Managing Employee Risk – Part 2 – Remuneration, Ongoing Oversight and Learning and Development

In the first article, we considered how to manage potential risk when recruiting a new employee and welcoming a successful candidate into the business. This article sets out some thoughts as how a business can manage the risk once an employee is established in the organisation.

Remuneration and Incentives

Remuneration and incentives are a reflection of the culture of a business, showing what conduct the business prioritises and what it values. There can be a risk that employee objectives are focussed simply on financial results, the taking on of new business, or the business’s share price. Whilst such objectives may be appropriate for individuals fulfilling some roles, they would not be wholly appropriate for all (for example compliance personnel or anyone who has responsibility for deciding whether or not to accept a new client).

Businesses could consider setting some basic standards that must be met by all employees, for example successfully completing all required training and not being responsible for any material breaches during the year, and then setting some targeted and specific objectives that are appropriate for each employee’s role and incentivise conduct that is in the best interests of the business’s clients and all stakeholders, not just the shareholders.

It may be useful to consider the approach of the UK’s Financial Conduct Authority, which has published several different Remuneration Codes applying to different types of firms such as banks, asset managers, and MIFID investment firms. The FCA looks at remuneration as part of considering a business’s culture and will generally want to understand: 

• how a firm’s reward strategy is aligned with its business strategy and purpose 
• how firms measure individual performance to assess good behaviour and conduct 
• the link between behaviours and reward outcomes including how individuals are held to account for their conduct and competence 
• a firm’s governance and oversight of remuneration arrangements 

The FCA expects firms to be able to demonstrate how their remuneration practices lead to appropriate outcomes for customers and show how effective their governance arrangements are in identifying, managing, and mitigating the risk of harm that inappropriate incentives may cause.

Learning and Development

The JFSC and certain professional bodies stipulate the amount and nature of continuing professional development that must be completed by people holding different roles and different levels of seniority. They may also stipulate compulsory CPD subjects such as anti-money laundering / countering the financing of terrorism and countering proliferation financing, data protection and cyber security. In all cases, training should be tailored to the roles of the individuals and their seniority. To the extent possible, it should also address any development needs, any personal objectives, and these across both the short-term and long-term.

One relatively recent development is that the JFSC expects regulated businesses to be able to demonstrate the effectiveness of training provided. This is most easily done by way of a quiz at the end of the training session but there are potentially other forms of assessment, the key being to be able to evidence that the employees understand the subject of the training.

It’s essential to remember that as well as training protecting employees, it also protects businesses. In the event of any problem, it can be an important defence for a business to be able to demonstrate that its employees had received comprehensive training. By way of an example training has been specifically drawn out as one of a suite of “reasonable prevention procedures” with reference to the UK’s Criminal Finances Act 2017.

Ongoing Oversight of Employees

The provision of comprehensive and targeted training to employees is an important part of the measures needed to ensure that personnel remain fit and proper. Other measures include:

• Regular screening for any adverse media, any conviction reported in the press, any appointment to a politically exposed person role, or the (hopefully unlikely) designation of an individual under the sanction regime, alongside monitoring of the local press;
• As well as formal appraisals, which should be taken seriously by the business and not just be a box-ticking exercise, line managers should be encouraged to provide feedback as and when the need arises;
• Appraisals and feedback chats are also opportunities for employees to raise any concerns and queries they may have themselves. Businesses may want to consider introducing other channels such as designating a Non-Executive Director or other member of senior management who can be contacted with any concerns and will treat anything they are told in confidence or even providing access to an external whistleblowing service;
• As well as requiring employees to declare any conflicts of interest, personal account dealing, material gifts and hospitality as and when they arise, business should require all employees to provide annual confirmations that they have done so;
• Finally, it can be useful to run a full annual review of everyone’s CPD training to check that everyone has completed the required amount of relevant training, although we’d recommend that it’s also checked perhaps three months before the deadline just in case there are any stragglers who need a nudge and time to complete the necessary training, especially with senior management often being the worst offenders.

Next

In the final article, we consider what steps can be taken when things don’t go so well, with reference to disciplinaries and investigations, and finally how a business can potentially learn some useful lessons when an employee decides to leave.