At the Ami we have been thinking about the practical implications for advisers of the final guidance from the FSA on the risks to customers from financial incentives.
Whilst the work this document was based on and its original reasoning was centred around larger firms selling their own products, it still has a big impact on intermediary firms of all sizes.
The FSA is clear that it is not against incentive schemes per se but their review found that most of the schemes looked at were likely to drive people to mis-sell.
The recommendations made are a start point, not the end of the journey. The most poignant addition from the draft version is the assertion that “where an appointed representative has their own sales staff or advisers, the principal firm is responsible for managing the risks from incentive arrangements and any mis-selling”. This means that networks will not only have to carefully operate their own incentive programmes, but also review and monitor those of its “members”. This is a complex and perhaps costly task.
Looking forward, firms need to know the risks any scheme might introduce. So if there are “precipice” dates, such as to be in the top 40 at a point in time to make the overseas convention, then a firm must be taking additional measures to ensure those vying for places are not selling inappropriately.
Perhaps the toughest challenge is what happens if such a “failure” is found.
The new FCA will be looking for evidence of proper disciplinary processes. Where there is evidence of poor selling, are bonuses with-held? Is the income deducted from the relevant period? Are people “taken off the plane”? If there is evidence of top performers systemically mis-selling are they dismissed? Do the contracts that exist between networks and member firms and their employees allow such action to be taken?
Is this all sewn into the scheme rules? Where there is evidence of poor behaviour, is appropriate action always taken?
Firms will have to look at their management structures to ensure there is sufficient independence between those who manage sales and may benefit from their teams performance and their role in monitoring and supervising their quality.
The guidance asks firms to assess if their procedures adequately asses the face-to-face actions of advisers, as it is here that poor sales can occur.
As an industry we need to ensure we can still properly incentivise our people and reward them for doing a great job. The key driver for this must be that the products and services sold meet the customer’s needs and they understand what they have bought and why it works for them.
Rewarding this is very much allowed, but management need to ensure they are fully understand their reward schemes and where there might be risks of advisers doing the wrong thing to gain financially. In creating schemes we need to ensure that the risks are fully assessed and mitigated and review processes are proportionate to the incentives offered.
Robert Sinclair is chief executive at Association of Mortgage Intermediaries