1 February 2013

FSA finds over 70% of firms had shortcomings or inadequate mis-selling controls

The FSA reports shortcomings and insufficient controls to prevent sales incentives driving mis-selling in over 70% of the financial institutions audited.

Concerned about the way bonuses were being paid within Financial Services companies, the FSA published a review of sales incentives and asked for feedback on their proposed guidelines. That feedback is now complete and the FSA have now produced a Final Guidance document titled Risks to customers from financial incentives.

The FSA conducted a review of 22 authorised firms covering large and smaller businesses across sectors including banks, insurers and investment firms. All had in-house sales teams with at least 20 sales staff.

Their review showed that 20 of the 22 firms "had features in their incentive schemes that increased the risk of mis-selling”. Not too bad in itself so long as the firms were properly aware of the increased risks and had taken steps to monitor and control the risks.

Worryingly this wasn't always the case. Five firms "had shortcomings in their approach” but worse, eleven out of the twenty firms "were not properly addressing the increased risk of mis-selling”. Four of these cases had significant failings and one has actually been referred to the FSA's Enforcement and Financial Crime Division.

Sales incentives identified as potentially promoting mis-selling were:

• Disproportionate rewards for marginal sales where bonuses could be multiplied for cross selling other products or "first past the post” super bonuses where the first few salespeople to hit a given target were rewarded.
• Accelerators – where bonuses were increased once a sales threshold for a product had been reached.
• Inappropriate bias between products – where one product had a higher incentive payment that a similar one. Would the customer be sold what was appropriate to needs or the better reward?
• Variable salaries – one firm reassessed base salary between bands on a quarterly basis with the top bands earning more than three times the lowest band. This produced a pressurised environment where sales staff might be more concerned with their salary banding than selling according to the rules and would potentially cut corners in order to avoid a drop in salary.
• Inappropriate requirements to determine if incentives are paid – such as setting minimum targets for a range of product types meaning again sales staff sold according to quota rather than customer need.

The FSA want to see incentive schemes that reward quality or good compliance rather than sales numbers and include deterrents to penalise poor behaviour or mis-selling. Even when firms had sanctions in place against mis-selling, they were often poorly designed, such as the company that had a "quality gateway” which would stop staff being paid a bonus if certain quality standards weren't met. The system worked on a points basis where staff had to hit a number of points to be paid sales based bonuses. The system was found to be ineffective because it was possible to give a customer consistently bad advice yet still be paid the bonus.

We fully support the FSA in its challenge to drive up standards across the industry. And as we believe in leading by example we:

• don't pay commissions or bonuses based on sales
• don't do "advised” sales, we're happy to help you through the process and make sure you see what's on offer but we don't recommend specific products.
• sort our comparisons on Price or Features, not by favouring commission payments
• support organisations such as Credit Unions who pay no commission but who we feel offer the less credit worthy a more responsible way to borrow
• don't promote industries where we have taken a view that customers might find themselves worse off if they use them – such as payday loan companies

If you would like to sample the MoneyMaxim difference why not give us a call and see how we can help you make the most of your money!