FSA clamps down on `flawed' bank bonus schemes

The FSA wants to see an end to bank bonus schemes which result in customers being sold products they neither want nor need.

The Financial Services Authority (FSA) has announced plans to tackle ‘poorly designed incentive schemes’ in place at banks, building societies, insurers and investment firms.

The regulator believes these commission schemes encourage mis-selling, and has identified a range of serious failings by major financial firms.

The FSA conducted a review of 22 firms’ financial incentive schemes, which found:

• Most incentive schemes were likely to drive people to mis-sell
• Firms had either not realised these schemes would drive people to mis-sell or were turning a blind eye to that risk
• Firms had implemented complex incentive schemes which even they didn’t understand and so could not control
• Sales managers had clear conflicts of interest. For example, having to manage the conduct of sales staff while relying on team sales to earn a bonus
• Firms were not doing enough to control the risk of mis-selling in face-to-face situations

The specific examples of poor practice the FSA found make for scary reading:

• One firm used a ‘first past the post’ system where the first 21 sales staff to reach a target earned a ‘super bonus’ of £10,000
• Basic salaries for sales staff can move up or down by more than £10,000 a year depending on how much they sold
• One firm incentivised one product over another, as it made more money from sales of that particular product. It claimed to offer impartial advice
• One firm allowed sales staff to earn a bonus of 100% of their basic salary for the sale of loans and PPI, but the bonus was only payable to those who sold PPI to at least half of their customers

What happens now?

Martin Wheatley, managing director of the FSA and the chief executive officer designate of its replacement, the Financial Conduct Authority, made clear that changing this culture was down to the financial firms themselves.

He said: “CEOs are ultimately accountable for the way their staff are incentivised, so we expect them to take a real interest in fixing this.”

However, he added there will also be further supervisory work, enforcement proceedings and a possible strengthening of the rules if necessary.

The regulator is now consulting on its guidance to firms on how to identify and manage the risks of incentive schemes. The FSA says it expects firms to:

• Consider if their incentive schemes increase the risk of mis-selling
• If so, review whether their governance and controls are adequate
• Take action to address any inadequacies
• If risks can’t be managed, change the incentive scheme
• Where a recurring problem is identified, take action and pay redress to customers who have suffered as a result

The consultation closes on 31st October. Any firm or person with an opinion on the management of incentive schemes is invited to provide feedback. You can read all of Martin Wheatley’s speech on the FSA website.

What do you think? Do these incentive schemes encourage mis-selling? Should financial firms incentivise sales staff at all?

More on banking:

Huge rise in bank complaints

Why the banks are still strangling British business

Shock jump in inflation in July

Why base rate hasn't been cut to 0%