global insurance management

Sales Incentives - Update


Dec 11 2013

Sales Incentives (3)

Relevance:                   All firms.

Action required:           Take another look at any sales incentive schemes you may have in operation to ensure they fit with the FCA’s expectations.

Earlier this year we issued two alerts relating to the topic of Sales Incentives and did so because the FSA at that time was very concerned about how some schemes may not be treating customers fairly.

The FSA issued a Finalised Guidance document and also contacted firms in a programme of on-line assessments.

The FSA warned firms that it expected them to:

  • properly consider if their incentive schemes increase the risk of mis-selling and, if so, how;
  • review whether their governance and controls are adequate;
  • take action to address any inadequacies – this might involve changing their governance and/or controls, and/or changing their schemes;
  • where risks cannot be mitigated, take action to change their schemes; and
  • where a recurring problem is identified, investigate, take action and pay redress where consumers have suffered detriment.

The Financial Conduct Authority (FCA) has continued with the project started by its predecessor and today it has published details of one particular case following the completion of their investigations at the Lloyds Banking Group.

This link to the FCA’s Press Release will give further information: http://www.fca.org.uk/news/press-releases/fca-fines-lloyds-banking-group-firms-for-serious-sales-incentive-failings

These are some of the points made by the FCA:

  • The FCA has fined Lloyds TSB Bank plc and Bank of Scotland plc, both part of Lloyds Banking Group (LBG), £28,038,844 for serious failings in their controls over sales incentive schemes;
  • This is the largest ever fine imposed by the FCA, or its predecessor, for retail conduct failings;
  • The FCA increased the fine by 10 per cent because the FSA had previously warned about the use of poorly managed incentive schemes over a number of years and the firms’ previous disciplinary record, caused in part by the general pressure to meet sales targets;
  • The incentive schemes led to a serious risk that sales staff were put under pressure to hit targets to get a bonus or avoid being demoted, rather than focus on what consumers may need or want;
  • Financial incentive schemes are an important indicator of what management values and a key influence on the culture of the organisation, so they must be designed with the customer at the heart;
  • Customers have a right to expect better from our leading financial institutions and we expect firms to put customers first – but firms will never be able to do this if they incentivise their staff to do the opposite;
  • The FCA expects all financial incentive schemes to be designed carefully with good customer outcomes in mind, and the risks they pose must be identified and managed properly.

In particular, the FCA has highlighted certain aspects of the Lloyds’ schemes that they considered to be of poor practice:

  • The incentive schemes rewarded advisers through variable base salaries, individual and team bonuses and one-off payments and prizes.
  • Variable base salaries:
    • Advisers could be automatically promoted and get a pay increase or be automatically demoted and have a pay reduction depending on their sales performance.
  • Bonus thresholds:
    • Both firms had in place thresholds that meant should a certain sales target be reached large bonuses could be earned.
  • One-off payments and prizes:
    • In one month advisers at Halifax and Bank of Scotland had the opportunity to win a one-off payment of £1,000, known as a ‘grand in your hand’, for meeting a particular target.
  • Product bias:
    • There was a significant bias in incentives towards sales of protection products, which was a strategic area of focus for the firms.
  • Systems and controls used by the firms to manage the incentive schemes were inadequate.
  • The managers that were responsible for ensuring good practice by advisers also had their own performance measured against sales targets - a clear conflict of interest that needed careful management.

The FCA indicates that it is currently conducting follow up work to see if firms are now managing the risks to consumers from sales based incentives and plans to publish the findings in the first quarter of 2014.

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