It follows a review of current practices, in which it found 20 out of the 22 firms assessed had features in their incentive schemes that increased the risk of mis-selling.
The FSA wants firms to tighten their governance and controls and identified areas for firms to focus on and examples of good and poor practice from its review.
Emphasising quality
Bonus and incentive schemes need to reward good compliance (selling the right way) with a sufficient deterrent to penalise poor behaviour or mis-selling.
Good practice
Taking action on poor quality
A firm took strong action when they found that the quality of sales was poor. Depending on the seriousness of the breach, this meant the sales person could be removed from the incentive scheme immediately.
Lesser failures led to deductions in bonus payments, depending on how serious and frequent the problem was.
Poor practice
Sanctions not applied
Sanctions in the bonus scheme were not applied despite problems occurring. For example, staff remained part of the bonus scheme even when the quality standards were not met.
Quality failures not having a material impact
One firm had both a monthly and quarterly bonus scheme for sales staff, with the monthly scheme providing the majority of the bonus available.
Where the firm’s file checking identified failures (such as giving poor advice that needed corrective action), sales staff were penalised by losing only their quarterly bonus.
However, they were still eligible to receive the more significant monthly bonuses, which in some cases were more than £7,000 over the course of three months. Since staff could still earn significant bonuses while giving poor quality advice, this scheme was unlikely to have the right impact on staff behaviour.
Flawed ‘quality gateway’
A firm had an incentive scheme with a ‘quality gateway’ that was meant to stop staff receiving bonuses if certain sales quality standards were not met. It was based on a points system driven by the firm’s monitoring of advice quality, upheld complaints, product lapses, the mix of products sold and other measures.
The firm had presented this as a positive example of how their incentive scheme was linked to sales quality. However, this was not an effective control because staff could have any number of sales failed for incorrect advice and still qualify for a bonus payment, if the other categories the firm measured met the standards.
Doubling bonus even if mis-selling
One firm doubled the monthly bonus of staff who met a high standard of compliance with sales processes as long there was only one mistake. Administrative errors (e.g. getting a customer’s name wrong) were treated the same as mis-selling (e.g. withholding key product information). Sales staff could therefore still have their bonus doubled even if they had mis-sold.
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Management information
The FSA expects firms to collect sufficient information to be able to properly manage risks with their incentive schemes and to act on the results accordingly.
Good practice
Using information effectively
A firm used a wide range of information to monitor the sales patterns of individual sales staff, analysing trends and causes, with particular attention paid to those staff selling the most products and other staff who may have been at a higher risk of mis-selling.
Poor practice
Monitoring individual sales patterns
Management information (MI) did not take account of the specific features in a firm’s incentive scheme and did not identify trends or spikes in the sales patterns of individual staff that may be a sign of mis-selling. For example, sales patterns before and after a target has, or has not, been met.
Not reviewing a wide enough range of appropriate MI
A firm failed to use MI down to the level of individual sales staff, which could assist in identifying potential inappropriate selling, for example penetration rates for cross-selling or variations in the mix of products sold. Other firms selling insurance products did not review claim repudiation rates, and the reasons for rejected claims at the level of individual sales staff.
For smaller firms, the FSA pointed out that the information needed is likely to vary depending on the nature, scale and complexity of the firm’s business.
Business quality monitoring
Where incentive schemes increase the risk of mis-selling, the FSA expects firms to take account of these increased risks in their approach to monitoring and when identifying sales cases for checking.
Staff undertaking business quality monitoring should be sufficiently independent of the sales function to avoid inappropriate influence by sales staff or managers.
Good practice
Targeting additional monitoring
The management information used by a firm to identify the sales patterns of individual sales staff activity influenced where additional monitoring was targeted. For example, where there were trends or spikes that indicated an increased risk of mis-selling.
Poor practice
Monitoring
- Monitoring was not consistent with the sales and bonus strategies. For example, it focused on the more risky products but did not review enough of the products with the highest sales, or the products where there were large bonuses for selling.
- Monitoring was based on checking that sales were carried out according to the firm’s sales guidelines and the information gathered, rather than identifying where there had been poor customer outcomes.
- No extra monitoring was carried out on sales staff achieving high sales volumes, or other staff whose sales patterns indicated increased risk, or who may have been under pressure to sell, for example, due to fear of disciplinary action.
- No extra monitoring was carried out on individuals who had higher than normal rates of cross-selling different products where they could earn extra bonuses for this, or on sales of products that earned much higher bonuses.
- Monitoring was based on narrow checklists that gave the same weight to minor administrative errors as they did to mistakes in the sales process that meant customers were likely to lose out.
The FSA accepted that, for smaller intermediary firms, monitoring of the business is often carried out by the principals or senior advisers and it therefore may not be proportionate for such firms to have a separate independent monitoring function.
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Sales managers’ conflicts of interest
Firms should reduce or manage the conflicts of interest which may arise when sales managers are responsible for supervising staff and also earn incentive payments based on the volume of sales made by those staff.
Good practice
Independent checking
One firm carried out independent quality checking of the supervision assessments and/or business quality monitoring undertaken by sales managers.
Controls for inappropriate behaviour by sales staff
Inappropriate staff behaviour during sales conversations, motivated by financial gain, is unlikely to be identified by firms undertaking reviews of written sales records or from training and competence schemes.
Poor practice
Example of an adviser blatantly misleading customers
One firm gave a bonus to sales staff based on the amount the customer paid for the product. We listened to a call where sales staff colluded to intentionally overcharge a customer to help meet a sales target. During the conversation that took place before they called the customer, the sales person said:
“This is going to make my target… I’ll end up with about a thousand pounds… We need to ring [the customer], I will do all the talking [and] you confirm the price.”
Good practice
Monitoring calls
At one firm monitoring recorded telephone calls helped to identify inappropriate behaviours and acted as a deterrent to sales staff, as well as checking the firm’s sales guidelines were being followed and that sales were compliant. Calls were also assessed to check that sales staff provided information in a way that was clear, fair and not misleading, and to check that customers were not put under undue pressure to buy.
Poor practice
Seeking customer feedback
One firm relied on contacting customers after the sale for feedback, but collected irrelevant evidence, because the main focus was on customer satisfaction. They relied on ‘yes/no’ questions, for example asking the customer if the key features or limitations of a product were explained to them, rather than testing if the correct information was provided clearly.
Over reliance on training and competence
A firm relied on observations of sales conversations carried out as part of training and competency arrangements to assess sales staff for inappropriate behaviour. This type of monitoring can be useful for checking competence, but it is unlikely to spot mis-selling or inappropriate behaviour motivated by financial gain as staff know they are being assessed.
Smaller firms were told they should consider how they can obtain and use customer feedback to assess what is said to customers during sales conversations.
Governance arrangements
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.
Good practice
Customer interests
A firm made a senior manager formally accountable for representing customers’ interests in the design and review of incentive schemes.
Poor practice
Not understanding the risks
Senior managers responsible for incentive schemes did not understand the risks to customers created by the features of their incentive schemes or relied on other staff who did not understand the risks.
Regular reviews
A firm failed to carry out regular reviews of the effectiveness of controls in mitigating the risks arising from the incentive schemes.
