Regulatory spotlight: Payment services and sales staff remuneration

July 16, 2024

by Michelle Plevey, Stuart Taylor, and Andre Mendes, KPMG

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What is this article about?

The critical regulatory landscape that firms in the payment services industry must navigate and the importance of compliance to avoid regulatory scrutiny and disciplinary actions.

Why is it important?

Understanding and adhering to payment services and sales staff remuneration regulations is crucial for ensuring consumer protection, regulatory compliance, and competitive advantage in a complex and evolving financial services landscape.

What’s next?

Aligning remuneration policies with the Consumer Duty regime, conducting regular reviews, and integrating comprehensive compliance frameworks to maintain regulatory adherence and strategic advantage.

Our practice regularly delivers payments training sessions to a diverse range of bank and non-bank payment service providers. These sessions consistently highlight the significant volume of regulatory obligations firms must navigate beyond the Payment Services Regulations 2017, the Electronic Money Regulations 2011, and the Payment Account Regulations 2015.

While some ancillary rules are readily identifiable, others often escape the attention of risk and compliance teams. The extent to which these rules apply depends heavily on the nuances of each firm’s nature and business activities. However, payments firms are commonly exposed to other sources of regulation, including (but not limited to):

The Financial Conduct Authority’s (FCA’s) Principles for Business and other parts of the Handbook:

Consumer credit regulations;
Cross-border payments legislation;
Cybersecurity and data protection legislation; and
Anti-money laundering and counter terrorist financing.

Firms generally recognise the applicability of the rules mentioned above. However, we have found a limited awareness and bespoke compliance frameworks for meeting the FCA’s expectations regarding the European Banking Authority (EBA) Guidelines on Remuneration Policies and Practices Related to the Sale and Provision of Retail Banking Products and Services.

The Guidelines were published in September 2016 and took effect in January 2018, specifying requirements for the design and implementation of remuneration policies and practices governing the offering or provision of banking products and services to consumers (payment services and electronic money included). It ultimately aims to protect consumers from undesirable detriment arising from the remuneration of sales staff.

Adhering to EBA guidelines in a post-Brexit scenario

Despite Brexit, EBA sources remain largely relevant for UK payments and e-money firms. The FCA has clarified that European Union (EU) non-legislative material remains pertinent, and firms are expected to continue applying EBA guidelines to the extent they remain relevant. This means considering the risks and objectives targeted by the guidelines and taking them into account where applicable.

Protecting customers from undesirable detriment arising from sales staff remuneration remains a key objective for the FCA. Inappropriate sales remuneration frameworks can foster unhealthy cultures, driving behaviours that harm markets and consumers. Numerous FCA-regulated firms have faced regulatory scrutiny and disciplinary action due to conduct failings linked to remuneration policies that incentivised undesirable behaviours and mis-selling.

Key requirements of the EBA guidelines

Within the context of payments and e-money firms, the guidelines require robust governance arrangements related to remuneration policies and practices. The guidelines cover the following four key components:

Design

Key elements in the design and implementation of remuneration policies should include (though not exclusively):

Consideration of the rights and interests of consumers to make sure that remuneration does not incentivise actions that would be detrimental to consumers;
Input from HR, risk and compliance functions; and
Consideration of both qualitative and quantitative criteria for sales staff remuneration.

Documentation, notification, and accessibility

Firms should document their remuneration policies and practices and retain them for audit purposes for at least five years from the last date that they applied. This documentation should include (but not exclusively):

The objectives of the remuneration policy and practices;
Who falls within the scope of these policies and practices; and
How the policies have been implemented in practice.

Approval

A firm’s management body should approve and retain responsibility for remuneration policies and practices. In the event a firm has a remuneration committee, its advice should be sought, along with Compliance’s review to confirm adherence to the guidelines. Any changes should be approved by the firm’s management body.

Monitoring

Finally, monitoring requirements establish at a high level that:

Policies and practices should be reviewed at least annually to ensure compliance with the guidelines;
During the review, an assessment of any customer detriment risks crystalising should take place;
Policies and practices should be amended as a result of this review where they are found not to be operating as intended/prescribed; and
Firms should have in place controls to check policies and practices are being adhered to, identify and address any failings.

Turning compliance into a strategic advantage

The Consumer Duty regime explicitly acknowledges that remuneration structures can harm retail customers. Therefore, these structures should be designed to deliver good outcomes for customers.

For instance, fair value assessments within the context of distributorship arrangements demand taking into account the impact of remuneration structures, investigating if they result in:

a product no longer providing fair value to retail customers;
incentivising the offering of a particular product or service unsuitable to the customers’ needs or characteristics of their target market.

Also, firms’ governing bodies are expected to monitor and ensure that remuneration policies are adequately contextualised under the Duty.

Whilst compliance with one regime does not automatically translate into compliance with the other, understanding the interconnectedness between both frameworks can unlock synergies and form a more robust compliance narrative and supporting evidential framework. This approach transforms regulatory compliance from a tick-box exercise into a strategic advantage.

The regulatory burden on firms continues to grow, but those that put their customers at the heart of their business will necessarily gain a competitive advantage. Ensuring that remuneration structures drive the right culture and sales practices, leading to customers receiving the correct product that meets their needs, must be the cornerstone of all businesses. Of course, adherence to the EBA Guidelines on remuneration practices is a key step in achieving these outcomes.