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FSA Firms Up Guidance for Stopping Inappropriate Sales Incentives

Joe Mont | January 16, 2013

The Financial Services Authority, the regulator of financial services in the U.K., this week published final guidance intended to curb questionable sales incentives that can push unsuitable financial products upon consumers.

The guidance follows a review of sales incentives conducted by the FSA in September. That study, which reviewed 22 financial institutions, found that some didn't understand their own incentive programs because they were so complex. There was also, in many cases, inadequate governance and oversight of the design, approval and review of incentive programs, with risks not identified, assessed or adequately mitigated. One firm, for example, allowed sales staff to earn a bonus of 100% of their basic salary for the sale of loans and “payment protection insurance,” but the bonus was only payable to those who had sold that product to at least half their customers.

At that time, FSA Managing Director Martin Wheatley, who will also head that country's forthcoming Financial Conduct Authority once the current agency is split in two later this year, said firms would have up to 18 months to show a “back-to-basics approach” to products and sales incentives or risk facing punitive actions. The finalized guidance, he said on Wednesday, “gives financial firms a clear idea of what we expect from them and how they should manage their incentive schemes.”

Among the standards and suggested practices contained in the guidance:

  • Changing incentives so they are not based on sales volumes.
  • Reducing the value of incentive schemes linked to sales, or capping maximum payments.
  • Additional monitoring for higher performing sales staff
  • Strengthening governance arrangements around the design and sign-off of incentive programs

Business quality monitoring (including call monitoring for telephone sales), carried out by competent staff, can also be an effective control. Staff undertaking business quality monitoring should be sufficiently independent of the sales function to avoid inappropriate influence by sales staff or managers. Firms should take appropriate action where issues are identified, for example, reviewing individual sales, re-training and undertaking follow-up monitoring to ensure issues are not recurring.

Although it may be harder to monitor face-to-face sales conversations, it is suggested that firms can identify inappropriate behaviors by such controls as: mystery shopping; contacting a sample of customers shortly after completing a sale; recording face-to-face sales conversations for later review; or additional scrutiny of high- performing sales staff or those with unusual sales trends.

A similar crackdown on questionable incentive practices and is also underway in the U.S. The Consumer Financial Protection Bureau has been reviewing sales incentives at credit card companies and, this past summer, with its first public enforcement action, ordered Capital One Bank to refund approximately $140 million to nearly two million customers. The action resulted from a CFPB examination that identified “deceptive marketing tactics” used by Capital One's vendors to pressure or mislead consumers into paying for add-on products, among them payment protection insurance.