FSA announces incentive scheme review findings

The Financial Services Authority (FSA) has completed a review of 22 organisations’ financial incentive schemes.

The review encompassed banks, building societies, insurers and investment firms.

It found:

  • Most incentive schemes were likely to drive employees to mis-sell and these risks were not being properly managed.
  • Firms were failing to identify how incentive schemes might encourage staff to mis-sell, suggesting they had not properly thought about the risks or simply turned a blind eye to them.
  • Firms were failing to understand their own incentive schemes because they were so complex, therefore making it harder to control them.
  • Firms were relying too much on routine monitoring of staff rather than taking account of the specific features of their incentive schemes.
  • Sales managers had clear conflicts of interests, such as a responsibility to manage the conduct of sales staff while themselves able to earn a bonus if their team made more sales.

Martin Wheatley, managing director of the FSA and chief executive officer designate of the Financial Conduct Authority (FCA), said: “I want to draw a line in the sand here, and use the report we are publishing today to set out our expectations.

“What we found is not pretty. Most of the incentive schemes we looked at were likely to drive people to mis-sell in order to meet targets and receive a bonus, and these risks were not being properly managed.”

The FSA found many different types of poorly-managed incentive schemes that had a clear risk of benefiting sales staff and managers rather than customers.

For example:

  • One firm operated a first-past-the-post system where the first 21 sales staff to reach a target could earn a ‘super bonus’ of £10,000.
  • Basic salaries for sales staff at one firm could move up or down by more than £10,000 per year, depending on how much they sold.
  • One firm allowed sales staff to earn a bonus of 100% of their basic salary for the sale of loans and payment protection insurance (PPI), but the bonus was only payable to those who had sold PPI to at least half their customers.

The review also contains proposed guidance that the FSA wants all authorised firms to consider when setting up and managing incentive schemes in future. The proposed guidance applies to all firms that deal with consumers and have sales staff or advisers who are part of an incentive scheme.

Wheatley says: “Today marks the start of a programme of work to reduce these risks, which the FCA will take forward. This will involve further supervisory work, a wider review of incentive schemes, enforcement proceedings, and a possible strengthening of our rules.

“CEO’s are ultimately accountable for the way their staff are incentivised, so we expect them to take a real interest in fixing this. I expect those running firms to start looking at what their schemes are set up to do.”