Banks must stop giving their staff bonuses that encourage mis-selling and leave customers with unsuitable and expensive products, the Financial Services Authority (FSA) has warned.
Martin Wheatley, managing director of the conduct business unit within the FSA, said that while large bonuses paid to senior figures at banks have already been under the spotlight, it is now time to address the "flawed sales bonuses that encourage mis-selling" among the front-line staff in banks and building societies who interact with the public.
The FSA reviewed 22 firms that included banks, building societies, insurers and investment firms between September 2010 and September 2011 and Wheatley said what it found was "not pretty".
It discovered that many incentive schemes where staff are paid extra to sell a certain number of products can lead to mis-selling. One firm operated a system where the first 21 sales staff to reach a target could earn a 'super bonus' of £10,000.
The FSA is taking enforcement action against one company where it found serious failings, but it is now up to chief executives to read the FSA's guidance and review their sales initiatives to check that staff are not encouraged to promote unsuitable products in order to meet sales targets or obtain larger bonuses.
The City watchdog said firms must address any problems – including changing the scheme and paying compensation to customers who may have been mis-sold. If companies fail to reform their sales practices, Wheatley said tougher rules could be introduced next year to protect customers.
"The dictionary tells us incentives are something that incites an action, so firms need to ask what type of action it is they incite," he said at an event in London this morning. "Is it to get the best deal for the customer, or is it to get the best deal for the person or firm selling it?"
According to Wheatley, badly-designed reward schemes are a deeply embedded problem. He highlighted the fact that many customers walking into banks nowadays can be met with a "very heavy selling pressure" to buy extra products such as insurance or a packaged account when all they want to do is something simple like pay a credit card
Rotten to the core
Wheatley added: "Incentive schemes on payment protection insurance were rotten to the core and made a bad problem worse.
"This is not like when you go to a fast food restaurant and the server asks 'do you want fries with that?'. We all know they ask these questions because they are encouraged to make the most of every sale. But then we also know what to expect – chiefly lots of salt, calories and a bigger waistline."
Wheatley argued that it was very different and much more serious with financial services as most people trust staff who give financial advice, many financial products are complex and customers don't fully understand them, and when a financial product is mis-sold the customer could ultimately lose their savings or their home.
Martin Lewis, creator of moneysavingexpert.com, also spoke at the event and said it was "wonderful this cause is at last being championed by the FSA".
He said the structure of rewards leads to "constant mis-selling" and called on bank staff to be renamed 'salespeople' rather than 'advisers'. Wheatley said a cultural change was needed in the industry. He recognised that some sales staff are not aware that they are mis-selling as they do not fully understand what they are selling, while others are unhappy that they have to be a part of that culture to make a decent living.
The practice of a dishonest salesperson misrepresenting or misleading an investor about the characteristics of a product or service. For example, selling a person with no dependants a whole-of-life policy. There have been notable mis-selling scandals in the past, including endowment policies tied to mortgages, employees persuaded to leave final salary pensions in favour of money purchase pensions (which paid large commissions to salespeople) and payment protection insurance. There is no legal definition of mis-selling; rather the Financial Services Authority (FSA) issues clarifying guidelines and hopes companies comply with them.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.