Perhaps for the first time since polarisation (the high point of regulatory common sense, now sadly 20 odd years old, so not many of you will even know what it almost achieved) I have found an FSA paper uplifting. Imagine!
The paper in question is its guidance consultation, Risks To Customers From Financial Incentives.
Despite its title page’s awful punctuation, it’s a model of clarity and common sense. One doesnot know what will become of it once the lobbyists get to work but it seems to me to be a very decent start to the Wheatley era. And happily it is one that the IFP community and all others now operating on a fee only basis will find unlikely to trouble their core business models. Thanks be.
It tackles an issue that is most prevalent in institutional salesforces and those giving tied and restricted advice although every consumer-facing financial services business needs to have a good read of it and make sure the way they incentivise their revenue generators is properly defensible against the accusations of bad practice it makes so powerfully.
Of course iis an issue that the regulator should have tackled way back, certainly before, or at least as part of, the RDR but I suspect the Guidance Consultation’s origins lie in that vast work stream, so one has to say better late than never and well done on getting to a root cause of bad practice in the end.
To explain, the FSA is tackling the way salesforces routinely still get incentivised to flog the wrong products to their customers. For years it has been common knowledge that many institutional retail financial services salesforces have been focused on selling what makes the most profit for their employer. But until I read the report I had no idea of the sheer range of grubby techniques used to encourage foul sales behaviour.
The examples given make one’s toes curl. These include: “No bonus would be paid unless sales staff sold PPI to at least 50 per cent of all customers” and in a cracking example of how to let salespeople claim not to be on commission: “A firm reviewed staff salaries every quarter, and moved staff between salary bands depending on how much they sold. The highest salary band earned more than three times the lower salary band.” Strewth
One of the areas highlighted as a scheme that increases the risk of mis-selling is one where the salesperson’s pay is 100 per cent dependent on monthly performance.
Those of us who were advising in the 80s can testify that the FSA has got that right and while I had not thought there were any salesforces of that ilk left, except in claims management, there are many franchise style operations, where the effect is worse as costs have to be covered by the salesperson before they can even start to earn. That is pressure.
So it is not just the big boys who need to pay attention, very small firms will naturally fall foul of the 100 per cent variable earnings factor.
Those drafting the resulting rules will need to accept that the acid test should be whether any consumer detriment is being caused at a firm. Management does need to be allowed to incentivise activity and reward success through good practice.
There is no reason why a well supervised top adviser (or even seller) should be a bad one after all.
But after years and years of the RDR, it is great to see a root cause of consumer detriment being tackled and attention being focused on where the real big business management dirt lies.
Tom Baigrie is chief executive of Lifesearch