Martin Wheatley, managing director of the Financial Services Authority (FSA) and chief executive officer designate of the Financial Conduct Authority (FCA), says he wants to see an end to mis-selling created by sales incentives.
At a Thomson Reuters Newsmaker event in London this morning, Wheatley announced a major piece of work to tackle poorly designed incentive schemes that too often result in customers being sold products they do not need or cannot use, while boosting the earnings of the sales person.
Speaking to an audience of senior bankers, compliance officers, trade and consumer groups, Wheatley said: “Why is it that every time I walk into the bank to do something simple, like pay my credit card bill, the person behind the counter asks me if I would like to extend my credit, take out more insurance or look at their competitive mortgage rates?
“When did this happen? Banks for me used to be a service – a place where you would go in, stand in a queue, have a pleasant chat with the clerk and go about your daily business. Some time ago, this changed – financial institutions have changed their view of consumers from someone to serve to someone to sell to.”
He believes that cultural change is needed and this change can only come from the top of an organisation.
“CEO’s are ultimately accountable for the way their staff are incentivised, so we expect them to take a real interest in fixing this.”
But the FSA, he said, and in future the FCA, will work with the industry to help it make the necessary changes. Martin Wheatley also confirmed that he would be taking a lead role in bringing about these changes.
“We, as the regulator, intend to change this culture of viewing consumers simply as sales targets and I am going to be personally involved in getting this right. This will be part of the ongoing improvements we make to regulation as we seek to make markets work well and give people a fair deal.”
Wheatley noted that many, if not all, of the recent mis-selling scandals had dysfunctional incentive schemes at the root of the problems, payment protection insurance (PPI) serving as a good example. He said:
“This bonus-based approach has played a role in many scandals we have seen over the years. Incentive schemes on PPI were rotten to the core and made a bad problem worse.”
Wheatley encouraged firms to change the way incentive schemes are run so that they work for the customer and not just the sales person. He also told the audience that today would undoubtedly be the beginning of a long journey and the first step would be to look inwards.
“I expect those running firms to start looking at what their schemes are set up to do. The dictionary tells us incentives are something that incites an action, so firms need to ask what type of action it is they incite. Is it to get the best deal for the customer, or is it to get the best deal for the person or firm selling it?”
To assist firms using incentive schemes the FSA has published the results of a review which contains proposed guidance on the steps they can take now to help customers get a fair deal.
“I want to draw a line in the sand here, and use the report we are publishing today to set out our expectations.
“What we found is not pretty. Most of the incentive schemes we looked at were likely to drive people to mis-sell in order to meet targets and receive a bonus, and these risks were not being properly managed.”
The introduction of new rules is also being considered to make certain that this new, fairer, approach is hard-wired into the way firms do business, and enforceable if they disregard them.
“Today marks the start of a programme of work to reduce these risks, which the FCA will take forward. This will involve further supervisory work, a wider review of incentive schemes, enforcement proceedings, and a possible strengthening of our rules.”
While he noted that the industry has a chequered history of treating customers fairly, Martin Wheatley said the only way to achieve success would be for the regulator and firms to work together.
“We know this isn’t an easy job and we can’t do this alone. Making such a change is going to take time and it’s going to need your full support – ultimately we need you to help us. By making these changes your customers will be happier and ultimately your businesses will do better.”
In his speech Wheatley discussed the findings of a review of 22 firms’ financial incentive schemes. That review, which encompassed banks, building societies, insurers, and investment firms, uncovered a range of serious failings. These include:
Most incentive schemes were likely to drive people to mis-sell and these risks were not being properly managed;
firms failing to 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.
So serious are the failings of one firm that it has been referred to the FSA’s enforcement division. All firms that had problems are now taking action to put things right, while the worst performing ones have already begun checking past sales to identify if mis-selling has occurred and will pay redress where appropriate. The paper also contains proposed guidance that the FSA wants all authorised firms to consider when setting up and managing incentive schemes in future.
The FSA has seen many different types of poorly managed incentive schemes that had a clear risk of benefiting sales staff and managers rather than customers. For example:
One firm operated a ‘first past the post’ system where the first 21 sales staff to reach a target could earn a ‘super bonus’ of £10,000.
Basic salaries for sales staff at one firm could move up or down by more than £10,000 per year, depending on how much they sold.
Another firm excessively incentivised one product over another, therefore – despite claiming to offer impartial advice – there was a clear risk that its advisers would sell the product that earned them more money. The FSA also found that the same firm made more money from sales of that particular product than any other, hence the bigger incentives for sales staff.
One firm allowed sales staff to earn a bonus of 100% of their basic salary for the sale of loans and PPI, but the bonus was only payable to those who had sold PPI to at least half their customers.
The FSA now expects firms to consider carefully whether they have incentive schemes that increase the risk of mis-selling, review whether their governance and controls are adequate, and address any inadequacies – including changing the scheme where necessary and paying redress to customers that may have been mis-sold.
The review sets out how the FSA expects firms to manage their incentive schemes and gives a strong indication of how, in the future, the FCA will expect firms to treat customers fairly. The proposed guidance applies to all firms that deal with consumers and have sales staff or advisers who are part of an incentive scheme.
The consultation closes on 31 October 2012 and the FSA is inviting any firm or person with an opinion on the management of incentive schemes to provide feedback.
So far overdue.
However, are they missing another very important and similar point.
Self Employed FS Sales People working for Companies (i.e. Not one man bands or partnerships working on a self Employed basis).
If Sales people are working for one Company. as they have to if working in FS, then they will be subject to the same sort of incentive (i.e. sell, or you don't earn).
There is no justifiable reason to have Self Employed people in Sales enviroment, unless they are operating their own Company.
All sales forces should be on Salaries and EMPLOYED, with no Sales Incentives. And before any FS Companies says they would not be able to afford it and it would effect their business, thats just tough. It should all be part of "fit and proper", and if they have not got the financial resources to operate at this level, then they should not be in the game (at this level).
I can only see the Self Employed Sales people or business operaters who have self employed sales people disagreeing with this. Everyone else in the industry will recognise the probelms that these type of Advisers can cause and I'm sure will have numerous stories to tell.
<I Have had to split this in to multiple parts so my apologies for the length of this response>
I can only imagine that SJP does not have diverse enough experience to understand the errors of his views and that he failed to read the article above.
The FSA's concern is with sales incentive which typically only applies to the employed advisers. They get a salary and may then get bonuses for achieving say PPI sales or promoting a life settlement investment because the business earns a greater commission. Self employed advisers are on straight splits, so are seldom affected by such practices.
Indeed, there is little evidence in favour of employed advisers and indeed possibly the opposite is easier to prove, so perhaps the FSA might consider all advisers going self employed with clietn ownership to address its concerns.
Let us not forget, the biggest misselling scandals in terms of number of cases were undertaken by banks and their employed sales forces. Having worked for 3 banks at a middle management level, the issue was not the banks' boards encouraging bad practice, but individual junior directors and managers "bending the rules" to hit targets and achieve promotions.
The misselling of investment products (especially endowments) was equally prevalent in both self-employed and employed sales forces with the latter, through estate agents and banks, again having the highest number of cases. FOS is broadly funded by the complaints against employed advisers.
On the next issue of the principle of self-employed advisers, there are 4 positive factors against SJP's comments.
1. The UK economy blossomed in the 80s and recovered from the recession in the 90s from the small business and self-employed, who still form an important part of our economy. Encouraging small businesses with less legislation and lower monthly outlay was key to companies taking a chance and growing to be big firms – the examples are almost endless.
2. SMEs and large corporations are currently held back by a raft of Left-wing UK employment laws, which seem great for trade unionists (in the short term) but are a detractor for employers. It is cheaper and easier to grow a company outside the UK and thereon the EU. I could list the reasons if required. Taking on self-employed advisers therefore enables advice firms to grow with little outlay and indeed many experienced advisers prefer this, as it enables a better work-life balance.
It should not be forgotten that many of the largest and most respected advice firms and networks were started from a small group of self-employed advisers.
3. While different companies have different models, broadly the self-employed have to attain higher standards of service to ensure their client relationship – and thereon cashflow – is maintained. They will usually ensure they have client ownership and will take their clients with them if they change roles. Employed advisers are lucky if they can complete 10 years with the same firm in the current industry, so why should they care about tomorrow. Estate agent advisers rarely undertake remortgage reviews and instead these are passed to centralised teams so they can concentrate on servicing new buyers.
As was recently commented in the "pinks", many employed advisers would missell for as long as possible, achieve promotion and then leave the problems for their replacements with no consequences for their actions. How many bank staff have been sacked for PPI or endowment missellling?
The self-employed en large have to think about 10-40 year client relationships, so will look beyond a "quick buck today" if they hope to survive. Sure, some get it wrong, but most do not. I know advisers who have had the same clients for nearly 40 years and are more like friends, which could never be achieved if he were employed.
4. When a company has employees, it must ensure it gets the most value from each one, as they pick up the same salary whether they do one sale or a hundred. Accordingly, this lead to high pressure management and thereon high pressure sales techniques and misselling. If advisers do not perform, they are sacked.
If advisers are self emplyed, a firm's fixed monthly outlay is much lower and so can afford for some advisers to earn less and others.
In summary, SJP needs a new perspective.