The reputation of a newspaper rests, partly, on the timeliness of its coverage. So imagine the damage if its front-page headline tomorrow read: ‘The Titanic has sunk'.
Well, we are within our rights this morning to wonder whether the Financial Services Authority (FSA) can ever expect to be taken seriously again.
In a guidance consultation paper entitled: ‘Risks to customers from financial incentives', the regulator said it had uncovered examples of firms (banks, mainly) incentivising staff to flog products, often to the detriment of the customer.
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How some very old news may affect IFAs
Though it's old news, the FSA's ‘discovery' is extremely important. Indeed, the extent of the customer abuse (I think it can be called that) it had come across appeared to know no bounds. In one case, apparently witnessed by an FSA representative, a salesperson intentionally lied about the price of a product to increase his bonus. In another example, an ‘adviser' cut corners to rush through six sales to avoid a pay reduction at the end of the quarter.
What the regulator (soon to be the Financial Conduct Authority) plans to do about all this isn't precisely clear. It has set out its expectations of firms, including that they should "properly consider" if their incentive schemes increase the risk of mis-selling, which is all fine and dandy but should surely come as standard anyway.
More interestingly, perhaps, was that it suggested it may introduce new rules "to make certain that this new, fairer, approach is hard-wired" into firms, and enforceable if they disregard them.
Independent financial advisory businesses may wonder what any of this has got to do with them. After all, rules that will be introduced at the end of the year following the Retail Distribution Review (RDR) were designed to reduce the risk of mis-selling by removing commission on retail investment products. Surely the RDR is enough?
Well, today's paper may have implications for advisory businesses, depending on the remuneration packages they have in place.
For example, according to the FSA, any incentive scheme based on income, including via fees, increases the likelihood of mis-selling.
In particular, the FSA said it was concerned by what it called ‘100% variable pay': remuneration packages which did not include a basic salary but which depended on earned revenue. It said these firms, which include many smaller businesses, should be aware of the increased risk of mis-selling and have controls in place to mitigate it.
Additionally, the regulator said it was concerned by firms which offered to reduce advisers' compliance costs once they had reached a revenue threshold. In this instance, the reduced costs effectively increase individuals' earnings, rendering this process, too, a mis-selling risk.
So, even though advisers' main source of income (historically at least) is being removed at the end of this year, the regulator will also be shining a very bright light on any rewards offered to advisers in the new world, too.
But I should stress that the FSA's wider initiative is clearly aimed at large banks, building societies, insurance companies and investment firms, which is where it spotted the problems in the first place.
Even if it was a bit late to the news.
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