The Financial Services Authority (FSA) has
launched a new initiative to outlaw flawed sales bonuses at banks
that encourage mis-selling by the branch staff, and has published
the results of a review which contains proposed guidance on the
steps banks can take to ensure customers get a fair deal.

Martin Wheatley, managing director of the FSA
and chief executive officer designate of the Financial Conduct
Authority (FCA), said “poorly designed incentive schemes that too
often result in customers being sold products they do not need or
cannot use, while boosting the earnings of the sales person” needed
to be tackled.

“We, as the regulator, intend to change this
culture of viewing consumers simply as sales targets and I am going
to be personally involved in getting this right.

“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,” said Wheatley.

Firms are being encouraged to
incorporate the new rules
into the way they do business and
they are enforceable if disregarded.

“Today marks the start of a programme of work
to reduce these risks, which the FCA will take forward,” added

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Wheatley further said, “CEO’s are ultimately
accountable for the way their staff are incentivised, so we expect
them to take a real interest in fixing this.”

Reacting to the FSA announcement, Craig
Donaldson, chief executive of Metro Bank said the lender “welcomes”
the new initiative as “banks should exist to serve their customers,
not the other way around”.

“If you incentivise your staff to sell, you
shouldn’ t be surprised when they miss-sell. Metro Bank
incentivises store staff on giving amazing customer service,
measured by regular mystery shopping. This means that our staff
focus entirely on problem solving, rather than product


Sales incentives review

The results published by the FSA reviews 22
firms’ financial incentive schemes, which encompassed banks,
building societies, insurers, and investment firms.

Some of the key findings include:

  • Most incentive schemes were likely to drive people to mis-sell
    and these risks were not being properly managed;
  • firms were failing to identify how incentive schemes
    encourage staff to mis-sell,
    suggesting they had not
    properly thought about the risks or turned a blind eye to
  • firms were failing to understand their own incentive schemes
    because they were so complex, therefore making it harder to
  • firms were relying on routine monitoring of staff rather than
    taking account of the specific features of their incentive
  • sales managers had clear conflicts of interests; and
  • firms were not doing enough to control the risk of mis-selling
    in face to face situations.

David Kenmir, financial services regulatory
partner at PwC, added:

“Additional investment will be required in
areas such as HR, technology and other operational policies and
procedures. Firms will have to prove how they understand and
appropriately manage customer risks as part of their day to day
business, and they will need to define conduct risk appetite and
demonstrate how this is being adhered to while ensuring it is
compatible with the strategic focus of the firm.”


Focus on technology

The FSA is also, reportedly, exerting further
pressure on high street banks to set IT contingency plans in place
to avoid a software glitch similar to the one experienced by Royal
Bank of Scotland (RBS) in June. The FSA is now requesting names of
relevant senior managers at banks, so that these people can be held
personally responsible in the event of an IT meltdown.

Ben Robinson, director of strategic planning
at Temenos, said the FSA’s announcement represents a “major turning
point” and puts IT “back on the banking agenda”.

“The FSA’s measures are necessary, with the
fact remaining that IT glitches could happen at any number of large
retail banks. If action is not taken now such issues are likely to
become more common, with many high street banks running on legacy
systems that are decades old and not equipped for the demands of
today’s 24/7 multi-channel banking.”

The FSA regulates the financial services
industry and has four objectives under the Financial Services and
Markets Act 2000: maintaining market confidence; securing the
appropriate degree of protection for consumers; fighting financial
crime; and contributing to the protection and enhancement of the
stability of the UK financial system.

The FSA is due to be replaced by the FCA and
Prudential Regulation Authority in 2013