In a guidance consultation issued this morning, the regulator has set out how its successor, the Financial Conduct Authority (FCA), will seek to minimise the risks to customers from financial incentives.
The proposed guidance tells firms they need to properly consider the risks of mis-selling as a result of their own schemes, review whether their governance and controls are adequate, and make changes to address any inadequacies.
“This guidance applies to all firms in retail financial services with staff who are part of an incentive scheme and deal directly with retail customer transactions,” the FSA said.
“Firms affected by the Retail Distribution Review (RDR) will need to consider how their incentives increase the risk of mis-selling, even where they are based on fees.”
Among the risks identified for small firms is variable pay, where advisers are remunerated purely based on the revenue they earn.
“This is a form of 100% variable pay, so these firms should be aware of the increased risk of mis-selling and have adequate controls to mitigate the risk,” the FSA said.
“Advisers can also receive additional bonuses for exceeding a revenue threshold, which acts like an accelerator on their earnings.”
Where a recurring problem is identified, the FSA said firms will need to investigate, take action and pay redress where consumers have suffered detriment.
Elsewhere in the paper, the FSA added 100% variable pay “significantly increases the risk of mis-selling”.
The FSA also raised concerns that compliance costs are sometimes reduced if the adviser’s revenue passes a certain threshold.
“This can create a disproportionate reward for marginal sales if advisers are trying to reach the threshold towards the end of any qualifying period, as the reduced compliance costs effectively increase future earnings,” it said.
In a speech introducing the paper later this morning, Martin Wheatley (pictured), the CEO-designate of the FCA, will focus on mis-selling by banks and call for a change of culture across the industry.
This article continues…
Continued from previous page…
“I expect those running firms to start looking at what their schemes are set up to do,” he will say. “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?”
The consultation follows a review of 22 authorised firms with in-house sales teams, including banks, insurers and investment firms, in which the FSA found 20 had features in their incentive schemes which increased the risk of mis-selling.
Meanwhile, 11 out of the 20 firms were not properly addressing the increased risk of mis-selling and in four cases there were significant failings.
Among the problems identified were schemes so complex that even management did not understand them, while incentives for sales managers also created conflicts of interest.
