offered to consumers to identify areas of increased risk of mis-selling. Ensure that the results of such analyzes are documented and reported to senior management, together with eventual proposals for corrections.
- Run surveys to test if reps are acting fairly, and in accordance with consumers’ rights and interests.
Furthermore, the new rules will most likely require that compensation policies and practices are documented, retained for at least five years, and made available to competent authorities upon request.
It will also be the financial company’s obligation to make these standards easily accessible to sales staff. Sellers should receive clear information on how the policies and practices apply to them before they are allowed to provide services to consumers.
Using Sales Operations as a Service to Meet Compliance Demands
SOaaS can help financial companies implement changes required by new regulation in key business areas:
- Complement the existing quotas with additional components focused on customer satisfaction.
- Model the impact of various possible plans.
- Leverage expertise/models applied to other industries with similar plan components. For example, retail and telecommunications both rely heavily on customer satisfaction data in their compensation plans.
- Develop new metrics related to consumer outcomes. Determine how to measure and how to pay on those metrics (paying on time, defaults, risk, etc.)
Training and communication
- Use an integrated platform to push out information about sales guidelines with:
- practices to avoid
- processes to follow
- transparency standards to respect.
Retention and audit trails
- Use a designated tool to save sales comp data and meet regulatory needs.
- Conduct surveys to collect customer satisfaction data.
- Link customer satisfaction data to sales.
- Look across all data sets to find correlations/patterns (sales, customer satisfaction, performance, etc.)
- Use data to drive tweaks and make improvement to plans.
Contact us to learn more about real life scenarios when adjusting to new regulation such as the EBA sales compensation guidelines.
*EBA released these draft guidelines in December 2015 for public consultations. The deadline for input from the industry was March 22nd 2016. The authority will soon publish the final version of the paper, with the guidelines scheduled to go into effect starting January 3rd 2017.