Financial Services Authority publishes report on incentives and consultation paper

Today the British Financial Services Authority (FSA) published the results of a review of incentives in the sales of financial services and published a consultation paper.

In the investigation 22 authorised financial firms with in-house sales teams and more than 20 sales staff were reviewed. The review shows that 20 out of the 22 firms had features in their incentive schemes that increased the risk of mis-selling. For example,

  • firms had not properly identified the risks posed by their incentive schemes to ensure effective controls were in place. Some schemes were so complex that management did not understand them;
  • sales quality generally had much less of an impact on staff incentives than the quantity sold; and
  • some sales managers earned a bonus on the volume of sales made by the staff they supervised. This created a conflict of interest for managers who also played a significant role in checking the sales quality of their staff, the risks of which were not adequately managed.

Worst examples include one firm that 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 Pounds; one firm where the basic salaries of sales staff could move up or down by more than 10,000 Pounds a year depending on how much they sold; or another firm that allowed sales staff to earn a bonus of 100 percent of their basic salary for the sale of loans and PPI, but the bonus was only payable to those who had sold PPI to at least half their customers.

Managing Director of the FSA, Martin Wheatley, explained that this bonus-based approach had played “a role in many scandals we have seen over the years. Incentive schemes on PPI [Payment Protection Insurance] were rotten to the core and made a bad problem worse.” He also said that while “public attention has been on the huge rewards on offer to the few, the effect of more modest rewards on the many needs to be dealt with.”

The FSA therefore proposes that financial firms had to put in place effective controls and governance which includes:

  • robust risk-based business quality monitoring and adequate controls to mitigate the risk of inappropriate behaviour during sales conversations;
  • management information (MI) to identify, and act upon, trends or patterns in individual sales staff activity that could indicate an increased risk of mis-selling. Using this MI to inform the approach to monitoring sales staff incentive risks;
  • proper management of sales managers’ conflicts of interest;
  • effective oversight of incentive schemes by appropriate senior management, including approval of the incentive schemes; and
  • an effective risk identification and mitigation process, including regular reviews of incentive schemes and the effectiveness of controls, taking into account customers’ interests.


Further information: und

Source: FSA