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FSA incentives crackdown could aid intermediaries

The FSA’s crackdown on sales incentive schemes could lead some lenders to favour intermediary distribution, according to Association of Mortgage Intermediaries chief executive Robert Sinclair.

Last week the regulator ordered financial services firms to overhaul their sales incentive scheme and pay appropriate redress following a year-long investigation into how such schemes drive misselling.

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 published its finding last week.

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.

Sinclair says: “This is an opportunity for brokers to put their head above the parapet. It is an opportunity for lenders which might want to get out of direct distribution and move into the intermediary space because we can take away some of the risks that they are running with their incentives.”

While the report focuses mainly on the activities of larger organisations, Sinclair says brokers – especially those operating self-employed, volume-based models – should review their compliance practices to ensure they do not fall foul of the regulator. The FSA cites variable pay based on the volume of products sold as one area that could increase the risk of misselling.

He adds: “We will be talking to our members about this. They too need to be careful about how they pay themselves and how that is presented and, of course, networks are different in terms of how much commission they pass on.

“This is more of a problem for the banks as pay and incentives are more transparent in the intermediary space. But all firms will have to take a look at what they are doing and make sure they understand the implications if they do not.”

Lentune Mortgage Consultancy director Stuart Gregory says: “This is more a problem for the banks but directly authorised brokers need to ensure they have adequate controls in place too.”

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