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FCA warns self-employed advisers need to abide by incentive rules

The FCA has warned that its sales incentive rules apply to self-employed advisers who receive all of their remuneration from a proportion of fees or income paid to the firm.

In its latest review of sales incentive schemes, published today, the FCA says responses to its online assessment suggest that some firms believe they do not have any form of financial incentive scheme if staff do not receive a separate bonus or other incentive payment linked to sales.

But the regulator says that in instances where staff or self-employed advisers receive all of their remuneration from a proportion (fixed or otherwise) of fees, income or commission paid to the firm, it does consider these arrangements as incentive schemes.

The FCA says this is because the level of remuneration an individual can achieve is variable as it is solely based on the products or services taken up by their customers and the fees or income this generates.

It says that 100 per cent variable pay/commission-only arrangements, where no salary is paid, is an incentive scheme feature that significantly increases the risk of misselling.

The review says: “We accept that many smaller firms will have 100 per cent variable pay because of the nature of their business models and we are not directing firms to adopt remuneration approaches that include fixed costs.

“However, it is important that all firms understand and manage the risks of misselling rising from remuneration based on 100 per cent variable pay.”

The FCA adds that its online assessment suggests small firms with staff subject to incentives may not have acted on its previous guidance on sales incentives to the same extent as other firms.

For instance, the smallest firms were less likely to have any pro-active testing in place for inappropriate behaviour in face-to-face sales, and were less likely to say they had been prompted by the FCA’s guidance to consider their incentive arrangements.

The review says: “The smallest firms that have incentive schemes for sales staff or advisers, including 100 per cent variable pay, need to read the guidance carefully, along with this publication, and take action to improve controls where required.”

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Comments

There are 22 comments at the moment, we would love to hear your opinion too.

  1. E L Wisty (an only twin) 4th March 2014 at 11:45 am

    Blimey, the FCA publishes a review containing sensible concern and common sense – will wonders ever cease!

    To be serious, I don’t think that the FSA is taking this far enough. It is intuitive that people’s behaviour is primarily influenced by their remuneration. If a self-employed individual only earns if they sell products/services, and if certain products or services pay more than others, then their behaviour will be influenced.

    It is time that the FSA addressed the issue as to whether it is desirable for advisers to be retained on a self-employed basis. In addition, consideration should also be given (in conjunction with HMRC) as to whether firms are still abusing the self-employed rules and requiring staff to be self-employed when they are, in fact, solely acting for one company and, therefore, fail the self-employed test. I am aware of at least two firms that require administrative staff to be self-employed and, of course, a certain very large tied firm with a biblical name retains its ‘partners’ on a self employed basis; when to my knowledge, that is only a ‘marketing’ term and they work solely for that firm.

    One of the objectives of RDR was to remove commission bias, and to move the industry onto a more professional basis. Therefore, it is important that the FCA uses this opportunity to ensure that self-employed advisers are not unduly influenced, and also that firms are not denying their staff their legal employment rights.

  2. First question should be are they really self-employed under the law.

  3. @ E L Wisty. Maybe I am living on different planet to you but was the RDR not supposed to mean that clients AGREE to pay us for what we do? Therefore the days of remuneration influence (you know, that influence or bias that the FSA could not find) has gone for ever?
    The FCA has said it is not and will not be a price regulator the imortant thing is the client is clear what they are paying for. I would love to hear their view for a how a sole trader adviser is expected to earn any kind of living as 100% of his/her income is derived from selling products (or advice if you prefer that term). AS for this being a sensible move remains to be seen. IS this just MM’s interpretation of what was in the document. I would like to hear the actual meaning explained by Martin Wheatley because I am sure that what has been reported is not what the FCA were meaning. As normal though, they are unlikely to comment on this – they will leave the industry to stew on this and wait to see what happens before doing or saying anything.

  4. I wonder if this reporting is really accurate as there is a logical impasse.
    I am a self-employed sole trader. I therefore receive all my income from the fees that I generate. I am certainly incentivised to bill my clients. How does that leave me in the eyes of the regulator?
    The review says: “We accept that many smaller firms will have 100 per cent variable pay because of the nature of their business models and we are not directing firms to adopt remuneration approaches that include fixed costs.
    “However, it is important that all firms understand and manage the risks of misselling arising from remuneration based on 100 per cent variable pay.”
    This last sentence is ambiguous and falls into the usual category of Regulation speak – which is always a million miles from clear and concise.
    There is a body of opinion which states that the risk of misselling is often linked to the necessity of paying the bills. If therefore advisers have a huge amount of capital and/or are independently wealthy one may presume that inducements and incentives would not figure. But this is plainly an unachievable utopia.
    But what I ask is the danger of incentives if you charge a fee which is not necessarily related to a product? In other words the fee is payable whether or not a product is purchased.
    Perhaps either the regulator or the reporter can be more explicit?

  5. E L Wisty (an only twin) 4th March 2014 at 2:12 pm

    @ Marty

    I fear that, metaphorically, you are on a different planet.

    The issue is not whether clients agree to pay us for what we do, but whether the financial pressures of self-employment impact on an adviser’s ability, or willingness, to give suitable and objective advice.

    As for commission bias, one only needs to consider endowment policies …….

    I’m sorry if you’re none the wiser, but hopefully you are now better informed.

  6. Does job security, via meeting minimum targets, not affect an “employed” advisers perception of the importance of achieving a “sale”. In my experience the minimum targets applied to “employed” advisers far exceeds the average self-employed adviser’s earnings – often double in fact.

    A guaranteed salary just transfers the incentive to the employer .

  7. @ E L Wisty

    Many ‘professionals’ are self-employed be they accountant, solicitor or indeed barrister …
    Ethics are what matter and rather than the FCA spending too much time on this perhaps those that award advisers an SPS should be doing more for their fees.

  8. Test Comment MM 18.27

  9. Test Comment 18.30

  10. Test Comment MM 18.32

  11. Test Comment MM 18.38

  12. What I find hugely annoying is the fact that on the FCA Website on the firms register there is no indication of the firm’s status.
    I have tackled the FCA about this and their completely unacceptable answer is that the firm has to make this clear.
    It is unacceptable because
    1. They made the rule so they should be seen to comply with it.
    2. The answer is fatuous because a client will only know AFTER approaching a firm – provided the firm is honest. If an individual just wants to research before making a selection it seems logical that they would go to the FCA website and this tells them nothing about the status of the adviser – other than if they are an AR.
    Does anyone think this is unreasonable?

  13. I think it’s a bit rich to “target” self employed advisors, after all the banks have without a doubt committed billions of pounds of mis-selling PPI, they also often offer limited advice or non advised sales which can only be to the client’s detriment. They are notorious for their sales incentives and pushing clients into products that are unsuitable. In comparison the “self employed sole trader” (whom it seems the FCA want to remove from this industry) has to make long term client relationships in order to survive and therefore is more likely to act in his client’s best interests because he needs the repeat custom and referrals that will come from good service and advice.
    Are we really expected to accept that employed advisors who don’t get incentives (if there is such a thing) are always going to be a safer bet than a self employed sole trader? If the sole trader doesn’t sell then he doesn’t earn, but sometimes he does so because the client will appreciate his honesty and therefore come back to him in the future. Whereas when the employed advisor doesn’t sell they get a rocket from the line manager, perhaps a poor performance review and so on……after all big business is about big profit….not customer care/good advice etc…..
    My proposal is ban the banks from selling any products as their records shows they’ve mis-sold billions already and they will do again….
    Oh and scrap the FCA too, after years of having regulators we’ve had one mis-selling farce after another and a recession while the FSA now FCA have slept through them all……their only solution seems to be to eliminate sole traders……which would drive even more clients to the banks to rip off yet again…………….still as most of the FCA have never worked a day in the industry it should be of no surprise when they mess it up.

  14. All workers in the private sector who are responsible for producing and/or bringing income into a business are ultimately paid by results. Why therefore is the regulator’s presumption that productivity means poor quality product/advice?

    Where is the presumption that people take pride in their work in order to do a good job and be rewarded for being successful?

  15. I’m sorry but this article makes no sense ?

    Everything, we do or anybody does, s/employed or employed is done to earn money

    Quote !!

    “But the regulator says that in instances where staff or self-employed advisers receive all of their remuneration from a proportion (fixed or otherwise) of fees, income or commission paid to the firm, it does consider these arrangements as incentive schemes”

    The above statement suggests we are not allowed to earn or benefit from the activities we do on a proportional ( after cost have been taken into account ) basis ?

    Quote !!
    “The FCA says this is because the level of remuneration an individual can achieve is variable as it is solely based on the products or services taken up by their customers and the fees or income this generates”.
    “It says that 100 per cent variable pay/commission-only arrangements, where no salary is paid, is an incentive scheme feature that significantly increases the risk of misspelling”

    This statement suggests that if the money you do get varies ? this is classed as an inducement ?

    If what I read is factual then we all break the rules employed, S/employed alike ?.

    Its just not logical ?

  16. I recommend people read the Thematic Review (it’s not very long).

    In general the review is positive about the progress being made – especially at the big banks. It also gives plenty of examples of good practice (whereas earlier documents concentrated on the bad stuff).

    The FCA is not against all incentives, just incentives that lead to miss-selling.

    Having got the banks moving in the right direction, the FCA is now focusing on smaller firms.

    The FCA makes two points about our sector:

    1) Many networks need to deal with inappropriate incentives at their ARs. This is not going to be popular with the ARs affected. But it is the network that is regulated and responsible for this stuff, not the ARs. If ARs don’t like it, they need to go directly regulated.

    2) Many small firms think 100% variable pay (as in you-eat-what-you-kill) is not an incentive scheme. The FCA report reminds everyone that they have issues with this this method of remuneration. What has been missed out in the comments above, is this applies to employed and self-employed advisers. However most employed advisers are not on 100% variable pay whereas many self-employed advisers are.

    There are a number of factors at work which put the self-employed adviser business-model under threat. This is just another one.

    It’s a bit like the Premier League – most of the money currently goes straight to the players and the clubs have little control over wages. But in our world this is changing and the “clubs” are taking more control (or being forced to by the FCA).

    It’ll be interesting to see how this pans out. I believe the days of the “lone ranger” adviser operating loosely under the banner of another firm are numbered. If that affects you then I’m sorry, but fore-warned is fore-armed.

  17. Ian H0w00d1234 5th March 2014 at 5:07 pm

    abacus test comemnt3

  18. So earning a living is an incentive – well blow me down I never realised that.

    Maybe we should all work in the public sector, which is what the FCA is despite its claims of independence, then we dont have to worry about who actually pays our salary.

    The FCA seems to think up new horrors that might lead to the economy going into meltdown, RDR based on totally unproven commission bias, to justify its existence whilst being asleep on the job with regards to the credit crunch, Co-Op Bank etc.

    It really is time they concentrated their efforts on actually focusing on the real issues.

  19. Julian Stevens 6th March 2014 at 9:58 am

    So what was the basis on which the FSA’s £20m bonus pot was divvied up? Private sector bonus/ incentive schemes are based on each individual’s contribution to the firm’s profitability. How do such schemes work in the public sector where profitability isn’t a factor? What sort of bonus/incentive scheme does the FCA operate?

    That said, if the FCA’s current focus is on schemes that place unreasonable pressures on individuals to meet targets in such a way as to actually encourage inappropriate sales, then perhaps we shouldn’t be making too much fuss about it.

  20. I think Martin Wheatley was clear on this what do you charge if the right advice is to do nothing or very little.
    Transaction based revenue self employed or otherwise cannot be the sole determinant, after all just how you square this with a self employed adviser who carries none of the risk and his firm does I just don’t know.
    It’s not a simple case of one is right and one is wrong. The FCA needs to provide examples to avoid speculation overtaking interpretation of their rules.
    As to the taxation status until the accountants and solicitors are schedule E HMRC is stymied, if more firms made the adviser pay the PII excess and had it a sensible level of discomfort we will not move forward.

  21. The FCA is quoted as saying, “it is important that all firms understand and manage the risks of misselling arising from remuneration based on 100 per cent variable pay”

    In other words as all advisers get money for making sales they all might make dodgy sales to get some money. But that clearly applies to all adviser remuneration. No firm will pay a flat salary to a client adviser who does not bring in fee revenue (London Life & Equitable ring any bells?)

    As the retainer of self employed advisers we check every case before submission. If we are not satisfied the case does not go through. Interestingly I don’t think it has ever happened but we have beefed up a lot of client reports – which helps adviser, firm and client alike…

    As far as this element of regulation is concerned I think we are bombproof. But I can see how anyone who retains self employed advisers that they do not adequately supervise would be concerned.

  22. Good that the FCA is finally getting round to giving the above advice, but there’ a huge hole in their thinking.

    I’m an expat advisory researcher living overseas, and the losses caused to pensioners living abroad by so-called FA;s claiming that they have registration with the FCA are huge. The majority, (not including those caught in the LM scandal, where selling went on right up until the fund was suspended), have been mis-sold insurance-wrapped bonds with high maintenance charges and are losing out hand over fist. The products are being offered to unsophisticated investors, and involve well-known names such as Friends Provident International and others of that ilk.

    Given that England’s offshore financial jurisdictions are now in closer contact with the UK regulators, it would be a great help if the FCA could take on board the fact that (literally) millions are being lost in this way. I’m sick to death of having to inform people that there’s nothing they can do, as no-one cares, especially when the FA concerned, as in a present scandal involving losses to 40 people of a total of £3.5 million, with the FA concerned now safely back in the UK and presumably continuing his conning career there.

    This is an international scandal covering many countries, and the crooks involved are almost invariably British.

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