The FSA has published final guidance that will help financial firms avoid creating and operating incentives schemes that drive mis-selling.

In September 2012 the FSA published a review of sales incentives and asked for feedback on proposed guidance. At the same time Martin Wheatley, managing director of the FSA and CEO-designate of the Financial Conduct Authority (FCA), addressed an audience of senior bankers and insurers to ask them to end reward schemes that encouraged bad sales.

The guidance remains largely unchanged but the FSA has clarified the wording in some areas and provided further examples of good and bad practice. The guidance applies to all firms that deal with consumers and have sales staff or advisers who are part of an incentive scheme.

Many responses raised the issue of how firms use performance management and target setting; some saw this as more likely to increase mis-selling than financial incentives. The guidance makes it clear that firms need to manage these risks as well, and the FSA is considering what additional work it will undertake in this area.

Wheatley said: “Finalising this guidance is important because it gives financial firms a clear idea of what we expect from them and how they should manage their incentive schemes. It also marks a key step in changing the culture of viewing consumers as a sales target to somebody to serve.

“I have been encouraged by a number of firms that have already overhauled their reward structures, but I want to see others following suit. When I speak to the bosses of the banks they tell me they want to change, and this is good, but real cultural change will only happen if attitudes shift throughout an organisation from the CEO to the frontline sales personnel.”

The FSA is planning to widen its review of sales incentives and will review how firms are acting on its guidance. The FSA will be assessing high street banks and other firms in addition to the 22 firms that were originally assessed.

Wheatley added: “If they have not done so already, firms need to look at this guidance now, work out how it applies to them and what they should do differently. We remain open-minded about whether or not new rules are needed to ensure consumers get a fair deal, but the answer to that question will ultimately come from the industry’s response to this piece of work.”

The review published in September 2012, which encompassed banks, building societies, insurers, and investment firms, uncovered a range of serious failings, such as:

• 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.

The FSa said that so serious were the failings at one firm that it was referred to the regulator’s enforcement division.