Not just the banks: The FSA’s smaller firm incentive concerns

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Advisers say the FSA investigation into sales incentive schemes will force firms operating a self-employed, volume-based model to review their compliance practices and introduce tougher sanctions for unsuitable advice.

The regulator published a report yesterday following a year-long investigation into the way sales incentive schemes drive misselling. The FSA found 20 out of 22 firms assessed operated incentive schemes which increased the risk of misselling. Lloyds Banking Group has been referred to enforcement following the investigation.

The review focused on banks, building societies, insurers and investment firms. But the FSA says smaller firms also need to consider whether their incentive schemes increase the risk of misselling, and address this where necessary.

In relation to smaller firms, the FSA cites variable pay based on the volume of products sold as one area that could increase the risk of misselling. It says that as many small mortgage brokers and investment advisers pay staff purely according to the revenue they generate, these firms should have adequate controls to mitigate misselling risk.

The regulator also highlights schemes where advisers’ compliance costs are deducted from sales revenue, which are then reduced if sales pass a certain limit. “This can create a disproportionate reward for marginal sales if advisers are trying to reach the threshold towards the end of any qualifying period, as the reduced compliance costs effectively increase future earnings,” says the FSA.

Syndaxi Chartered Financial Planners managing director Robert Reid says: “Many firms pay advisers on the basis of product volume, and inevitably this is the case for self-employed advisers, and so arguably they will be caught by this.”

Reid argues the self-employed model is built on the basis that individual advisers write as much business as they want to earn, so it may be difficult for advisers to prove a recommendation was made purely because it was suitable for the client and not to boost the adviser’s income.

He says: “Firms will be under pressure to evidence that advisers have done the best thing for the client, and made deductions from advisers’ pay where they have screwed up. Contracts with individual advisers will certainly have to change to reflect this.

“A lot of networks also have tiered charging structures. They might argue this paper has nothing to do with them because firms work on an independent basis. But the charging structure is a contributing factor in the way products are sold. Firms will have to ensure the quality of sales is just as important as the quantity.”

Informed Choice operates both a self-employed and employed model. Manging director Martin Bamford says the business will be largely unaffected by the FSA report as staff are paid according to advice activity rather than sales.

He says: “For our self-employed people, the more advice they give the more they earn, and our employed people receive a bonus based on advice activity as well.

“There could be a fallout for some smaller firms, but to some extent this will be tackled by the RDR and the move away from commission to adviser charging. Firms that continue to work on a speculative basis are more likely to be caught up in this.”

An FSA spokesman says: “We have visited 22 firms as part of this review, we will revisit those firms and widen the review out to other firms. We are also going to look at our supervisory approach.

“This paper will be considered as part of general supervision going forward. This is a big piece of work. Any firm that uses an incentive scheme needs to consider how this paper affects them and how they treat their customers.”