Incentivisation. Encouraging a particular action by offering a reward. Kidnapping your daughter. That would work. Do what we want and you will get her back. Just ask Will Montgomery (Nicolas Cage in Stolen, 2012).
Bribery is slightly safer. Put the contracts my way and there will be something in it for you. It is still a crime, of course, but it became so normal in some international deals that new laws had to be passed to make bribery by UK firms or citizens anywhere in the world illegal.
Earlier this year, 35-year-old Tom Hayes was convicted of conspiracy to defraud for rigging the Libor rate at UBS and Citibank between 2006 and 2010. His crimes made UBS nearly £200m and he earned £1.3m there and even more at Citigroup. He claimed in court he acted with complete transparency and his actions were known, if not approved, up the management scale. UBS was fined $1.5bn by the US authorities.
Hayes was a small part of systematic Libor fixing, which tainted many banks in the UK and around the world. Some people have lost their jobs. But so far only Hayes has been jailed. Just before Christmas his sentence was reduced on appeal to 11 years.
Libor rigging was followed by revelations that major banks had fixed foreign exchange rates too. The FCA fined five UK-based banks, including UBS, HSBC and Royal Bank of Scotland, £1.1bn in 2014 and the evidence showed such activity was endemic. The profits were huge. And of course those involved were earning bonuses: money that was paid, as it turns out, for breaking the law, though prosecutions are still awaited. New laws are being passed to make rigging “systemically important benchmarks” a specific crime.
At the heart of all these dealings are two things. First, there is conflict of interest. Fixing Libor and exchange rates puts the bank in conflict with its customers. It puts its own interests ahead of theirs. Second, there is performance-related reward when that performance is measured simply in money. Or perhaps that is the wrong way round. First, there is personal reward related to making money for the firm, and that leads to the conflict of interest.
So I was shocked to read in the pages of Money Marketing that a Government-appointed panel of experts advising the FCA in its Financial Advice Market Review is considering calling for the return of commission as a means of paying financial advisers.
In an interview on Money Box on BBC Radio 4 last week, FCA interim chief executive Tracey McDermott told me “I wouldn’t rule out an element of commission in sales” if it was recommended by the review and as long as there were suitable safeguards in place.
I used to say that commission was the cancer at the heart of the financial services industry. After 10 years the FCA finally came round to my point of view and from 31 December 2012 no regulated adviser selling regulated or unregulated investment products could earn commission from the sale. Hooray.
But, of course, it did not stop unregulated advisers earning commission from selling all sorts of rubbish. Nor did it end commission on loans or mortgages or insurance products. And the FCA had to step in when some regulated networks of non-independent advisers took cash payments or other rewards for putting firms on their panel of approved advisers – commission by another name. Instead of extending the ban to these other areas, it is now possible the FCA will return commission to everyday retail sales.
The problem with commission is the same conflict of interest between adviser and client that exists in rigging Libor or bribery. If the person sitting opposite me labelled “adviser” has a financial interest in the choice I make then that is a conflict of interest. I can never trust the advice I am given because I do not know whose interest is being promoted by the recommendation they make.
That does not mean, of course, that all – or indeed any – advisers are corrupt. It simply means there is a conflict of interest that undermines the trust between the two parties.
That conflict has been at its worst mainly with non-independent advice given by banks to their customers. I only need say “PPI”. Since the RDR major banks stopped offering customers investment advice in their branches, not least because the FCA intervened and in some cases fined them for their activities.
So what are the banks doing now to “incentivise” their staff to sell us stuff we may not want or need and which may be totally unsuitable? Barclays ended a troubled year with a fine of $13.75m from the US regulator after putting thousands of customers into unsuitable investments and keeping trading discounts it should have passed on to them. Could it happen here? In the UK the FCA announced in its 2015/16 business plan that it would investigate “inducements and conflicts of interest”. The research was done last year but the regulator has decided to keep the results secret. It will be consulting on proposed rule changes on inducements for the start of Mifid II in January 2017.
So we will remain in ignorance about how banks and others try to skirt round the general ban on commission-related sales of investments and pensions.
Meanwhile, Santander, which was fined £12.4m in 2014 for “investment advice failings” and has set aside £43m for customer redress, will soon have 225 “financial planning managers” in its main branches, selling its own products to customers with more than £50,000 to invest and charging them 2.5 per cent of the funds invested (with a cap of £3,750) for the privilege. They will be able to earn bonuses but Santander says “there is no link to sales in the assessment of this reward”.
Paul Lewis is a freelance journalist and presenter of BBC Radio 4’s ‘Money Box’ programme. You can follow him on twitter @paullewismoney