FSA clamps down on misleading 'incentives'

FSA clamps down on misleading 'incentives'



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The FSA has published a series of final guidelines to help firms avoid creating or operating incentives schemes that drive the mis-selling of various financial products.

The FSA has published a series of final guidelines to help firms avoid creating or operating incentives schemes that drive the mis-selling of various financial products.

The Authority previously published a review of sales initiatives in September 2012, asking for any feedback from firms on the guidance it proposed.

A month later, the FSA’s Managing Director and CEO-designate of the incoming FCA, Martin Wheatley, addressed an audience of senior bankers and insurers, requesting that they put an end to reward schemes that encourage irresponsible sales.

Responses to the initial consultation raised the issue of how firms use performance management and target-setting: some saw the practice as more likely to increase mis-selling than financial incentives.

The new advice makes it clear, however, that firms need to manage these risks as well, with the FSA considering what additional measures it will put into place in this area.

The guidance issued in September remains largely unchanged, though the FSA has clarified its wording in some places and illustrated the changes in policy through examples of both good and bad practice.

The Authority’s guidelines will apply to any firms which deal with consumers and have either sales staff or advisers who might benefit from an incentive scheme.

The original review – which was addressed to banks, building societies, insurers and investment firms – uncovered a number of serious failings, including:

• Most incentive schemes were likely to drive people to mis-sell and such risks were not being properly managed;

• Firms did not identify how incentive schemes might encourage staff to mis-sell, suggesting they had not properly thought about the risks or simply turned a blind eye to them;

• Firms failing to understand their own incentive schemes because they were so complex, therefore making it harder to control them;

• Firms relying too much on routine monitoring of staff rather than taking account of the specific features of their incentive schemes;

• Sales managers with clear conflicts of interests, such as a responsibility to manage the conduct of sales staff whilst themselves able to earn a bonus if their team made more sales; and

• Firms not doing enough to control the risk of mis-selling in face-to-face situations.

Martin Wheatley said: “Finalising this guidance is important because it gives financial firms a clear idea of what we expect from them and how they should manage their incentive schemes. It also marks a key step in changing the culture of viewing consumers as a sales target to somebody to serve.

He added: “I have been encouraged by a number of firms that have already overhauled their reward structures, but I want to see others following suit. When I speak to the bosses of the banks they tell me they want to change, and this is good, but real cultural change will only happen if attitudes shift throughout an organisation from the CEO to the frontline sales personnel.”

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