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FSA launches crackdown on sales incentive schemes

FSA Letters 480

The FSA is ordering financial services firms to overhaul their sales incentive schemes and pay appropriate redress following a year-long investigation into how such incentives drive misselling.

The regulator has today published a report into the way misselling is motivated by high-volume, target-driven bonuses and pay structures.

Between September 2010 and September 2011, the FSA reviewed the incentive schemes of 22 large and small firms, including banks, building societies, insurers and investment firms.

It found 20 out of the 22 firms assessed had features within their incentive schemes that increased the risk of misselling. Of those 20 firms, 11 were not properly addressing the increased risk of misselling. The FSA says one firm has been referred to enforcement as a result of its investigation.

Examples of the poor practice uncovered include one sales team where bonuses were multiplied up to eight times for cross-selling protection products.

Another firm ran a “super bonus” competition, where the first 21 people to make the required number of sales earned up to £10,000.

The FSA found the quantity of products sold impacted staff incentives more than quality of sales. Some sales managers also earned a bonus based on sales volumes, creating a conflict of interest when checking sales.

The FSA says: “In light of these serious findings, we are considering whether we should change or strengthen our rules in this area.

“We will be closely monitoring this and revisiting the firms that have the greatest improvements to make.”

Financial Conduct Authority chief executive designate Martin Wheatley has spearheaded the FSA’s investigation on incentives and it is understood the project is seen internally as of a similar scale to the RDR and the mortgage market review.

Martin Wheatley
Martin Wheatley

Speaking at a Thomson Reuters Newsmaker event in London this morning, Wheatley said: “Why is it that every time I walk into the bank to do something simple, like pay my credit card bill, the person behind the counter asks me if I would like to extend my credit, take out more insurance or look at their competitive mortgage rates? 

“When did this happen? Banks for me used to be a service – a place where you would go in, stand in a queue, have a pleasant chat with the clerk and go about your daily business.  Some time ago, this changed – financial institutions have changed their view of consumers from someone to serve to someone to sell to.”

He added: “What we found is not pretty.  Most of the incentive schemes we looked at were likely to drive people to mis-sell in order to meet targets and receive a bonus, and these risks were not being properly managed.”

Wheatley said the change in culture needed to come from the top. “CEO’s are ultimately accountable for the way their staff are incentivised, so we expect them to take a real interest in fixing this.” he said.

Aifa policy director Chris Hannant says: “For too long, the regulator has wasted a lot of time over comparatively minor issues, particularly within the advice sector. It is right the FSA is now focusing its attention on these mass-scale areas where the largest harm is done.”

Essential IFA managing director Peter Herd says: “The regulator needs to look at whether banks are product providers or advisers. If they are advisers, any advice has to be for the benefit of the client. The whole bank culture needs to be addressed.”

FSA incentives

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Comments

There are 12 comments at the moment, we would love to hear your opinion too.

  1. What impact does this have on Life Assurance providers distributing to IFA’s? Their sales force have incentives to promote certain products and have top performer prizes and trips?

  2. Wont change anything.

    All that will happen is that basic salaries will be increased to compensate for the lost ‘commission’.

    Then when they dont hit ‘production’ targets they will be out of the door.

  3. martin wheatley asks “when did this happen?” – started 1985 mr wheatley and has gone on, increasingly, ever since.

  4. I also gather that John Lennon is no longer with us and the pope is Catholic.

    Can’t wait for the FSA’s investigation into bear’s toilet habits…..

  5. It really makes me laugh, here we have Week Knees bemoaning his trips to the bank which is no different to going into any esablishment that whats you to buy its products be that a shop, pub, post office etc etc etc.

    Sales incentives are not the route of the problem (OK some may be excessive) but they need to look at the bulling behind the scenes, Oh but stop ! the FSA like the bully tactic’s.
    Remember “be afraid be very afraid”

    If people are faced with lose your job and your salary they may do some desperate things !!!

  6. Mr Wheatley says “when did banks change”, well it was a damn long time ago Mr Wheatley. Where have you been? Where has the FSA been on this? Why haven’t you looked into the banks bonus schemes many years earlier. I left banking in 2001 and the culture, incentives and misselling was rife then and had been for many years. Put your hand up FSA and admit your failings.

  7. ken170647 youtube 5th September 2012 at 9:23 am

    Must have been put in deep freeze 25 years ago. The only rational explanation…

  8. “When did this happen”. What a stupid statement. It started when the banks cast an envious eye on what the building society movement was achieving in the 80’s. Since the it has got steadily worse. This sort of statement does not provide the industry with any confidence for the future.

  9. At least they seem to be looking at a real problem -as opposed to perceived ones dreamt up in Canary Wharf boardrooms whilst gazing at expensive art. So credit where it is due, but as others have commented THIS HAS BEEN GOING ON FOR A QUARTER OF A CENTURY!!!!!!!! Furthermore it took a year long investigation, if they had an ounce of understanding of this industry I could have shown the problem in less than ten minutes. A great relief to the consumer must be that we have all had the right font size on our disclosure documentation for maybe five years now, thank goodness as that must have stopped an avalanche of misselling!

  10. I was offered a job with a well know Building Society earlier this year. They changed their minds three times what they would like to pay me for a basic salary. I learned at the end that they didn’t have a basic salary but a bonus led basic that was subject to change. Some of the large banks also use this method. It was then that I politely said no thank you.
    What advice are you going to give when you are close to a threshold on your basic salary? We are all qualified to level four now and so should be paid as professionals with a reasonable basic and potential to earn more. When you put people on panic mode then you will get bad advice and put your business and reputation at risk, and for what?
    Pay peanuts and get monkeys, vary the basic and get misselling. Be careful now guys, a bad reputation will now follow you very closely indeed. Avoid the companies, who follow this practice, they will damage your wealth!

  11. What this guy lacks is a sense of realism. The banks and insurance companies make profit by selling to the consumer. So they take people on with low basic salaries and drive them into the ground in order for staff to earn anything like a realistic standard of living for both the pressure applied, and the level of qualification needed to practice. RDR will only benefit the large company as when they dont pay any bonuses, and certainly don’t raise the salary level to an acceptable level they will still make a tidy profit. IFA’s going by the wayside will not affect the economy as much as if these FTSE 100 banks and building societies do in terms of money generated and people employed so the FSA are quite happy for this to happen,

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