Regulation  

FSA to increase focus on scrutiny of incentives

Martin Wheatley, incoming chief executive of the Financial Conduct Authority, said the regulator would instead widen its scrutiny of sales incentives to see how firms were acting on guidance.

He said: “If they have not done so already, firms need to look at this guidance now, work out how it applies to them and what they should do differently.

“We remain open-minded about whether or not new rules are needed to ensure consumers get a fair deal, but the answer to that question will ultimately come from the industry’s response to this piece of work.”

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Following an initial review in September 2012, the FSA’s 34-page document issued last week said firms would be expected to consider if incentive schemes increased the risk of mis-selling, review whether their governance and controls were adequate, take action to address any inadequacies and, if necessary, change their schemes.

If a recurring problem was identified, it should be investigated, action taken and redress paid if consumers have suffered detriment.

The FSA’s stance reflects a report from the World Bank which claimed that better auditing of incentive schemes would be more effective than constant rule changes.

Simon Webster, managing director of Kent-based Facts and Figures Financial Planning, said: “I remain confused by the FSA priorities here. It fiddles around the edges where incentivised sales may cause some limited consumer detriment in limited circumstances, yet completely misses the banking crisis and messes up the start of the retail distribution review.”

Failings uncovered by the FSA included:

Firms failed 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 failed to understand their own incentive schemes because they were too complex, therefore making it harder to control them.

Firms relied 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 while being able to earn a bonus if their team made more sales.

Firms not doing enough to control the risk of mis-selling in face-to-face situations.

World Bank report key points:

A 30-page report, Incentive Audits: A New Approach to Financial Regulation, said rules on capital requirements and transparency do nothing to tackle perverse incentives.

Regular incentive audits would be more effective to prevent wrongdoing than constant regulatory changes.

Proposal that regulators carry out incentive audits of regulated firms.

Proposal that incentive audits would “regularly and systemically” evaluate structural factors that affected incentives for risk-taking in the financial sector.