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Lenders slow to respond to FSA sales incentive crackdown

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Lenders have been slow to react to the FSA’s crackdown on sales incentive schemes, with the Co-op and Barclays the only banks to commit to scrapping sales-based rewards.

Last month, the regulator ordered financial services firms to overhaul their sales incentive schemes following a year-long investigation into how sales incentives drive misselling.

Of the 22 firms assessed, 20 had features within their incentive structures that increased the risk of misselling and 11 of these were not properly assessing the increased risk of misselling. Lloyds Banking Group was subsequently referred to enforcement as a result of the investigation.

The FSA said: “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.”

Last week, the Co-operative Bank and Barclays outlined plans to switch to customer service-based incentive schemes for their branch staff.

Co-op said 3 per cent of its branch staff were incentivised to sell under its old incentive scheme but now they will receive bonuses of up to £400 per quarter based on customer service performance, judged by mystery shoppers, independent experts and questionnaires. Chief executive Barry Tootell says: “Frankly, if your business is about delivering excellent customer service then why would you incentivise selling?”

Barclays followed suit the following day by declaring none of its staff will receive any commission or incentives based on products sold from 1 December. Instead, staff will be paid based on customer service for branches and areas rather than individual performance. Previously the bank awarded incentive payments based on a mixture of sales targets and customer service.

Virgin Money, which was formerly Northern Rock, says it has not had an incentive scheme based on sales since the Government split the former state-backed lender into a “good” and “bad” bank in December 2009.

Virgin pays its in-house advisers an annual bonus based on customer service. A spokesman says: “Our customer-facing staff are not incentivised based on individual sales targets – they do not receive commission-based payments. Overall performance is already assessed against a broad range of factors including customer service and overall company performance.”

Not all lenders have decided to follow Barclays and Co-op’s route.

Nationwide, which claims to be one of the two firms the FSA was happy with in terms of staff incentives, still uses sales targets in part to determine staff remuneration. However, it claims to mainly use customer service to determine staff rewards. It says it measures things like customer retention and mystery shops its staff to see if they have given adequate service.

It has also launched the “Clear Blue Challenge”, which offers staff an average annual bonus of £1,900 if it achieves a six consecutive month lead of 4 per cent or more in the FRS Tracker, an index which compares customer service levels at financial services firms. It says it has no immediate plans to change its incentive structures.

A Nationwide spokesman says: “All our employees are totally focused on serving the needs of our members and customers and a significant part of their remuneration is based around service metrics – something that has always been a key measure.”

Santander, which reviewed its scheme at the start of the year, also says it takes various factors into account when determining staff remuneration, measuring both sales and customer service. It says if a staff member hits sales targets but not customer service targets, no incentive payment is made. But, equally, those who do not hit sales targets will not receive incentive payments no matter how well they perform in relation to service. Santander refuses to comment on whether it will follow Barclays and Co-op and scrap sales targets.

Lloyds Banking Group says it has reviewed its sales incentive schemes since the FSA’s review. Sales targets are still used to determine staff pay, alongside customer service targets. The bank has decided to cap the total incentive that can be awarded to its employees, but refuses to disclose the size of the cap.

A Lloyds spokeswoman says: “The cap is to ensure our incentives are appropriate.”

HSBC says it is currently reviewing its variable pay for branch staff but has not decided whether to make any changes yet. It says its staff receive “most” of their remuneration through basic pay, although it will not disclose what proportion. The bank currently takes into account sales targets and customer service performance when awarding incentives.

Royal Bank of Scotland refused to disclose details of its remuneration scheme.

A Council of Mortgage Lenders spokesman says incentive schemes will vary between the various banks and building societies depending on their business models. He says: “It is up to each individual lender to choose how best to incentivise staff. It all depends on their business model and what distribution channels they use.”

Association of Mortgage Intermediaries chief executive Robert Sinclair (pictured) says while some lenders are taking sales targets out of their incentive schemes, it is unlikely that staff will not be under pressure to reach a certain level of sales.

He says: “Even though these banks have removed sales targets from incentives and the incentive is now linked to their service standards, it does not necessarily mean branch advisers will not have sales targets, it just means the reward is no longer linked to it. Their performance will still be monitored and their annual pay increase could still be partly determined by sales levels.

“I believe there will be a gap between the rhetoric and reality. I find it hard to believe banks will put up with someone who is not selling as they are expected to.”

Lentune Mortgage Consultancy director Stuart Gregory says: “The problem is banks have become used to operating in this pressured environment and it is hard to break out of that, although the FSA’s crackdown is a start. Sales targets do not work and are not in the interest of the customer. All banks need to increase basic salaries and set targets based on customer service.”

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