Automatic demotion for failing to meet targets, uncapped bonuses and one-off payments including a ‘grand in your hand’ competition led to a serious risk of Lloyds Banking Group advisers selling products consumers did not need or want, says the FCA.
In a final notice published today, the regulator has set out details of the largest ever fine imposed by the FCA or FSA for retail conduct failings: a £28m fine against Lloyds over “serious failings” related to its sales incentives schemes.
It found fear of demotion, incentives to meet end-of-month targets and a “flawed” system which allowed advisers to meet standards even when suitability failings were identified were to blame.
From January 2011, Lloyds TSB introduced the right to automatically demote advisers who had consistently failed to meet 90 per cent of their sales target over a nine-month period.
If advisers were demoted, they would stay on reduced basic salaries for a minimum of nine months. The drop in salary for a middle tier adviser for a one tier demotion would be from £33,706 to £25,927, a 23 per cent drop.
In 2011, 139 advisers were demoted by one tier and four were demoted by two tiers.
Lloyds TSB advisers were given an individual bonus, an additional bonus and a team bonus if they achieved 100 per cent of their sales point targets over a three-month period, which was referred to as a ‘champagne bonus’.
The FCA says this created a disproportionate reward for, and higher risk around, the marginal sale that took advisers over the threshold.
Advisers were also paid uncapped bonuses, which incentivised them to continue selling as many products as they could by the end of the month after meeting their target.
In addition, Lloyds TSB advisers earned more sales points for larger value and longer term protection policies, thereby creating a risk that advisers would persuade customers to take out more cover than they needed or select a product term that was longer than required.
Advisers also had to meet minimum targets on product mixes to obtain additional bonuses. For Lloyds TSB advisers over the relevant period, this required 1.5 to two times the number of protection products to be sold compared to sales of savings and investment products.
In addition, advisers had opportunities to win one-off payments or prizes, such as a ‘grand in your hand’ competition in September 2010 where those who met sales targets for the month received an additional £1,000.
The FCA found Lloyds’ systems and controls to monitor the quality of sales by advisers were “flawed” as they allowed advisers to pass even if significant issues were identified with their sales.
During the relevant period, it identified 1,826 instances where a Lloyds TSB adviser had one instance of inappropriate advice identified and still received a bonus payment, and nine instances where an adviser had five ‘advice fails’ in a month and still received a bonus.
The bank focused its risk monitoring on higher risk product or customer characteristics.
But the regulator says it should also have quality monitored sales by advisers who were at risk of demotion, close to reaching bonus thresholds or approaching end of month targets.
This type of risk based monitoring, carried out on Halifax advisers after the FCA’s thematic review visit, identified concerns relating to four out of 31 sampled advisers, which included advisers making sales to themselves, their family members and branch staff.
In the most serious case, the adviser had been at risk of dropping a salary tier and having a bonus ‘deficit’ of almost £5,000 to repay. Halifax and Bank of Scotland advisers could face bonus deficits which had to be repaid if they chose to receive bonus payments early and later failed to meet all their targets.
The adviser processed sales of life cover, critical illness and expenses on death cover to himself and his wife for large premium amounts. He also sold a CI policy to a branch staff member which was later cancelled. Disciplinary action was taken against the adviser.
The investigation found there was a “significant bias” towards sales of protection products. The bank had a strategy of focusing on protection rather than investment sales in order to achieve its target of doubling its bancassurance customer base between 2010 and 2015.
During the investigation period between 1 January 2010 and 31 March 2012, the bank earned £600 in commission for every protection policy sold, ten times the average £60 in commission earned for every regular premium investment plan sold.
Over the period, Lloyds TSB’s protection sales rose by 65 per cent while its investment sales fell by 54 per cent, and Halifax’s protection sales rose by 94 per cent while its investment sales decreased by 68 per cent.
In a statement, Lloyds Banking Group says: “The group has already commenced a review to address potential customer impacts that may have occurred as a result of these failings. We are already contacting customers, and will continue to contact potentially affected customers over the coming months.
“The group recognises its oversight of these particular schemes during the period in question was inadequate and apologises to its customers for the impact that they may have had. We are determined to ensure any customer impacts are dealt with quickly and fully.”