FCA warns on self-employed adviser fee models

Smaller advisory firms whose advisers are self-employed and depend wholly on fees for income could fall foul of incentives guidance issued by the Financial Conduct Authority, according to the latest thematic review published by the regulator.

The watchdog today (4 March) published findings which suggest that while larger firms such as banks have changed their ways after the FCA’s incentives paper late last year, small companies, including specifically advisers with self-employed front-line staff, have “not understood” that the rules apply to them as well.

The regulator says in its report: “In instances where staff do not receive a separate bonus or other incentive payment linked to sales, some firms believe they do not have any form of financial incentive scheme.

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“For example, where staff or self-employed advisers receive all of their remuneration from a proportion (fixed or otherwise) of fees, income or commission paid to the firm.”

Because the amount such advisers earn in this situation depends wholly on the amount of business they do, they count as “100 per cent variable pay” models, an incentive scheme that the FCA believes “significantly increases the risk of mis-selling”.

FCA chief executive Martin Wheatley first warned of a regulatory crackdown on sales incentives during his tenure as managing director of FCA predecessor, the Financial Services Authority.

The FSA simultaneously released a paper outlining its concerns, followed by finalised guidance in January 2013.

Lloyds banking group was later last year hit with a £28m fine by the regulator, over serious failings in its sales and incentive scheme controls.

The FCA’s latest review found that around one-in-ten firms with sales teams operate higher-risk incentive schemes and still appear not to be managing the risk properly.

It outlined several areas where firms with models that pose a risk - including self-employed advisers - should concentrate to better manage incentive schemes:

• checking for spikes or trends in the sales patterns of individuals to identify areas of increased risk;

• doing more to monitor poor behaviour in face-to-face sales conversations;

• managing the risks in discretionary incentive schemes and balanced scorecards, including the risk that discretion could be misused;

• monitoring non-advised sales to ensure staff who are incentivised to sell do not give personal recommendations;

• improving oversight of incentives used by appointed representatives; and

• recognising that remuneration that is effectively 100% variable pay based on sales, increases the risk of mis-selling and managing this risk.

Mr Wheatley said: “We’ve seen some good progress but it is going to take time to see whether the changes firms have made to incentive schemes and their controls stick, and whether good beginnings are part of a genuine cultural change.”