As such, the then Financial Services Authority’s clampdown on incentive structures that promote inappropriate sales was rightly cheered; the £28m fine for Lloyds last year for potentially mis-selling more than 1m products due to poor incentive structures even more so.
However, I have to question how far the Financial Conduct Authority is going to take its scrutiny of incentives, especially when it comes to small firms.
This morning (4 March) the FCA published a thematic review examining the ongoing risks to customers from financial incentives.
On the whole it looked like an overall reasonable piece of work: the regulator revealed that banks seem to have changed their sales practices in the customers’ best interest, but also said it would keep an eye on them to make sure they didn’t revert if profits began to slide.
That’s great. Everyone likes seeing the banks being held to account. That it continued to single out the “one-in-ten” firms that have still not got their safeguards in order despite the warnings is also obviously welcome.
It then goes on to say that smaller firms - some of the smallest financial services firms, in fact - had not heeded the guidance as fully as the regulator would like, believing it did not apply to them.
Again, nothing wrong with pointing this out in principle.
But it added that advice firms that operate a self-employed model where their advisers’ remuneration depended wholly on products or services paid for by clients could fall foul of the FCA’s incentives guidance.
My question is this: at what point do we cross the border from incentivised mis-selling to simply doing business?
I can somewhat understand what the regulator is saying about self-employed advisers if those advisers are part of a larger firm and separate from the firm’s compliance function. They are out there selling as much as they can to earn as much as possible, and leaving it up to someone else to make sure it complies.
But take the logic on and the regulator is dangerously close to saying that any self-employed adviser, including sole practitioners or “one man bands”, would be in breach of guidance simply because their whole livelihood depends on doing business. Does this mean there is an inherent mis-selling risk?
If you are a self-employed housepainter, you make your living getting paid for painting houses. Would it be so wrong for you to promote your services, maybe even to suggest to people that their homes could use a fresh coat? Surely, it is up to the homeowner to decide whether or not their facade could do with a fresh lick.
I should point out here that the regulator is no longer simply talking about selling products, it specifically says making money from “providing services” could also breach incentive guidance. So if you promote planning services that do not necessarily involve any product sale you could still be on the wrong side of the line?
To be fair, one commenter on our earlier previous story pointed out that the FCA is “not saying you can’t pay your advisers proportionally to the fees they earn, you just have to accept that there may be risks associated with this method of remuneration”.
The person added that the risks are probably dependent on how much business the adviser is required to bring in to earn their keep, which would push this guidance into much more sensible territory.
We are getting increasingly close to some pretty awkward questions about conflicts of interest among one-adviser firms. Some more guidance on the FCA on what exactly it doesn’t like here would be useful.
