Cookies on Pinsent Masons website

This website uses cookies to allow us to see how the site is used. The cookies cannot identify you. If you continue to use this site we will assume that you are happy with this

If you want to use the sites without cookies or would like to know more, you can do that here.

Better governance and control of staff incentives required to prevent mis-selling, says FSA

Most financial institutions that incentivise their staff to sell financial products to customers are encouraging those staff to engage in "mis-selling" practices that are not being properly managed, the City regulator has said.05 Sep 2012

The Financial Services Authority (FSA) conducted a review of incentive schemes operated by banks, building societies, insurance companies and investment firms and other regulated businesses and found that of 22 firms' schemes it assessed, 20 contained "features" that "increased the risk of mis-selling". Six cases presented "significant" risks of mis-selling, it said.

The FSA said some organisations were not exerting sufficient control over the schemes to prevent customers being sold products and services they did not need. In some cases the schemes were so "complex" that management at the firms did not fully understand them, whilst some sales managers had a "conflict of interest" in the way they oversaw the work of their staff because they stood to gain bonuses on the basis of sales volume, it said.

In addition firms relied too heavily on "routine business quality monitoring" which often did not identify the "riskiest areas," the FSA said.

The regulator has called on firms to check whether their "governance and controls are adequate" to guard against the risk of mis-selling resulting from the way they incentivise sales staff and to alter their schemes if necessary.

"We were concerned to find that incentive schemes with high risk features and the potential for sales staff to earn significant bonuses were common across the firms we assessed," the FSA said in a statement. "Most firms did not have effective systems and controls in place to adequately manage the increased risks of mis-selling arising from their incentive schemes."

Under FSA rules a regulated firm "must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems". However, the FSA said it is considering updating its rules to better proscribe how firms manage their incentive schemes. In the mean time it has issued new guidance (32-page / 889KB PDF) on how it expects regulated businesses to tackle the problem.

"We expect firms to: properly consider if their incentive schemes increase the risk of mis-selling and, if so, how; review whether their governance and controls are adequate; take action to address any inadequacies – this might involve changing their governance and/or controls, and/or changing their schemes; where risks cannot be mitigated, take action to change their schemes; and where a recurring problem is identified, investigate, take action and pay redress where consumers have suffered detriment," the FSA's guidance said.

"While this work has looked at financial incentives, we expect firms to manage the risks from sales targets and performance management, which will also influence the behaviour of sales staff. Firms should ensure that risks from incentive schemes are not transferred to these areas. Risks to customers from incentive schemes may also arise in areas such as complaints handling, claims processing, mortgage arrears and customer retention," it added.

The FSA said it considers 'mis-selling' to have taken place when firms do not "deliver fair outcomes for consumers". It said customers must be "treated fairly" and be able to "understand the key features of the product and whether they are being given advice or information."

In addition firms must ensure that customers are "given information that is clear, fair and not misleading" which allows them to make "informed" decisions about purchasing financial products or services or on trading investments. Companies offering financial advice to customers must also ensure that they "recommend suitable products" to those individuals, the FSA added.

Firms should "collect sufficient information to be able to properly manage risks with their incentive schemes" and ensure that staff tasked with monitoring the work of sales staff are "sufficiently independent of the sales function to avoid inappropriate influence," the FSA said in its guidance. Sales managers' conflicts of interests must also be reduced or managed by firms, whilst the companies should also anticipate "what inappropriate behaviour might occur" as a result of their incentive schemes and "assess actively the behaviour of their sales staff during sales conversations, including what is actually being said to customers," it added.

In a speech on Wednesday Martin Wheatley, the FSA's managing director, said that chief executives of financial services firms must "take a real interest in fixing" the problem of mis-selling stemming from reward schemes being operated. This is because those individuals are "ultimately accountable for the way their staff are incentivised," he said.

"Senior management should approve incentive schemes with input from risk management and compliance functions into the design and review of incentive policies. Senior management should ensure they consider how incentive scheme features can lead to poor customer outcomes," the FSA's guidance said. "There should be frequent and effective reviews of incentive schemes, with sufficient attention given to risks to the fair treatment of customers. Management information should be collected and used by senior management to assess if risks are crystallising and if controls are effective in mitigating the risks."

Expertise in Financial Regulation

Pinsent Masons offers an experienced team who are adept at advising on the increasingly international and complex questions arising out of the current sea of regulatory change. The current climate dictates that lawyers have an ability to provide clear, practical advice delivered in a cost-effective manner.

More about Financial Regulation