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FSA launches crackdown on sales incentive schemes

FSA Letters 480

The FSA is ordering financial services firms to overhaul their sales incentive schemes and pay appropriate redress following a year-long investigation into how such incentives drive misselling.

The regulator has this week published a report into the way misselling is motivated by high-volume, target-driven bonuses and pay structures.

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 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.

The FSA says: “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.”

Financial Conduct Authority chief executive designate Martin Wheatley has spearheaded the FSA’s investigation on incentives and it is understood the project is seen internally as of a similar scale to the RDR and the mortgage market review.

Speaking at a Thomson Reuters Newsmaker event in London this morning, Wheatley said: “Why is it that every time I walk into the bank to do something simple, like pay my credit card bill, the person behind the counter asks me if I would like to extend my credit, take out more insurance or look at their competitive mortgage rates? 

“When did this happen? Banks for me used to be a service – a place where you would go in, stand in a queue, have a pleasant chat with the clerk and go about your daily business.  Some time ago, this changed – financial institutions have changed their view of consumers from someone to serve to someone to sell to.”

He added: “What we found is not pretty.  Most of the incentive schemes we looked at were likely to drive people to mis-sell in order to meet targets and receive a bonus, and these risks were not being properly managed.”

Aifa policy director Chris Hannant says: “For too long, the regulator has wasted a lot of time over comparatively minor issues, particularly within the advice sector. It is right the FSA is now focusing its attention on these mass-scale areas where the largest harm is done.”

Essential IFA managing director Peter Herd says: “The regulator needs to look at whether banks are product providers or advisers. If they are advisers, any advice has to be for the benefit of the client. The whole bank culture needs to be addressed.”

FSA incentives

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  • Lee Jones 5th September 2012 at 12:37 pm

    Sorry what about the sales incentives to the customer??? Come on FSA I am on my 20th Meerkat stuffed toy!Obviously I don’t care what isurance I am buying so long as I get my next MEEERRcat.. Zimple isn’t it?

  • Peter Keeney 5th September 2012 at 11:37 am

    Can’t agree more with comment one. 20 years ago whilst working for Commercial Union the big sales incentive was to transfer members away from Final Salary Pensions Schemes to a Commercial Union Private Pension Scheme. These types of incentives have continued to this day. It’s scandalous that the financial future, of so many, is allowed to be kicked about like a commission football. All too often it’s about sales figures and not about what is right for the client. PPI – need I say anymore

  • bob 5th September 2012 at 11:30 am

    Anonymous | 5 Sep 2012 9:27 am

    A good example of this is Openwork still taking their top advisors to Mauritius each year?

    Actaully thats not a good example at all. Thats rewarding good performance and recognising success, which is key for motivation and development, can only presume you’ve never had the invitation.

  • Des Platt 5th September 2012 at 11:07 am

    Quite astonished at the level of some of these bonuses.I worked for Nat West until 2004 and know from colleagues that branch based salaries are not in these sort of leagues. Nevertheless, I can remember the pressure to sell flexible mortgages at one stage ; never a fixed rate option and always done on an interest only basis. I remember discussing with colleagues that we thought years down the line it could be another misselling scandal. Fortunately, I always stuck to my mantra of treating the customer as I would want to be treated and eventually it decided me to go independent.

    Now eight great years down the line I am retiring and, much as I will miss the clients, I am grateful that my efforts will no longer go to profit for these criminal big organisations .

    Twenty years ago when Nat West announced performance related bonuses , I said to my boss it would be a disaster for banking. With the right people recruited into a small properly led team, targets are unnecessary

  • Andy 5th September 2012 at 10:15 am

    Also what about the staff having to resort to these measures in some cases to keep their jobs no doubt, the sales management need to take a long hard look in the mirror, its been going on too long and about time it was stopped!!

  • Chris 5th September 2012 at 10:08 am

    I just hope we brokers and IFA’s don’t get caught up in this and that the FSA realise that we advise clients where as banks do not. Banning protection commission to brokers/IFA’s would mean that millions of people would simply not puchase any protection product.

  • Tokiojo 5th September 2012 at 9:27 am

    A good example of this is Openwork still taking their top advisors to Mauritius each year?

  • Tokiojo 5th September 2012 at 9:27 am

    A good example of this is Openwork still taking their top advisors to Mauritius each year?

  • Ann Onymous 5th September 2012 at 9:19 am

    If the FSA has just noticed this practice from the Banks, what planet has it been on, or have they also benefitted from not noticing what the banks have done?