FSA calls for clampdown on sales commissions
The UK's financial watchdog is calling for a clampdown on commissions paid for selling insurance, loans and bank accounts.
The move comes in the wake of a series of mis-selling scandals such as payment protection insurance (PPI).
The Financial Services Authority (FSA) will not impose an outright ban on commissions.
But it is demanding that payments be dependent on the customer benefiting, not on the volume of sales.
A representative of the UK's banks said that changes were already being made, but that there was some merit to the use of commission.
It is common practice for bank, building society and insurance company staff to have an incentive to sell products and policies.
This includes pushing the sales of bank accounts, mortgages and credit cards when people simply go about their daily financial business in banks.
Martin Wheatley, FSA managing director, told the BBC that some incentive schemes seemed "guaranteed to give the wrong outcome for the customer".
Later, in a speech, he said: "It has been too easy, for too long, for those selling or giving advice to be motivated solely by the rewards on offer to them.
"We have found evidence of poor practice and we are concerned that this reward culture is a significant contributor to mis-selling.
"Incentive schemes on PPI were rotten to the core and made a bad problem worse."
With PPI - which was sold alongside loans and credit cards to cover repayments if people became ill or lost their jobs - many people were either not told they had bought it, or had bought it and were not eligible to claim on it.
However, many sales staff had an incentive to promote PPI. Banks are in the process of paying out £9bn in compensation to borrowers who were mis-sold PPI.
Mr Wheatley said that some of the incentive schemes were often so complex that it made it harder for firms to keep control of them.
The FSA conducted a review of 22 financial firms' incentive schemes.
Mr Wheatley said that some of the schemes could be good or bad, but he added, "most of what we have seen are bad".
Some of the risks that emerged included:
- A first-past-the-post system which offered a "super bonus" of £10,000 to the first staff member to reach a sales target
- Staff basic salaries moving up and down by £10,000 a year depending on sales
- Pushing one product over another, despite claiming advice was impartial
The report is pushing the ball into the court of financial institutions to clean up their act.
Mr Wheatley described it as a "wake up call".
He said firms must now review their schemes, ensure controls are adequate, and ask questions of how star salespeople were successful, not just congratulate them.
Mr Wheatley also said that the regulator would come down on firms that failed to clean up their act in a year or 18 months' time. This could be done before mis-selling occurred, rather than afterwards, and could include institutions losing their licences.
The British Bankers' Association (BBA), which represents the UK's High Street banks, said that things were already getting better.
"No-one wants mis-selling: it is not in the interests of customers or banks that people end up with products or services they do not need. Where mis-selling has happened in the past, the industry is already putting things right," said BBA chief executive Anthony Browne.
But he argued that commission could have a positive effect.
"In all walks of life, doing the right thing well should be recognised. In commerce, incentives are often part of that recognition. In banking, the right incentives create the right long-term outcome for customers while rewarding responsible behaviour by sales staff," he said.
However, consumer group Which? said that a stricter approach was needed from the regulator.
"It is clear that the light touch regulation of the past has not worked. We want to see the FSA rigorously enforcing the rules and taking tough action against those banks that continue to let their customers down," said Richard Lloyd, Which? executive director.
"Consumers have suffered one banking scandal after another. There must now be a fundamental shake up of banking culture and a return to banking for customers, not bankers."
Tracey Bleakley, chief executive of the Personal Finance Education Group, said customers needed to be more aware of what they were buying.
"Sales commissions are only one part of the mis-selling jigsaw. We need to ensure that the next generation of consumers have the skills, knowledge and confidence to make savvy consumer decisions, and avoid products that are unsuitable for them," she said.
'Out of control'
Next year, Mr Wheatley will take charge of a new body, the Financial Conduct Authority, which will oversee how finance firms treat their customers.
He agreed that a culture of greed and irresponsible attitude to customers may have "got out of control" in the financial sector.
"The public will no longer accept a brutal Darwinian relationship," he said.
He said he wanted to make banking "boring" again.
Mr Wheatley is also conducting a review of Libor, the inter-bank lending rate that has been discredited following manipulation by traders.
He said that most of the responses to his review had said Libor needed to change, but he declined to discuss it further while investigations were continuing.