FCA warning over mis-selling probe

Wednesday 05 March 2014

Some financial firms are still failing to put sufficient curbs in place on staff bonus schemes to cut out the risk of another mis-selling scandal, the City regulator has found.

A probe by the Financial Conduct Authority (FCA) was carried out to make sure firms have controls in place on the way they sell products to prevent a repeat of cases such as the widespread harm done to consumers by the mis-selling of payment protection insurance (PPI).

It found "considerable improvements", particularly among the major banks, which have either completely overhauled or made substantial changes to their incentive schemes and linked bonuses more strongly to the fair treatment of customers. But the FCA also estimated that one in 10 firms with sales teams still appeared not to be managing the higher-risk features of their schemes properly at the time of its assessment.

Martin Wheatley, chief executive of the FCA, said: "Some firms still need to get better control of their incentive schemes to be confident their staff aren't being induced to deliver the wrong outcome for a customer."

He warned firms they "can't sit back and assume everything is working as it should". The FCA wants firms to do more to check sales trends to pinpoint areas where there is a heightened danger of mis-selling. It found that many schemes have features which could result in spikes in sales, such as setting a monthly target for sales staff which results in an additional bonus.

The regulator highlighted the case of one firm which has made improvements by identifying staff who had only just exceeded or just fallen short of their sales targets. The firm would then look more closely at the sales patterns of these staff and place extra monitoring on any suspicious activity. It also wants firms to do more to monitor poor behaviour in face-to-face sales conversations and also ensure that staff are not giving personal recommendations.

The FCA's findings follow a report published in September 2012, which found that most firms had sales schemes that were likely to drive mis-selling, without enough controls in place to manage the risks. Its latest review involved looking on-site at the incentives in place at the largest retail banks as well as online assessments of incentive schemes at other firms carried out in the second half of last year.

Among the improvements it has seen, the FCA said another firm introduced a quarterly bonus based solely on customer satisfaction, regardless of staff sales results. In addition, sales bonuses were only paid once a year and these could be cut or stopped altogether if the quality of sales was not to be up to scratch.

In general, the regulator is seeing firms now offering staff fewer short-term bonuses, firms basing incentives on the performance of branches rather than individuals, caps on the amount of bonus that can be earned and sales quality having a bigger impact on eligibility for a bonus to be paid in the first place. Its review said that large banks have made significant reductions in mis-selling risks in branches and at call centres, for example involving staff who sell products such as paid-for "packaged" current accounts which bundle up a range of perks.

The FCA found three banks had completely removed the direct link to sales from some or all of their incentive schemes and the structure and design of incentive schemes now appears to be "less risky". But for some other firms there was more of a "mixed picture", the FCA said, and improvements were not across the board.

The FCA, which takes control of the consumer credit market next month, said almost all of the large and medium-sized firms involved have confirmed that they have, or will have, completed improvements by the end of March or shortly after. It said that given the progress firms have already made, it is not proposing any rule changes at this time, but it will continue to monitor the situation.

The regulator said that in the long-term and firms will need to make sure they are not pressurising staff to mis-sell in other ways, such as through the use of sales targets.

Research by consumer campaigners Which? in 2012 among bank sales staff with targets to meet found that almost half (46%) knew colleagues who had mis-sold products in order to meet their targets.

Which? executive director Richard Lloyd said: "It's encouraging that banks have started to make changes to their sales incentive schemes but we agree with the regulator there is still much work to be done to reform the culture across the industry."

He said there should be "strong action" for firms or individuals who were found to have broken the rules.

Martin Lewis, creator of consumer help website MoneySavingExpert.com, said a cultural change at the top of big firms, driven in part by the "ever-growing" sums of cash banks have had to put aside for mis-selling, should benefit consumers in the long run.

He said: "For too long, banks dressed up salespeople as advisers, and while that chapter isn't yet closed, the FCA does appear to have delivered its promised firm stance on financial incentives."