This issue goes right to the heart of the collapse in consumer confidence in financial services. With one mis-selling scandal after another, consumers have been questioning if products are sold to them because they need it or because someone’s pay or bonus is on the line.
The good news is that we have seen a marked improvement in the way that sales incentives are managed and the way firms monitor how they are working. But we’re not out of the woods yet, which is why we’ll continue to focus on this issue.
One area in which it is clear we need to do more is in helping smaller firms understand how they can make sure that sales incentives for staff aren’t standing in the way of customers’ best interests. Note that where people are paid solely by a share of income or commission this is a form of sales incentive (‘100 per cent variable pay’).
First, it’s important to make clear that this piece of work is not aimed at one man bands or partnerships where all sales activity or advice is undertaken only by the business owners. But these small business owners still have to be sure that the sales they make are fair and in their clients’ interests.
Second, we’re not advocating a tick-box regime, and we are not saying small firms have to cut all sales incentives or change the way they pay their people. We know that in some of the smallest firms 100 per cent variable pay is the norm and we don’t want to force them to take on inflexible, fixed costs. But that doesn’t mean they can ignore the risks of staff pay being directly linked to making sales, or the fees or income generated.
Our guidance takes account of the fact that firms of different sizes have, as a result, different resources at their disposal. So what do we expect?
It is paramount that firms don’t think that by virtue of their small size, the rules don’t apply. It may have been the banks under the hot spotlight of public reproof around sales tactics, but the guidance and latest report apply to all firms, large and small that have sales staff or advisers (employed or self-employed).
The starting point for managing sales incentives is making sure you have the right monitoring as well as the right management information. For example, if a firm notices that there is a spike in sales before the end of the month when staff pay is calculated, it could be an indication that there is something worth investigating. But without that information, it could be difficult to spot and the risk of costly mis-sales is likely to go unnoticed.
What we expect to see from firms is them putting in place the checks that are proportionate to their size. Independent mystery shopping may be too costly, but asking a sample of clients for feedback on their understanding of the products they have bought and/or any risk involved is a low cost way to help assess how sales are being made and can help to identify if any pressure or misleading selling tactics are being used.
Most importantly, we will always expect senior staff at all firms to take responsibility for managing sales incentives, and - if they have not already - they should read the recent report and guidance. They must be aware of the risks, take steps to monitor their affect and act where necessary.
Managing sales incentives is vital for the industry and an important part of cultural change. This is vital if together we are to work to improve the reputation of the financial services.
Clive Adamson is director of supervision at the Financial Conduct Authority.
