Firms urged to reform staff reward schemes as FSA issues guidance on avoiding mis-selling

The Financial Services Authority (FSA) said organisations such as banks and insurance companies should "collect sufficient information to be able to properly manage risks" associated with "incentive schemes" they run for staff.

"Firms should make sure that they have the right information to help monitor what is being sold and identify individual sales staff who are higher risk," the FSA said in new finalised guidance (34-page / 2.35MB PDF) on incentives and mis-selling. "This information may include: which sales staff are achieving high sales volumes and what products they are selling; patterns of an individual’s sales activity around incentive scheme features that indicate increased risk; and the effect of product promotions or sales campaigns. Firms should then act on the results accordingly, including taking areas of increased risk into account in business quality monitoring."

The FSA decided to issue guidance on how financial services companies can manage the risks and governance of incentive schemes after a review it conducted found widespread "features" of incentive schemes, operated by banks, building societies, insurance companies and investment firms and other regulated businesses, had "increased the risk of mis-selling".

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 previously said.

After consulting on draft guidelines in September last year, the FSA has now published finalised guidance on the issue of mis-selling and the relationship with incentive schemes. It said that companies should put in place independent checking mechanisms within their organisation to monitor sales staff that could be at risk of mis-selling because of the incentives on offer.

"Staff undertaking business quality monitoring should be sufficiently independent of the sales function to avoid inappropriate influence by sales staff or managers," according to the guidance. "Firms should take appropriate action where issues are identified, for example, reviewing individual sales, re-training and undertaking follow-up monitoring to ensure issues are not recurring. Firms should also check if the issues identified indicate trends of mis-selling."

Amongst the other guidelines it issued, the FSA stressed the importance of senior management oversight of any incentive schemes in operation.

"Senior management should ensure that firms identify and assess the specific features of their incentive schemes that might increase the risk of mis-selling and ensure controls are in place to adequately mitigate the increased risks," it 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 added in its guidance. "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."

Martin Wheatley, the FSA's managing director, said the finalised guidance would give financial services firms a "clear idea" of what the regulator expects of them.

"I have been encouraged by a number of firms that have already overhauled their reward structures, but I want to see others following suit," Wheatley said in a statement. "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."

"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," he added. "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."