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.
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.”