UK financial regulator acts after research shows sales incentives promote mis-selling

The UK Financial Services Authority (FSA) has launched a crackdown on finance firms' sales bonus schemes after a year-long study revealed how incentives promote mis-selling.

And the regulator has issued new guidance on implementing good practice, which will form the basis of a ‘programme of work' to be taken forward by the FSA's successor, the Financial Conduct Authority.

The FSA acted after 20 of the 22 companies studied – among them banks, building societies, insurers and investment firms – used schemes which “were likely to drive staff to mis-sell in order to meet targets and receive a bonus, and [where] these risks were not being properly managed”.

In the study report, Financial Incentives: risks to customers, the FSA said target-driven schemes – such as retrospective accelerators, thresholds, promotions and first-past-the-post competitive bonuses – skew sales efforts towards higher-return products and undermine consumer confidence.

It said: “One firm's sales staff could see their bonuses multiplied by up to eight times for cross-selling protection products. This resulted in a strong incentive for staff to sell protection products to consumers, regardless of their needs.”

Another company, the FSA said, “heavily incentivised one product over another, therefore – despite claiming to offer impartial advice – there was a clear risk that its advisers would sell the product that earned them more money.

“While we recognise that firms may want to incentivise their staff to sell, this must never be at the customer's expense.”

The FSA recommends companies simplify their bonus schemes, remove conflicts of interest, and collect and monitor wide-ranging management information on, for instance, the level of ‘claw-back', where bonuses are repaid because customers have cancelled a product.

It also urges strong action – such as removal from the incentive scheme – in cases of poor practice.

The recommendations are subject to consultation until 31 October.