Martin Wheatley, managing director of the Financial Services Authority (FSA) and ceo designate of the Financial Conduct Authority (FCA), announced this week that he wanted to see an end to mis-selling created by sales incentives.
At a Thomson Reuters Newsmaker event in London, 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.
Speaking to an audience of senior bankers, compliance officers, trade and consumer groups,he 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.”
Cultural change is needed, Martin Wheatley continued, and this change can only come from the top of an organisation.
“CEO’s are ultimately accountable for the way their staff are incentivised, so we expect them to take a real interest in fixing this.”
But the FSA, he said, and in future the FCA, will work with the industry to help it make the necessary changes. Wheatley also confirmed that he would be taking a lead role in bringing about these 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.”
Martin Wheatley noted that many, if not all, of the recent mis-selling scandals had dysfunctional incentive schemes at the root of the problems, payment protection insurance (PPI) serving as a good example. He said “This bonus-based approach has played a role in many scandals we have seen over the years. Incentive schemes on PPI were rotten to the core and made a bad problem worse.”
Wheatley encouraged firms to change the way incentive schemes are run so that they work for the customer and not just the sales person. He also told the audience that today would undoubtedly be the beginning of a long journey and the first step would be to look inwards.
“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?”
To assist firms using incentive schemes, the FSA has published the results of a review which contains proposed guidance on the steps they can take now to help customers get a fair deal.
“I want to draw a line in the sand here, and use the report we are publishing today to set out our expectations.
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.”
While he noted that the industry has a chequered history of treating customers fairly, Martin Wheatley said the only way to achieve success would be for the regulator and firms to work together.
“We know this isn’t an easy job and we can’t do this alone. Making such a change is going to take time and it’s going to need your full support-ultimately we need you to help us. By making these changes your customers will be happier and ultimately your businesses will do better.”
Eric Galbraith, BIBA chief executive “The FSA’s announcement is a step towards recognising the role that banks have played in the mis-selling of financial products, however the FSA could explore the merits of adopting a similar approach to Canada where banks are prevented from directly selling general insurance products altogether. Our sector has been tarnished by the practises of other institutions, whose main business is not insurance and have mis-sold insurance products. Banks and other organisations should focus on their core business and not be allowed to directly sell general insurance.
I agree with Mr Wheatley that ‘all of us need a strong, profitable financial services industry that can give us the advice we need to guide us’ however, this will not be achieved on general insurance unless the regulator recognises that advice is the area of the professional insurance broker and intermediary whose business is insurance and not a bank or other organisation whose main business is not insurance.”
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