FSA Pushes to Outlaw Flawed Sales Bonuses That Encourage Mis-selling
End mis-selling created by sales incentives!
Martin Wheatley, managing director of the Financial Services Authority (FSA) and chief executive officer designate of the Financial Conduct Authority (FCA), has announced a major piece of work to tackle poorly designed incentive schemes that too often result in customers being sold products they do not need or cannot use, while boosting the earnings of the sales person.
At a Thomson Reuters Newsmaker event in London yesterday, Wheatley told senior bankers, compliance officers, trade and consumer groups:
“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.”
Cultural change is needed, Martin Wheatley continued, and this change can only come from the top of an organisation.
“CEO’s are ultimately accountable for the way their staff are incentivised, so we expect them to take a real interest in fixing this.”
But the FSA, he said, and in future the FCA, will work with the industry to help it make the necessary changes. Martin Wheatley also confirmed that he would be taking a lead role in bringing about these changes.
“We, as the regulator, intend to change this culture of viewing consumers simply as sales targets and I am going to be personally involved in getting this right. This will be part of the ongoing improvements we make to regulation as we seek to make markets work well and give people a fair deal.”
Martin Wheatley noted that many, if not all, of the recent mis-selling scandals had dysfunctional incentive schemes at the root of the problems, payment protection insurance (PPI) serving as a good example. He said:
“This bonus-based approach has played a role in many scandals we have seen over the years. Incentive schemes on PPI were rotten to the core and made a bad problem worse.”
Martin Wheatley encouraged firms to change the way incentive schemes are run so that they work for the customer and not just the sales person. He also told the audience that today would undoubtedly be the beginning of a long journey and the first step would be to look inwards.
“I expect those running firms to start looking at what their schemes are set up to do. The dictionary tells us incentives are something that incites an action, so firms need to ask what type of action it is they incite. Is it to get the best deal for the customer, or is it to get the best deal for the person or firm selling it?”
To assist firms using incentive schemes the FSA has published the results of a review which contains proposed guidance on the steps they can take now to help customers get a fair deal.
“I want to draw a line in the sand here, and use the report we are publishing today to set out our expectations.
“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.”
The introduction of new rules is also being considered to make certain that this new, fairer, approach is hard-wired into the way firms do business, and enforceable if they disregard them.
“Today marks the start of a programme of work to reduce these risks, which the FCA will take forward. This will involve further supervisory work, a wider review of incentive schemes, enforcement proceedings, and a possible strengthening of our rules.”
While he noted that the industry has a chequered history of treating customers fairly, Martin Wheatley said the only way to achieve success would be for the regulator and firms to work together.
“We know this isn’t an easy job and we can’t do this alone. Making such a change is going to take time and it’s going to need your full support – ultimately we need you to help us. By making these changes your customers will be happier and ultimately your businesses will do better.”
Martin Wheatley was joined on the platform by Martin Lewis, creator of Moneysavingexpert.com, who welcomed the policy initiative.
Martin Lewis said: “The problem isn’t that people no longer trust banks and other big financial institutions, it’s they’re right not to. While bank staff may be called ‘advisers’, that should read ‘salesperson’. Remuneration is based on cross-selling products and often structured to ramp up sales with cliff-hanger rewards. This has led to calculated mis-selling being a constant part of the financial services landscape.
“Martin Wheatley is absolutely right to shift regulatory focus from product criteria and box ticking to the real interaction with customers. For too long we’ve had speed-bump financial services, with a product launched, sold heavily, then the brakes put-on with reclaiming campaigns. That’s bad for consumers and the industry. The bosses of the big banks and insurers need to get behind this, lead by example and prove they’re not just there to make a fast buck.”
Review into sales incentives
In his speech Martin Wheatley discussed the findings of a review of 22 firms’ financial incentive schemes. That review, which encompassed banks, building societies, insurers, and investment firms, uncovered a range of serious failings. These include:
- Most incentive schemes were likely to drive people to mis-sell and these risks were not being properly managed;
- firms failing to identify how incentive schemes might encourage staff to mis-sell, suggesting they had not properly thought about the risks or simply turned a blind eye to them;
- firms failing to understand their own incentive schemes because they were so complex, therefore making it harder to control them;
- firms relying too much on routine monitoring of staff rather than taking account of the specific features of their incentive schemes;
- sales managers with clear conflicts of interests, such as a responsibility to manage the conduct of sales staff whilst themselves able to earn a bonus if their team made more sales; and
- firms not doing enough to control the risk of mis-selling in face to face situations.
So serious are the failings of one firm that it has been referred to the FSA’s enforcement division. All firms that had problems are now taking action to put things right, while the worst performing ones have already begun checking past sales to identify if mis-selling has occurred and will pay redress where appropriate. The paper also contains proposed guidance that the FSA wants all authorised firms to consider when setting up and managing incentive schemes in future.
The FSA has seen many different types of poorly managed incentive schemes that had a clear risk of benefiting sales staff and managers rather than customers. For example:
- One firm operated a ‘first past the post’ system where the first 21 sales staff to reach a target could earn a ‘super bonus’ of £10,000.
- Basic salaries for sales staff at one firm could move up or down by more than £10,000 per year, depending on how much they sold.
- Another firm excessively incentivised one product over another, therefore – despite claiming to offer impartial advice – there was a clear risk that its advisers would sell the product that earned them more money. The FSA also found that the same firm made more money from sales of that particular product than any other, hence the bigger incentives for sales staff.
- One firm allowed sales staff to earn a bonus of 100% of their basic salary for the sale of loans and PPI, but the bonus was only payable to those who had sold PPI to at least half their customers.
The FSA now expects firms to consider carefully whether they have incentive schemes that increase the risk of mis-selling, review whether their governance and controls are adequate, and address any inadequacies – including changing the scheme where necessary and paying redress to customers that may have been mis-sold.
The review sets out clearly how the FSA expects firms to manage their incentive schemes and gives a strong indication of how, in the future, the FCA will expect firms to treat customers fairly. The proposed guidance applies to all firms that deal with consumers and have sales staff or advisers who are part of an incentive scheme.
The consultation closes on 31 October 2012 and the FSA is inviting any firm or person with an opinion on the management of incentive schemes to provide feedback.