British regulators have launched a new initiative designed to eradicate financial industry sales incentives that may end up hurting clients.
Speaking at an industry conference on Wednesday, Martin Wheatley, managing director of Britain’s Financial Services Authority (FSA) and chief executive officer designate of the new Financial Conduct Authority (FCA), announced that he intends to put an end to mis-selling by financial firms caused by distorting sales incentives. Wheatley said the FSA aims to address poorly designed incentive schemes that can result in customers being sold products they do not need, while boosting the earnings of the sales rep.
As part of that effort, the FSA published draft guidance on Wednesday that aims to help firms comply with existing regulatory principles, which demands that firms craft fair incentive schemes and that they have a strategy for mitigating the risk of improper sales. The draft guidance is open for consultation until Oct. 31; and the FSA says new rules are being considered too, along with a wider review of incentives, and possible enforcement action.
This comes in the wake of a review by the FSA, which it says found risky sales incentive structures are common in the industry, and that most of the firms it reviewed don’t have effective controls in place to manage these risks. One case has been referred to enforcement as a result of this review, the FSA notes.
Speaking to an audience of senior bankers, compliance officers, trade and consumer groups, Wheatley said, “I want to draw a line in the sand here, and use the report we are publishing today to set out our expectations. What we found is not pretty. Most of the incentive schemes we looked at were likely to drive people to mis-sell in order to meet targets and receive a bonus, and these risks were not being properly managed.”
The FSA said it now expects firms to consider carefully whether they have incentive schemes that increase the risk of mis-selling, review whether their governance and controls are adequate, and address any inadequacies – including changing the scheme where necessary and paying redress to customers.
Wheatley also lamented the rise of cross-selling efforts by financial firms. “Why is it that every time I walk into the bank to do something simple, like pay my credit card bill, the person behind the counter asks me if I would like to extend my credit, take out more insurance or look at their competitive mortgage rates?” he wondered. “When did this happen? Banks for me used to be a service – a place where you would go in, stand in a queue, have a pleasant chat with the clerk and go about your daily business. Some time ago, this changed – financial institutions have changed their view of consumers from someone to serve to someone to sell to.”
Wheatley said he wants to see this culture change, and he pointed to industry CEOs as the ones who must drive that change, along with the FSA. “We, as the regulator, intend to change this culture of viewing consumers simply as sales targets and I am going to be personally involved in getting this right,” he said. “This will be part of the ongoing improvements we make to regulation as we seek to make markets work well and give people a fair deal.”
Consumer advocates are applauding the FSA’s move, stressing that both regulators and the industry must follow through. “We welcome the publication of the FSA’s guidance consultation and the regulator’s commitment to action,” said Adam Phillips, chairman of the Financial Services Consumer Panel.
However, he stressed that the problem is urgent. “Consumers continue to suffer from inappropriate pay and bonus practices in banks and other financial institutions. Incentives that encourage client service staff to make a profit at the expense of the customer need to be removed now,” he said. “The regulator has made a commitment to change the industry’s behaviour. We hope that this time the industry will get the message and not try to find a way to get around the rules as they have done in the past.”