Last year, Martin Wheatley, FSA managing director and chief executive designate of the Financial Conduct Authority, announced the FSA’s findings into the way sales staff are incentivised by financial firms to sell products and services.
Looking at 22 firms of all sizes, including high street banks, building societies, insurance companies and investment firms, the FSA found some serious problems.
Most of the incentive schemes the FSA saw were likely to drive staff to mis-sell in order to meet targets and receive bonuses. Furthermore, these risks were not being managed properly. Examples the FSA found included:
• A firm operating a ‘first-past-the-post’ system where the first 21 sales staff to reach a target could earn a ‘super bonus’ of £10,000.
• A firm where the basic salaries of sales staff could move up or down by more than £10,000 per year depending on how much they sold.
• A firm allowing sales staff to earn a bonus of 100 per cent of their basic salary for the sale of loans and payment protection insurance (PPI), but the bonus was only payable to those who had sold PPI to at least half their customers.
The FSA’s immediate response to its findings was to launch a guidance consultation, which closed on 31 October 2012. The finalised guidance was published in January.
The dictionary tells us “incentives” are things that incite an action so the key question is what type of action is being incited. 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? The FSA does not have a problem with incentive schemes but argues that these should never be at a customer’s expense.
The FSA wants to change the culture within firms so customers are not viewed simply as sales targets and it expects such change to be driven from the top.
The FSA does not prescribe how firms should, or should not, incentivise their staff, however principles 2, 3, 6, 7 and 8 of the Principles for Businesses are applicable. Principle 3 is particularly relevant in that it provides that “a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems”. In addition to the principles, the provisions in senior management arrangements, systems and controls are also relevant, particularly SYSC 3.1.1R and 4.1.1R depending on the type of firm.
The review and the finalised guidance signal the start of work that the FCA will take forward. This will include further supervisory work, a wider review of incentive schemes, enforcement proceedings and possibly a strengthening of the rules.
Given this, firms should review their incentive schemes in light of the finalised guidance and ask themselves what the primary drivers of such schemes are and whether the risks of mis-selling are being properly managed. Firms should:
• Consider if their incentive schemes increase the risk of mis-selling and, if so, how.
• Review whether their governance and controls are adequate.
• Take action to address any inadequacies – this could include changing governance arrangements or controls and/or changing the schemes.
• Where risks cannot be mitigated to change the schemes.
• Where a recurring problem is identified, investigate, take action and pay redress to customers where they have suffered detriment.
Simon Lovegrove is a lawyer in the financial services team at Norton Rose LLP
