Roderic Rennison, director at The Ideas Lab, explains the implications of the regulator's work on incentives…
The Financial Services Authority’s (FSA) recent paper on risks to customers from financial incentives highlights the need for advisers to have robust systems and controls in place to monitor good practice, according to consultant Roderic Rennison.
He said how firms measure performance is key: “You can’t just have quantitative measures you have to have qualitative measures as well.”
Three areas to look for
Rennison breaks these measures down into three areas: the quality of the advice given; customer feedback; and complaints data.
“On the quality of advice, a firm needs to ask: ‘does the compliance system penalise poor suitability letters?’
How to keep the FSA at bay
“For customer feedback, a procedure needs to be put in place to measure this. Are firms telephoning clients after they have received advice to see how the experience went?
“Complaints also need to be monitored. Instead of remunerating on volume, firms need to be looking at the quality of advice given; for example, were advisers stronger in some areas compared to others?”
The regulator is looking for details of quality, said Rennison, and compliance schemes that have been thought through.
“Sales managers paid on volume have a conflict of interest, and customers are more likely to lose out,” he said.
Firms should stand back and look at their current incentive scheme and the consequences of it, Rennison recommends.
“I was once told proudly by one firm that it reviews its advisers’ case files to check for ‘advice fails’. But when I asked them how many fails they found, they said ‘none’! Their system was therefore useless.
“Another firm’s approach was decidedly different. It marked on how appropriate to the firm’s agreed system of doing business the file was, whether the fact find was complete and whether it could be directly linked to the client’s suitability letter.
“It also marked on how well an adviser gets documents to providers, and on client feedback, with advisers marked down if they received complaints afterwards.”
However only a minority of firms have the second approach in place, said Rennison.
“Firms have difficulty marking the standard of client files and the advice given on paper. It’s always been an issue, as the adviser concerned may walk out.
“But advisers should be given appropriate support to meet the standards. Employers must give training and support and examples of good practice. The onus is on firms to provide this or advisers won’t know good and bad practice.”
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Read the FSA’s final guidance for firms operating sales incentives schemes in full click here.
Data quality is key
Granted leave to appeal the judgement