All the major retail banks have either replaced or made substantial changes to financial incentive schemes, which played such a major role in the mis-selling scandals of recent years, the Financial Conduct Authority (FCA) revealed today. In its latest review of incentives schemes, the FCA found significant improvements at many firms of all sizes but identified a number of areas common across the industry where further work was needed.
The review found that around one-in-ten firms with sales teams had higher-risk incentive schemes and appeared not to be managing the risk properly. The FCA finalised its guidance on financial incentives in January 2013 and has since been working with the industry, with most large and medium sized firms committing to further improvements following the latest review.
Martin Wheatley, chief executive of the FCA, said:
“Eighteen months ago we gave the industry a wake-up call and it recognised that a poor incentive culture had helped push bad sales practice, which led to mis-selling.
“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 genuine cultural change. But consumers can be assured that this remains an area that we will be watching closely to ensure poor practice doesn’t return.”
The FCA has identified a number of areas on which firms should concentrate to better manage incentive schemes, in particular:
- 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.
The FCA has committed to further work on incentives for retail sales staff. In addition to the regulator's supervision teams maintaining their focus on this issue as part of understanding how firms are changing their culture, further thematic work will be undertaken on firms' performance management approaches.
The progress that has been made, and the further changes required to build on it, will only be effective in reducing the risk of mis-selling if they are embedded for the long term, and part of wider cultural change that places consumers at the heart of firms’ businesses. The FCA has also made clear firms should not simply replace bonus schemes with other performance management measures, which can put pressure on sales staff and are just as capable of causing poor sales practice.
Notes for editors
- Thematic review on risks to customers from financial incentives.
- The latest review of incentives follows on from a report published in September 2012 which uncovered incentive schemes likely to cause mis-selling in most firms with retail sales staff.
- Finalised guidance on risks to customers from financial incentives was published in January 2013.
- The FCA has committed to further work on incentives for retail sales staff. In addition to the regulator’s supervision team maintaining its focus on the issue, further research will be undertaken on how firms use other performance management measures.
- When the FCA begins overseeing the consumer credit market in April, it will look at the extent to which financial incentives drive poor customer outcomes as part of its work with these firms.
- Speech by Martin Wheatley ‘Laying myths to rest’, October 2013.
- Speech by Martin Wheatley ‘The Incentivisation of sales staff – are consumers getting a fair deal?’, September 2012.
- On 1 April 2013 the Financial Conduct Authority (FCA) became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
- The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
- Find out more information about the FCA.