News In Focus

FSA to clamp down on bank mis-selling

6 September 2012

Banks need to change their culture of viewing customers simply as sales targets, according to the managing director of the Financial Services Authority.

Martin Wheatley called for the rethink as he announced a "major piece of work to tackle 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".

The launch follows a review of 22 firms’ financial incentive schemes, covering banks, building societies, insurers and investment firms. This uncovered a range of serious failings, including:

• most incentive schemes were likely to drive people to mis-sell, and these risks were not being properly managed nor was action being taken by businesses to avert them;
• firms failing to understand their own incentive schemes because they were so complex, therefore making it harder to control them;
• firms relying too much on routine monitoring of staff rather than taking account of the specific features of their incentive schemes;
• sales managers with clear conflicts of interests, such as a responsibility to manage the conduct of sales staff whilst themselves able to earn a bonus if their team made more sales; and
• firms not doing enough to control the risk of mis-selling in face-to-face situations.

So serious are the failings of one firm that it has been referred to the FSA’s enforcement division. All firms that had problems are now taking action to put things right, while the worst performing ones have already begun checking past sales to identify if mis-selling has occurred and will pay redress where appropriate. The paper also contains proposed guidance that the FSA wants all authorised firms to consider when setting up and managing incentive schemes in future.

Addressing an audience of senior bankers, compliance officers, trade and consumer groups, Mr Wheatley said: “Why is it that every time I walk into the bank to do something simple, like pay my credit card bill, the person behind the counter asks me if I would like to extend my credit, take out more insurance or look at their competitive mortgage rates?

“When did this happen? Banks for me used to be a service – a place where you would go in, stand in a queue, have a pleasant chat with the clerk and go about your daily business. Some time ago, this changed – financial institutions have changed their view of consumers from someone to serve to someone to sell to.”

He undertook that the FSA, and from next year its successor body the Financial Conduct Authority, will work with the industry to help it make the necessary changes. “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. This will be part of the ongoing improvements we make to regulation as we seek to make markets work well and give people a fair deal.”

Mr Wheatley encouraged firms to change the way incentive schemes are run so that they work for the customer and not just the sales person. “I expect those running firms to start looking at what their schemes are set up to do. The dictionary tells us incentives are something that incites an action, so firms need to ask what type of action it is they incite. 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?”

On the review findings, he added: “What we found is not pretty. 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.”

The introduction of new rules is also being considered to make certain that this new, fairer, approach is hard-wired into the way firms do business, and enforceable if they disregard them.

“Today marks the start of a programme of work to reduce these risks, which the FCA will take forward. This will involve further supervisory work, a wider review of incentive schemes, enforcement proceedings, and a possible strengthening of our rules”, Mr Wheatley said.

Proposed guidance on incentive schemes is now out for consultation, with a final response date of 31 October 2012.