In early March 2014, the Financial Conduct Authority (FCA) published a review of the sales incentives practices being used by more than 400 firms,both large and small,that it regulates.The findings should be noted by all types of financial business.
[Stafford, March 20, 2014] - The FCA made reference to there being “significant improvements at many firms of all sizes”, but also said there were a “number of areas common across the industry where further work was needed.” A genuine note of caution is sounded when the regulator also says: “Most firms with incentive schemes had some improvements to make.”
Despite the improvements, 10% of firms were still considered to have high-risk incentive schemes where this risk was not being adequately managed.
Remuneration not based on sales volume alone
Commission and bonus payments are common in sales-based jobs across all sectors, but in the financial services sector, firms need to consider that their ‘salespeople’ are in fact advisers, who need to fully assess a client’s circumstances and only recommend products which are in their interests.
An example of good practice cited in the report is a firm whose adviser remuneration was not based solely on sales volume, but where the bonus payment was based in equal measure on how much was sold, the quality of these sales, numbers of cancellations and complaints and quality of customer service.
Poor incentive culture led to mis-selling
The £28 million fine handed to Lloyds Banking Group by the FCA in December 2013 was entirely due to its remuneration system. When HomeServe was fined £30.6 million in February 2014, remuneration was one of the reasons cited. In both cases, advisers could have more than doubled their basic salary in bonus and commission payments, while little account was taken of sales quality when determining incentive payments. A little reminder is required of how remuneration structures fuelled the large-scale mis-selling of payment protection insurance.
Martin Wheatley, chief executive of the FCA, said of the review: “Eighteen months ago we gave the industry a wake-up call and it recognised that a poor incentive culture had helped push bad sales practice, which led to mis-selling. We’ve seen some good progress but it is going to take time to see whether the changes firms have made to incentive schemes and their controls stick, and whether good beginnings are part of genuine cultural change. But consumers can be assured that this remains an area that we will be watching closely to ensure poor practice doesn’t return.”
Remuneration Systems for Advisers
Much of the publicity remuneration systems have attracted recently has centred on the banks and other large firms. But any firm that offers any form of incentive for its advisers to sell more business needs to think carefully about how it manages this situation.
Even for firms where all advisers are self-employed, the content of this report is very relevant, as here the advisers will be on 100% variable pay with no salary element. For many firms, advice fees are calculated as a percentage of the funds invested, so if an adviser does not succeed in completing a sale, they will not receive any payment. It is vital that firms have systems in place to check that their advisers are only recommending products that will benefit their clients.
The review says that many firms need to make better use of management information to be able to assess which advisers, products and time periods represent the highest risk. With regard to the last of these, it has been suggested that advisers are more likely to mis-sell just before the end of a period in which sales volume is assessed.