The Financial Services Authority (FSA) this morning issued a guidance consultation on minimising the risks to consumers from financial incentives.
It follows a review of current practices, in which it found 20 out of the 22 firms assessed had features in their incentive schemes that increased the risk of mis-selling.
The FSA wants firms to tighten their governance and controls and identified areas for firms to focus on and examples of good and poor practice from its review.
Bonus and incentive schemes need to reward good compliance (selling the right way) with a sufficient deterrent to penalise poor behaviour or mis-selling.
The FSA's good and poor practice guidance on incentives
Taking action on poor quality
A firm took strong action when they found that the quality of sales was poor. Depending on the seriousness of the breach, this meant the sales person could be removed from the incentive scheme immediately.
Lesser failures led to deductions in bonus payments, depending on how serious and frequent the problem was.
Sanctions not applied
Sanctions in the bonus scheme were not applied despite problems occurring. For example, staff remained part of the bonus scheme even when the quality standards were not met.
Quality failures not having a material impact
One firm had both a monthly and quarterly bonus scheme for sales staff, with the monthly scheme providing the majority of the bonus available.
Where the firm's file checking identified failures (such as giving poor advice that needed corrective action), sales staff were penalised by losing only their quarterly bonus.
However, they were still eligible to receive the more significant monthly bonuses, which in some cases were more than £7,000 over the course of three months. Since staff could still earn significant bonuses while giving poor quality advice, this scheme was unlikely to have the right impact on staff behaviour.
Flawed ‘quality gateway'
A firm had an incentive scheme with a ‘quality gateway' that was meant to stop staff receiving bonuses if certain sales quality standards were not met. It was based on a points system driven by the firm's monitoring of advice quality, upheld complaints, product lapses, the mix of products sold and other measures.
The firm had presented this as a positive example of how their incentive scheme was linked to sales quality. However, this was not an effective control because staff could have any number of sales failed for incorrect advice and still qualify for a bonus payment, if the other categories the firm measured met the standards.
Doubling bonus even if mis-selling
One firm doubled the monthly bonus of staff who met a high standard of compliance with sales processes as long there was only one mistake. Administrative errors (e.g. getting a customer's name wrong) were treated the same as mis-selling (e.g. withholding key product information). Sales staff could therefore still have their bonus doubled even if they had mis-sold.
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